By Aniruddha Basu

  MUMBAI, Nov 12 (Reuters) - Indian tycoon Vijay Mallya, whose cash-strapped Kingfisher Airlines cancelled scores of flights this week, drawing the ire of the government and travellers and spooking investors, questioned on Saturday whether it was the carrier's duty to fly loss-making routes.

  Shares in Kingfisher, the country's second-largest airline by market share, fell as much as 18 percent to an all-time low on Friday as investors fretted about the viability of the carrier, which acknowledged it had been late in paying salaries in recent months.

  On Saturday, the Mint newspaper, citing an unidentified source, reported that the government had decided in principle to allow foreign airlines to own up to 24 percent of Indian carriers, a move that could throw a lifeline to Kingfisher and its struggling rivals.

  It said the matter would be put before the cabinet of Prime Minister Manmohan Singh in the next four weeks.

  Mallya, the flamboyant liquor tycoon who owns a cricket team and a Formula One racing team, asked on the social networking site Twitter whether it was Kingfisher's duty to fly loss-making routes while it was being heavily taxed by state governments.

  Or should the airline be financially prudent and fly profitably, he asked.

  Late on Friday, Kingfisher said it was dropping unprofitable routes and speeding up a fleet reconfiguration, which would see its daily schedule of flights drop to 300 from 340. It recently said it was exiting the low-fare segment of the business.

  The carrier, whose share price has dropped 70 percent in 2011, bringing its market capitalisation below $200 million, also said on Friday it " does not see any risk to its future or long-term viability" .

  Aviation Minister Vayalar Ravi said he would approach the finance minister to seek emergency bank assistance for troubled airlines.

  Kingfisher said it had not sought a government bailout.

  India's mostly loss-making airlines are struggling amid fierce competition and high sales taxes on aviation fuel despite passenger growth of about 19 percent this year.

  The Centre for Asia Pacific Aviation has forecast a record $2.5 billion to $3 billion loss for Indian airlines for the year ending March 2012, with state-run Air India alone likely to account for more than half of it.

  On Friday, private carrier Jet Airways and budget airline SpiceJet reported losses for the September quarter, compared with profits in the year-earlier period. Kingfisher has never made a profit.

  For a factbox on India's airlines, see. (Editing by Tony Munroe and Robert Birsel)

VIENNA (Reuters) - The U.N. nuclear watchdog showed letters and satellite images on Friday as part of evidence pointing to military dimensions to Iran's atomic activities, diplomats said, but Tehran's envoy dismissed it as " lousy" intelligence work.

  Herman Nackaerts, head of nuclear inspections worldwide at the International Atomic Energy Agency, made an hour-long technical presentation of the IAEA's latest report on Iran's nuclear programme at a closed-door meeting for member states.

  The hotly anticipated document, released last Tuesday, said Iran appeared to have worked on designing an atomic bomb and that secret research may continue. It was the most detailed IAEA report to date on the issue.

  At Friday's briefing, participants said Nackaerts displayed procurement-related correspondence involving Iranian officials as well as satellite images of the Parchin military site southeast of Tehran.

  The IAEA report, based on what the agency called " credible" information, indicated that Iran had built a large explosives vessel there to conduct hydrodynamic experiments, which are " strong indicators of possible weapon development" .

  Diplomats said Nackaerts also highlighted which information in the report was new, apparently to counter criticism from Iran that the report only contained old allegations.

  Ali Asghar Soltanieh, Iran's ambassador to the IAEA, said there were no nuclear-related activities at Parchin.

  " There is no proof that Iranian activities are towards military purposes," he told reporters after the briefing.

  " We do have conventional activities (at Parchin) and this has nothing to do with nuclear."

  URANIUM METAL " DISCREPANCY"

  Saying the report had damaged the U.N. agency's credibility, Soltanieh added in English: " This kind of lousy job of intelligence created problems for all member states."

  For several years the IAEA has been investigating Western intelligence reports indicating that Iran has coordinated efforts to process uranium, test high explosives and revamp a ballistic missile cone to accommodate a nuclear warhead.

  Iran repeatedly has dismissed the allegations as forged, but its refusal to suspend sensitive nuclear work has drawn gradually tightening U.N. and separate Western sanctions.

  Western states have said they intend to ratchet up the sanctions pressure further on Iran after the IAEA report, but Russia has made clear its opposition to such steps.

  Western diplomats hope a November 17-18 meeting of the IAEA's 35-nation governing board will adopt a resolution denouncing Iran's nuclear activities and calling on Tehran to start addressing the agency's growing concerns about its aims.

  But Russian and Chinese reluctance may hinder such steps.

  Soltanieh said the report represented an " historical mistake" that had " poisoned the atmosphere" in efforts to resolve the nuclear row diplomatically.

  He also dismissed a finding in the IAEA's report of a " discrepancy" of nearly 20 kg (44 lb) of nuclear material at a site in Tehran, the Jabr Ibn Hayan Multipurpose Research Laboratory.

  The report said U.N. inspectors carrying out an inventory check of natural uranium metal and process waste at the facility measured 19.8 kg less than the operator's declaration.

  The IAEA said it was working with Iran to resolve the issue.

  Soltanieh said in response to a question: " It was explained today. These are technical things ... absolutely not an issue."

NEW YORK, Nov 11 (Reuters) - The dollar extended losses against the yen on Friday, raising speculation that the Bank of Japan may intervene yet again to stem its currency's strength.

  The dollar hit a session low of 77.03 yen, the lowest since Japan's massive yen-selling intervention on Oct. 31. Market sources have told Reuters that Japan has probably conducted more intervention since then.

  The dollar last traded at 77.06 yen, down 0.7 percent on the day, according to Reuters data. (Editing by James Dalgleish)

  * U.S. to start bank tests soon - Yellen

  * Financial disruption in Europe could dent U.S.- Yellen

  * Some big European banks facing funding pressures-Yellen

  * May need to use monetary policy for stability - Williams

  By Ann Saphir

  CHICAGO, Nov 11 (Reuters) - The euro zone's debt crisis could substantially damage the U.S. economy if not contained, the Federal Reserve's No. 2 official warned on Friday as she urged bold action by Europe.

  " Concerns about European fiscal and banking issues have contributed to strains in global financial markets that pose significant downside risks to the U.S. economic outlook," Fed Vice Chair Janet Yellen told a conference sponsored by the Chicago Federal Reserve Bank and the European Central Bank.

  While U.S. banks have " manageable" direct exposure to sovereign debt in the smaller European countries, they have substantial links to banks in larger European countries, some of which are facing funding difficulties, Yellen said.

  " In light of such international linkages, further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States," she said. " We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system."

  In her talk, largely an overview of the regulatory steps the Fed has and will take to shore up the stability of the financial system, Yellen said she would not rule out using monetary policy as a stabilizing tool, " at least on the margin."

  In a separate speech in Washington, San Francisco Fed President John Williams took a more aggressive stance.

  " Although macroprudential policies are the appropriate first line of defense against financial instability, these defenses are not impregnable," Williams told a conference at the International Monetary Fund. " In all likelihood, monetary policy will need to play a more active role."

  The Fed slashed interest rates to near zero in December 2008 in the midst of the financial crisis. It has kept them there since, and also bought $2.3 trillion in long-term securities to help support recovery from the deepest recession in decades by pushing borrowing costs still lower.

  Political and economic turmoil in Italy, the euro zone's third-biggest economy, has spurred fears of a possible break-up of the 17-nation currency bloc. Italy's borrowing costs reached unsustainable levels in recent days and the region appears unable to afford a bailout should there be a need for one.

  Fears over Italy eased somewhat as the country moved closer to a national unity government, following Greece's lead in seeking a respected veteran technocrat to pilot painful economic reforms in an effort to avert a euro zone bond market meltdown. For more see [ID:nL6E7M96E9].

  Yellen urged European officials to solidify and follow through on rescue pledges. While a euro zone crisis-fighting plan announced in October was a step in the right direction, details remain murky, she said.

  " The continued rise in sovereign debt spreads for some countries, more generalized market volatility, and political turmoil that we have seen in recent days speak to the need for forceful action to stabilize the situation," she said.

  U.S. bank regulators plan to begin their 2012 series of bank stress tests " in a couple of weeks," Yellen said, a process that will determine which banks are strong enough to pay dividends and buy back shares.

  Tests of banks' capacity to withstand crises have become a routine part of U.S. regulatory scrutiny, which was strengthened in the wake of the 2007-2009 financial crisis.

  " I think publishing all supervisory information we have and get in the course of our work with the banks is probably not something we are contemplating," Yellen said, " but information sufficient to give market participants information about the health of major financial institutions and their ability to withstand stresses and shocks, I think is important, and we are certainly thinking about doing that." (Reporting by Ann Saphir in Chicago, Mark Felsenthal in Washington and Pedro Nicolaci da Costa in San Francisco Editing by Chizu Nomiyama)

* Gold up as Wall Street soars on European debt hopes

  * Greece, Italy move closer to enacting austerity measures

  * Asian, European gold buying underpins as euro fears calm

  * Coming up: Chicago Fed index, existing home sales Mon. (Recasts, updates comment, market activity)

  By Frank Tang and Maytaal Angel

  NEW YORK/LONDON, Nov 11 (Reuters) - Gold rose 1.5 percent on Friday, tracking a Wall Street rally, as Italy pushed through austerity measures demanded by the European Union and a new Greece government fueled hopes that a euro zone sovereign debt meltdown could be averted.

  Bullion notched its third consecutive weekly gain, its longest winning streak since August, after Italian Senate passed a new budget law that cleared the way for a full approval of the fiscal package and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.

  The metal -- a traditional safe haven which has recently taken to tracking riskier assets -- rose in tandem U.S. equities and the euro, as the S& P 500 soared around 2 percent, as former European Central Bank policymaker Lucas Papademos was sworn in as Greek prime minister with an aim to avert national bankruptcy.

  " Optimism is growing in Europe because of a better economic outlook there. Buying from Far East and European gold investors continued as euro zone calmed some fears of tighter bank credit," said George Gero, vice president of RBC Capital Markets.

  Spot gold rose 1.6 percent to $1,787.04 an ounce by 3:26 p.m. EDT (2026 GMT), snapping a three-day losing streak.

  U.S. December gold futures settled up $28.50 at $1,788.10 an ounce. Trading volume was below its 30-day norm as U.S. banks, governments and the bond market are closed for the Veterans Day holiday.

  Silver rose 1.7 percent to $34.65 an ounce.

  ITALY, EURO ZONE WORRIES

  Gold fell in three out of the five days this week, hit by margin selling from the equity markets as Italy has overtaken Greece as the main focus of the euro zone debt crisis this week, with yields on Italy's benchmark 10-year bonds rising to levels considered to be unsustainable.

  " We are concerned about the lack of liquidity in the market, and we are even more concerned about how readily gold seems capable of falling $25-$35 an ounce at the very slightest sum of selling," said Dennis Gartman, a veteran trader and market commentator.

  Italian bond yields dropped on Friday after rising to levels deemed unsustainable earlier this week, though investors remained concerned that euro zone's third-largest economy could buckle under its 2 trillion euros of debt. Unlike Greece, Italy is too big to bail out.

  Analysts said that possible new liquidity programs by the ECB can aggravate price pressures, making gold more attractive as an asset seen to hold its value better than paper currencies during times of high inflation.

  Standard Bank analyst Walter de Wet, who said he expected the gold price to rise to $2,000 an ounce, said the ECB will have to create more money to assist the debt burden in Europe, supporting gold prices.

  Investment flows into gold-backed exchange-traded funds continued this week. SPDR Gold Trust, the world's largest gold ETF, reported a fifth straight day of gains in its holdings -- reaching 1,268.666 tonnes by Nov. 10, the highest since late August.

  In other platinum group metals, platinum climbed 1.2 percent to $1,636.45 an ounce and palladium rose 2.2 percent to $656.72, tracking a rebound in industrial metals led by copper. (Additional reporting by Amanda Cooper in London Editing by Marguerita Choy and Sofina Mirza-Reid)

(Corrects first paragraph to remove mention of Italy being first country to ban naked short-selling)

  MILAN, Nov 11 (Reuters) - Italy announced a ban on naked short-selling of stocks on Friday, in a bid to reduce market volatility due to the worsening euro zone debt crisis.

  Market regulator Consob said on Friday it would ban naked short-selling on the whole regulated stock market from midnight, Dec. 1, in a bid to reduce market volatility due to the worsening euro zone debt crisis.

  The move came as it also extended a ban on short-selling on financial stocks until Jan. 15, 2012, a day after France extended its own short-selling ban on the shares of 10 financial institutions by three months. [ID:nLDE7A9047]

  Bans on short-selling were introduced earlier this year to discourage speculative trading on financial institutions after Italian and French banking stocks took a beating last summer.

  Short-selling is the process through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.

  In a naked short sale, the investor has not borrowed the share, but still bets on a drop in the share price.

  Consob added it would continue to coordinate with other European market watchdogs to assess future action, which may include lifting the ban if market conditions allow it.

  At present France, Italy, Greece, Spain and Belgium have short-selling bans in place.

  Other major stock markets, including Britain, have refrained from imposing short-selling curbs. (For a TAKE A LOOK on short-selling curbs, click on: [ID:nL6E7JB1S5]) (Reporting by Michel Rose, editing by Gerald E. McCormick)

(Adds comments, details)

  Nov 11 (Reuters) - Australian shares rose 1.2 percent on Friday, helped by a recovery on Wall Street on corporate results and no worsening of Europe's debt crisis, but turnover remained thin as investors worried about the outlook for the euro zone.

  For the week, the benchmark index managed to rise 0.35 percent after a 1.7 percent fall the prior week.

  Analysts said the thin turnover reflected nervousness among investors about the next piece of news to hit out of Europe, where policymakers are dithering over how to resolve the region's debt crisis which seems about to engulf Italy.

  European politicians have denied any split in the euro zone was under discussion, while Italy appeared closer to forming an emergency government.

  " Event risk is still rampant across markets and that trend is going to continue until there is a proper resolution to the euro zone crisis," said IG Markets analyst Stan Shamu.

  The industrial sector was the best performer with shares in Brambles, the world's top pallet supplier, up 3.6 percent after the company affirmed full-year profit guidance on Thursday.

  Shares in Australia's Commonwealth Bank rose 1.6 percent to A$49.59, the best performer of the big four banks ahead of its quarterly update next week. The bank's shares had sharp losses on Thursday.

  The defensive health care sector also fared strongly, helped by private hospital operator Ramsay Health Care. Ramsay confirmed its earnings forecast for the fiscal year and said it has secured A$2 billion in new debt financing, lifting its shares 1.6 percent.

  The health care sub-index gained 1.8 percent.

  The benchmark S& P/ASX 200 index finished up 52.4 points at 4,296.5 points, but turnover was paltry at just 70 percent of average.

  New Zealand's benchmark NZX 50 index gained 0.1 percent to 3,322.

  Qantas Airways rose 2.2 percent to A$1.615 after it received final approval to launch a joint business agreement with American Airlines, allowing the carriers to coordinate services between the United States, Australia and New Zealand.

  Newspaper publisher Fairfax Holdings slumped 7 percent to A$0.86 after Marinya Media, John B Fairfax's private family company, sold its 9.7 percent stake in the company, ending the Fairfax family's association with the media empire that includes the Sydney Morning Herald and the Australian Financial Review.

  Extract Resources ended flat at A$7.90 after its main shareholder Kalahari Minerals said talks with its state-owned Chinese suitor were centred on a price below investors' expectations. For details, see

  Outdoor advertiser oOH! Media Group shares added another 7.4 percent to A$0.29, extending its solid run after rising 75 percent on Thursday when CHAMP Private Equity made an A$163 million offer ($166 million) to buy the firm.

(Adds context, quotes from Wilders interview)

  AMSTERDAM, Nov 11 (Reuters) - Dutch Prime Minister Mark Rutte on Friday shot down a political ally's proposal to abandon the euro and return to the guilder, saying it would be disastrous for the Netherlands' export-oriented economy.

  Eurosceptic politician Geert Wilders, whose Freedom Party provides crucial support for the minority coalition in parliament, told Reuters his party was studying whether it was in the long-term economic interest for the Dutch to return to the guilder, confirming a local media report on Friday.

  The " guilder debate" highlights the growing tension in the Netherlands over the euro zone crisis, where the minority government is finding it harder to muster broad parliamentary support for rescuing Greece and other countries.

  Dutch taxpayers have grown increasingly resentful of the high cost of bailing out the euro zone's more profligate members, with recent opinion polls showing that they are pessimistic about the prospects for the single currency zone, and fear Italy or Spain would be next in line for a bailout.

  A recent opinion poll found that 58 percent of those surveyed wished the Netherlands had stuck with the guilder.

 

  " The political elitist europhiles are moving more towards Europe and the public is increasingly against it and against helping Greece and other countries," Wilders told Reuters in a telephone interview, adding " I want a referendum: we're solving a lot of problems which we're not responsible for" .

  He said his party would call for a referendum on leaving the euro if research showed that it was in the country's best interests.

  Wilders added that he was firmly against more political and economic integration in Europe and a loss of sovereignty, but that at this stage he was not taking a position on whether the Netherlands should quit or remain in the European Union.

  Prime Minister Rutte told reporters that Wilders was free to carry out research on the topic but that a return to the guilder would be a " bad idea for the Netherlands," which was committed to the euro currency.

  " A return to the guilder would be a recipe for disaster," Rutte told reporters at his weekly press conference after cabinet meetings in The Hague.

  Finance Minister Jan Kees de Jager also reiterated the Dutch commitment to the euro earlier on Friday when he stressed the importance of stability and peace, speaking on a local radio programme.

  " This government is very clear and firm about its continued support for the euro currency, which is best for all Dutch people," De Jager told Dutch radio on Friday. (Reporting By Roberta B. Cowan, Marijn Wellink, and Sara Webb Editing by Catherine Evans/Ruth Pitchford)

* Case shines spotlight on long-standing industry practice

  * Firms have legal leeway with 'segregated' customer funds

  * Clients demanding assurance their money is safe

  * Backlash could rock industry already under pressure

  * Investor trust in 'segregated' accounts vital to markets

  By David Henry, David Sheppard and Matthew Goldstein

  NEW YORK, Nov 11 (Reuters) - Almost two weeks after the bankruptcy of commodities firm MF Global, customers at rival firms are all asking the same question: How safe is my money?

  MF Global's collapse is confronting clients across the industry with the harsh truth that while their accounts may be termed " segregated" that does not mean they are off-limits from trouble at a commodity futures firm, much less backstopped by any government insurance fund.

  MF Global revealed to regulators during its Oct. 31 bankruptcy that it was short perhaps $600 million in customer funds - money which the firm was supposed to keep in " segregated" accounts maintained under a raft of laws and regulations.

  The concerns among investors have reached such a pitch that futures exchange operator CME Group announced late Friday that it will provide a guarantee for $300 million of the missing money in the MF Global case.

  " I've lost a good deal of money already over this. Now I'm a big boy who should have known better, with over 25 years experience in the futures industry, but what they were doing with client funds is to me outrageous," said Stuart McClellan, an independent trader from Norfolk in the United Kingdom, who previously worked for Schroders in London.

  McClellan has more than $110,000 tied up in MF Global, which he doesn't know if he will get back.

  " Using the excess collateral in clients' funds to trade is not illegal, but to my mind it's immoral. There is a huge risk," he said.

  Futures commission merchants, as brokers in the industry are known, have always been allowed, with certain restrictions, to invest customers' so-called " excess margin," or the funds in their accounts over and above the collateral required to maintain trades. The brokers then book any profits for themselves.

  Segregation simply means that customer deposits can't be mixed with the firm's own money or used to cover firm expenses. They must always be available for customers to trade with or withdraw at a moment's notice. In other words, customer segregated money isn't some big cookie jar for the firm to dip into when it is short on cash.

  " That is what is so shocking about MF Global's situation," said Michael Greenberger, a former director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) and now a law professor at the University of Maryland.

  " If that stability is not present, people will not want to go into what is already a highly volatile trading environment," he said.

  Now with each passing day that missing money has not been found, there is growing concern that MF Global may have abused its legal latitude with the segregated customer accounts.

  The fear is that MF lost the segregated funds in bad trades or used them illegally to meet other obligations. By this time, traders and investigative sources say, it should have been possible to trace the money, if it still exists, in some account with another financial institution.

  Some traders who tried to withdraw funds from MF Global prior to the bankruptcy received checks that bounced.

  Commodity traders and investors are now saying they will demand their brokerage houses reveal exactly what they plan investing customer funds in.

  Don McAfee, a private investor from the San Juan Islands in Washington state, said he had been a " novice" trader of commodities who had become interested in the sector, in part because he saw less risk from the fate of individual banks and brokerages than in equities or bonds.

  " It was a way of diversifying out of just playing stocks, and I was very attracted to the fact you did not seem to have any counterparty risk," McAfee said, who has around $220,000 still frozen at MF Global.

  " In the future I am going to want an ironclad guarantee that my account is fully segregated. And if it's not I need to know that at most it's being invested in U.S. Treasuries, not commercial paper or foreign bonds."

  PRESSURE MOUNTS ON RIVALS

  Brokers at rival firms, who had perhaps hoped to benefit from the disappearance of one of their fiercest competitors, are fielding endless calls from concerned customers and fearing a run on their own accounts.

  " I'm getting calls from people, wanting to know if this could happen again, if I can give them proof that the banks I'm dealing with are okay and that their money is safe," said one broker on the floor of the Chicago Board of Trade (CBOT) on Thursday, who asked not to be identified.

  " That's never happened to me before. There's a lot of fear,' he said.

  Other traders said they were looking to spread their accounts across multiple brokers to limit their risk, after watching friends and colleagues locked out of the market over the past two weeks. Others said they were looking into insuring their funds.

  The failure to free up client funds quickly after the bankruptcy was further undermining faith in the safeguards in the commodities market, said Michael " Mack" Frankfurter, co-founder of commodity trading advisor Cervino Capital Management LLC in Beverly Hills.

  " There is unintended consequences and systemic risk evolving in this situation. It's not about what needs to be done going forward... It's about what needs to be done immediately to save the industry," he said.

  WHO TO TRUST?

  MF Global's standard agreement with customers permitted the firm to " borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan or invest any of the collateral" in customer accounts. The language is typical of agreements throughout the industry, said one longtime futures trader and industry consultant who did not want to be identified because he does work for CME Group.

  The largest customers might be able to get that language tweaked in their favor a bit, perhaps with an agreement to split revenue earned on the customer deposits. But smaller investors generally have to accept the firm's plans for the use of excess cash in their accounts.

  Trading in commodities has exploded over the past ten years, increasing by more than 600 percent according to some estimates, and bringing in a new breed of 'Mom and Pop' investors hoping to protect themselves against, and benefit from, the rising costs of food and energy.

  The practice of firms using customer excess cash to make money has been a basic source of revenue for the industry for decades, if not centuries. In fact, it is revenue from those investments that has allowed the firms to cut their commission rates to attract more business.

  The practice is codified in U.S. law and regulation, which until 2000 limited use of the funds to basically U.S. Treasury and state and municipal obligations. Over the next five years, the rules were eased to permit firms to use customer money to enter into repurchase agreements and buy foreign bonds, money market funds, and assorted securities.

  PROPOSAL SHELVED

  When the financial crisis prompted second thoughts from the U.S. Commodity Futures Trading Commission, the industry fought to stop proposals to cut back on how much the firms could do with customer money.

  MF Global, which was led by ex-Goldman Sachs CEO and former New Jersey Governor Jon Corzine, teamed up with Newedge Group, a major competitor, and warned in a December 2010 letter that reducing the stream of revenue could force some futures commission merchants to shut down.

  The Futures Industry Association, an umbrella organization representing futures traders such as Goldman Sachs Group and Jefferies & Company, as well as MF Global, also pushed back against plans to stop firms investing in foreign bonds and other riskier assets with customer funds. The proposal was eventually shelved.

  The MF Global collapse prompted CFTC Chairman Gary Gensler to say Nov. 7 that he will push again to tighten the restrictions. Industry experts say that may improve the security of segregated funds, but it could also force brokers to charge higher fees.

  Meanwhile, the building outrage over the missing money is rattling industry veterans. Dennis Gartman, a board member of the Kansas City Board of Trade known for his daily market commentary, wrote Friday that if industry leaders do not act quickly to make good on the MF customer money, " the futures markets shall be under real and permanent assault."

  Todd Thielmann, a former MF Global broker on the floor of the Chicago Board of Trade, said fear was spreading fast among customers.

  " They've taken any excess money out of all firms now and they don't know who to trust."

  (Reporting by David Henry, David Sheppard and Matthew Goldstein in New York. Additional reporting by Jed Horowitz, Barani Krishnan and Josephine Mason in New York, Samuel Nelson and PJ Huffstutter in Chicago editing by Edward Tobin and Martin Howell)

* Japan request on trade talks lifts Obama goals in region

  * U.S. requires Japan to meet high standards of free trade

  * CEOs press world leaders to make progress on trade

  * Euro zone crisis adds urgency for pro-growth steps (Adds fresh Clinton quote)

  By Doug Palmer and Emily Kaiser

  HONOLULU, Nov 11 (Reuters) - Japan's readiness to join Asia-Pacific free trade talks gave a major boost on Friday to President Barack Obama's drive to assert U.S. leadership in the world's most economically dynamic region and promote growth at home.

  The Obama administration is seeking to reset relations with Pacific nations and offer a counterweight to China's growing power at the Asia-Pacific Economic Cooperation leaders' summit this weekend in Honolulu.

  " We obviously believe that the world's strategic and economic center of gravity will be the Asia-Pacific for the 21st century and it will be up to American statecraft over the next decade to lock in a substantially increased investment -- diplomatic, economic, strategic and otherwise," U.S. Secretary of State Hillary Clinton said after meeting APEC ministers.

  Obama arrives later on Friday at the annual gathering of APEC's 21 members, which account for more than half of the world's output.

  With Europe's debt crisis sending shock waves around the globe, this year's meeting is also shaping up as a forum to press the euro zone to sort out its problems and for APEC countries to bolster defenses against the fallout.

  " The stakes are high for all of us," Clinton said earlier.

  Japanese Prime Minister Yoshihiko Noda announced in Tokyo that the world's third-largest economy wanted to join U.S.-led talks to forge a Trans-Pacific Partnership among nine nations.

  Incorporating Japan into any free trade area that is negotiated would create a huge regional market, around 40 percent bigger than the 27-nation European Union.

  Tokyo's move marked a breakthrough in Washington's efforts to seize the initiative from Beijing, which has made deep economic inroads in the region.

  " As a trading country that has built its prosperity of today, we must take advantage of growth in the Asia-Pacific region," Noda said in Tokyo before leaving for the summit.

  While welcoming the decision, U.S. Trade Representative Ron Kirk insisted Japan must be prepared to meet the " high standards" of liberalized trade the talks are striving for by reducing barriers to agriculture, services and manufacturing.

  This may prove a significant hurdle for Japan, where farmers have protested against removing large subsidies.

  Japan also must overcome skepticism in the U.S. Congress and among American business and labor leaders over whether it will be truly committed to a level playing field on trade.

  At least one major U.S. company, Ford Motor Co, said it opposed letting Japan into the pan-Pacific negotiations because it believes Tokyo is not prepared to address its barriers that block imports of American cars.

  Australia hailed Japan's interest in a comprehensive agreement, with Trade Minister Craig Emerson calling it " an extremely positive development."

  Other countries in the TPP trade talks are New Zealand, Malaysia, Singapore, Vietnam, Brunei, Chile and Peru.

  EXECUTIVES APPLY PRESSURE

  Asia-Pacific chief executives, also meeting in Honolulu, pressed world leaders to step up free trade initiatives.

  Business leaders advising the APEC summit said a " volatile and uncertain economic environment" was discouraging private sector investment and could spawn protectionist sentiment.

  With Europe in danger of slipping into recession and U.S. growth sluggish, Asia represents the best bet for keeping the world economy on track.

  Senior officials drafting an APEC communique agreed on Thursday on the need for Europe to act more forcefully to sort out its debt woes and for Asia-Pacific countries to bolster themselves against the potential spillover from the euro zone.

  But there was no sign the summit would offer any concrete measures to help the euro zone cope with its crisis.

  " Europeans have to ... provide a clear picture and provide a solution and put their hands around their own issues, and the international community is willing to help," Zhu Min, deputy managing director of the International Monetary Fund, said in Honolulu.

  APEC leaders, who begin meetings on Saturday, are expected to keep the heat on China over what many see as an artificially undervalued yuan that hurts competitors. The currency issue has been a major irritant between Washington and Beijing.

  Finance ministers pledged to take steps to strengthen growth and move faster toward market-based pricing of their currencies.

  Despite the APEC statement, China's deputy finance minister Wang Jun offered little prospect for a faster appreciation of the yuan.

  " Facing current economic conditions, the Chinese government will continue to adopt proactive financial policy and stable currency policy," Jun said, according to the state news agency Xinhua.

  But he did commit to quicken the pace of China's move over the longer term toward a domestic consumer market, in balance with its export-driven economy.

  China will " accelerate the transformation of the mode of economic development, strive to build a long-term and effective mechanism to broaden domestic demand and boost consumption, while continuing to stabilize and expand external demand, and actively expand imports," Jun said. (Writing by Stella Dawson and Matt Spetalnick Additional reporting by Kiyoshi Takenaka and Michael Martina Editing by John O'Callaghan)

By Edward Krudy

  NEW YORK, Nov 11 (Reuters) - Wall Street is stuck in a highly volatile range as investors hoping for a rally into the end of the year are browbeaten by Europe's unfolding crisis.

  For months, investors have been enthusing about valuations, earnings and, more recently, signs of an improving economy. Those may be good reasons why stocks should rally, but even the most ardent are starting to sound a bit glum.

  The political intrigue in southern Europe has flummoxed investors stateside. Papademos has replaced Papandreou. Berlusconi is, well, Berlusconi. The headlines and the subsequent volatility seem relentless.

  " It literally just changes consistently each and every night," said Jeremy Zirin, chief U.S. equity strategist at UBS Wealth Management in New York.

  " Earlier this week, there were worries about a potential Italian default and now we've seen government and regime change in two of the periphery nations."

  Again, events in Europe over the weekend could end up shaping the start of the trading week in U.S. markets.

  Italy's Senate approved a new budget law, clearing the way for approval of the package in the lower house on Saturday and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.

  In Athens, former European Central Bank policy-maker Lucas Papademos was sworn in as Greek prime minister, replacing predecessor George Papandreou after days of political wrangling. He is tasked with meeting the terms of a bailout plan to avert bankruptcy.

  The net result was that the S& P 500 ended up almost 1 percent on the week after a drop of nearly 4 percent on Wednesday.

  That midweek plunge came after Italy's bond yields blew out to over 7 percent, raising fears that the country, which is also the world's third-largest bond market, could go bankrupt.

  But with worries that the crisis could spread to other countries, investors are looking for either the European Central Bank or EU governments to commit more capital in order to backstop sovereign bond markets.

  " For the markets to continue to rally, we would need to see market confidence that Italian, Spanish and French bonds are money good," Zirin said. " There is likely to be more volatility around the sovereign debt crisis until we get more capital committed to the solution."

  HEDGING THEIR BETS

  Many investors picked up put options heading into the weekend to hedge against a potential downdraft in equities next week.

  Options traders exchanged about 1.48 million contracts on the Financial Select Sector SPDR fund -- 3.6 times the average daily volume -- as puts outpaced calls by a factor of more than 13 to 1, according to Trade Alert.

  Technical factors are taking on greater significance as the S& P 500 hovers at the top end of its trading range and traders watch for a break either up or down. When that happens, it could be swift if recent volatility is anything to go by.

  Ari Wald, a technical analyst at Brown Brothers Harriman in New York, said evidence is building for a move to the downside after the index failed for a second time since late October to push above its 200-day moving average at around 1,272.

  " If we keep failing at this, it looks like it's confirming another lower high from the May peak," he said. " This still looks like a downtrend to me."

  The 200-day moving average, a closely followed level, has emerged as a key battleground for investors this year, with successive tests to the downside over the summer eventually leading to a 13 percent cascade during five fraught trading days in August.

  On the downside, Wald sees support at the 50-day moving average at around 1,200. A breach of that could take the index back to around 1,100 in early 2012, he said.

  But market technicians also say positive seasonalities could be in stocks' favor.

  'TIS THE SEASON

  November marks the start of the " six best months of the year" when the Dow has booked an average gain of 7.5 percent since 1950, compared with just 0.4 percent in the other half of the year, according to the Stock Trader's Almanac.

  One reason cited for that seasonal lift, at least during the last few months of the year, is holiday spending.

  Investors will look for more improvement in retail sales when data for October is released on Tuesday, especially after the Thomson Reuters/University of Michigan report on Friday showed consumer sentiment rose to a five-month high in November.

  During the last major week of earnings season, some prominent retailers are set to report results and give an outlook through the end of the year. They include Wal-Mart Stores, often seen as a barometer of U.S. consumer spending, and a niche retailer such as Abercrombie & Fitch.

  " My guess is we are going to have a reasonably good consumer in the year-end," said Philip Dow, director of equity strategy at RBC Wealth Management in Minneapolis. " My target on the S& P is 1,380. I still think it could happen." (Wall St Week Ahead runs every Friday. Questions or comments on this column can be e-mailed to: edward.krudy(at)thomsonreuters.com) (Reporting by Edward Krudy: Editing by Jan Paschal)

By Philip Pullella

  ROME (Reuters) - Italian Prime Minister Silvio Berlusconi is expected to resign on Saturday, making way for an emergency government and ending one of the most scandal-plagued eras in Italy's post-war history.

  The Chamber of Deputies was due to start a debate at 1130 GMT on a package of economic reforms intended to reverse a collapse of market confidence.

  The definitive approval of the package by the lower house will mark the final act of the Berlusconi government. He is expected to hold a last cabinet meeting and then go to the Quirinale Palace and hand his resignation to President Giorgio Napolitano.

  His resignation will trigger a series of events over the weekend and most likely conclude on Sunday night or Monday morning with the formation of new government headed by former European Commissioner Mario Monti.

  Monti, currently head of the prestigious Bocconi University in Milan, is expected to head a largely technocratic government to push through reforms in an effort to head off a perilous crisis.

  Napolitano and Italian legislators have put the process on a fast track, prompting healthy reactions from the stock and bond markets.

  Italian bond yields, which shot way above sustainable levels earlier this week, fell sharply in response to acceleration of the process leading to Berlusconi's resignation and the approval of the reforms.

  Global markets panicked earlier this week because of the sustained political turmoil in the euro zone's third largest economy, and Italy's borrowing costs shot above a " red line" of 7 percent -- the level at which Portugal and Ireland had to seek an international bailout.

  EUROPEAN LEADERS SUPPORT ITALY PRESIDENT

  Napolitano has received encouragement from various European heads of state, including French President Nicolas Sarkozy and German President Christian Wulff.

  In telephone calls on Friday, all three agreed that the new measures must be enacted quickly because the situation in Italy was extremely worrying for all of Europe and particularly the euro zone.

  Monti, a highly respected international economist, has been favoured by markets for weeks to lead Italy out of the crisis.

  But although he would be supported by most centrists and the biggest opposition force, the Democratic Party, there is substantial opposition in Berlusconi's existing coalition.

  Berlusconi has dominated the Italian scene since 1994 and has led three governments in 17 years.

  After making a fortune in property and media, Berlusconi created his own party almost overnight to fill the void on the centre-right caused by the demise of the Christian Democratic party in the corruption scandals in the early 1990s.

  His third and last stint in power, which began in 2008 when his centre-right won the national elections, has been the most scandal plagued.

  His second wife left him 2009, accusing him of frequenting minors.

  He leaves office facing four separate trials for fraud and having sex with a minor.

  For much of this year, Italian newspapers have been filled with lurid details of " bunga-bunga" parties with young women at his luxurious residences in Rome, Milan and Sardinia.

  One leaked wiretap had him boasting of having sex with eight women in one night and being so occupied with starlets that he was only prime minister " in my spare time" .

  (Reporting By Philip Pullella)

* Hang Seng index up 0.9 pct, down 3.6 pct on week

  * Shanghai Comp edges up 0.1 pct, off 1.9 pct on week

  * Battered banking shares lead recovery, volume low

  * Macau casino names hit hard after Melco sell-off in U.S. (Updates for close)

  By Vikram Subhedar

  HONG KONG, Nov 11 (Reuters) - Hong Kong and China shares rebounded slightly on Friday but a heavy selloff in financials the previous day ensured both benchmarks ended lower for the week with eurozone worries still looming and some funds keen to sit on cash.

  The Hang Seng posted its second successive weekly drop as investors continued to take money off the table following last month's rally in Chinese shares with escalating worries about Italy and Greece providing little incentive for fresh buying.

  The benchmark gained 0.9 percent on the day following Thursday's 5.3 percent and over-1000 point drop. For the week, the Hang Seng lost 3.6 percent.

  Trading activity on Friday fell nearly one-third from the previous day as a round of short-covering earlier in the day failed to spur funds to take fresh positions ahead of the weekend.

  " In addition to the events in Europe, next week is a big week for US data and for Japan, which is likely to mean a week of choppy trading," said a trader at an American brokerage in Hong Kong.

  " Signs that the US economic recovery is slipping combined with bad news from Europe could see Asian markets take another leg down," he said.

  The focus is likely to be on macroeconomics once again for investors with Japanese and French GDP data in the early part of next week followed by U.S. retail sales, industrial production and housing starts in the latter half.

  Hedge funds were actively shorting on Thursday, driving the short-interest up to 9.1 percent of total turnover, compared with an average this month of 8 percent.

  A trader at an Asian brokerage said hedge funds " saw yesterday as an opportunity to get short" , adding that long-only funds were also raising cash levels by selling positions. Some of those bets were covered on Friday.

 

  BANKING SUPPORTS SHANGHAI

  On the mainland, the Shanghai Composite rose 0.1 percent to 2,481.1 supported in part by large-cap banking and energy shares.

  Those gains spilt over to Hong Kong, where shares of ICBC , among the heaviest losers in the sell-off, rose 2.1 percent. Smaller rival Agricultural Bank of China rose 3.5 percent.

  For the week, Shanghai's index was down 1.9 percent.

  Signs of easing inflation in China have stoked optimism about selective easing in the country as the West's problems take their toll on China's exports.

  " European debt problems and the U.S. economic slowdown may have begun to affect China's trade," said Alan Lam, Greater China analyst at Julius Baer in Hong Kong, pointing to weaker-than-expected exports last month.

  " China's export slowdown may lead to acceleration in macro policy normalisation, which is potentially positive for Chinese equities," said Lam.

  Optimism about a year-end rally in Chinese shares, underperformers relative to Asia this year, drove a month-long rally starting in early October on hopes that authorities would start loosening their grip on the economy.

  In a sign of loosening, Chinese banks extended 587 billion yuan ($92.5 billion) in new loans in October, up from 470.0 billion yuan in September, evidence of " selected" policy easing by the government to support growth as inflation falls.

 

  WEAK MACAU

  Bucking the market's move up on Friday, casino stocks in Hong Kong tumbled following the sharp drop on heavy volume for shares of Melco Crown Entertainment, which lost 11.9 percent overnight in the U.S.

  Melco operates the City of Dreams casino on Macau's Cotai strip, a region fast becoming the biggest contributor to the gambling enclave's revenues.

  Wynn Macau dropped 5.6 percent, leading a broad sell-off across the sector. Galaxy Entertainment fell 6.9 percent and MGM China Holdings lost 4.9 percent.

  Sands China lost 4.5 percent but could be the first to bounce back later if it is included as a benchmark constituent of the Hang Seng index later on Friday when the index management company announces results of its latest quarterly review.

  Analysts at JPMorgan and Nomura said last week that Sands could be a candidate for inclusion, which would require index-tracking funds to buy shares. (Editing by Jacqueline Wong and Richard Borsuk)

* European, Asian shares rise on Europe hopes

  * Disney, Nvidia results tops views

  * Futures up: Dow 78 pts, S& P 9.2 pts, Nasdaq 13.5 pts

  By Chuck Mikolajczak

  NEW YORK, Nov 11 (Reuters) - U.S. stock index futures rose on Friday with markets hopeful that debt-laden Italy will implement tough austerity measures crucial to avoid a euro zone meltdown.

  * Italian bond yields eased ahead of a vote by that country's Senate later in the day on a package of cuts that is expected to pass easily, as it should in the lower house on Saturday.

  * European shares bounced back rising 0.7 percent on the developments.

  * Asian shares also rebounded. Japan's Nikkei share average rose 0.2 percent and MSCI's broadest index of Asia Pacific shares outside Japan gained 1.3 percent, recouping some losses suffered in a sharp selloff in the previous session.

  * In Greece, the prime minister designate, Lucas Papademos, will name a new crisis cabinet to roll out austerity plans.

  * S& P 500 futures rose 9.2 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures climbed 78 points, while Nasdaq 100 futures gained 13.5 points.

  * Walt Disney Co will be in focus after the media and entertainment group reported a 7 percent gain in revenues and a 30 percent jump in profit, trumping expectations.

  * Nvidia Corp's shares climbed 4.4 percent to $15.10 in light premarket trade after the chipmaker posted quarterly results that beat estimates as it refocused on smartphones and tablets in a tepid personal computer market.

  * Caterpillar Inc will offer to buy China's ERA Mining Machinery in a deal that could be worth up to $885 million.

  * On the economic front, Thomson Reuters/University of Michigan Surveys of Consumers preliminary November consumer sentiment index is due to be released at 9:55 a.m. EST (1455 GMT). A Thomson Reuters poll found a forecast for a reading of 61.5 compared with 60.9 in the final October release.

By Michael Martina and Emily Kaiser

  HONOLULU (Reuters) - Asia-Pacific CEOs will press world leaders on Friday to boost growth and seal a regional trade deal, goals made more urgent by the European debt crisis that has darkened global economic growth prospects.

  Business leaders advising the Asia-Pacific Economic Cooperation (APEC) summit said a " volatile and uncertain economic environment" was discouraging private-sector investment and could spawn protectionist sentiment.

  In a letter to U.S. President Barack Obama, who arrives for the Honolulu talks late on Friday, CEOs called on governments " to liaise closely with business as we work together to stimulate economic growth and create jobs in the short term, and work towards balanced growth in the long term."

  With Europe in danger of slipping into a recession and U.S. growth sluggish, Asia represents the best bet for keeping the world economy on track.

  Senior officials drafting an APEC communique reached consensus on the need for all member economies to bolster themselves against the potential spillover from Europe.

  But there was no sign the summit of countries that account for more than half of global economic output would offer any concrete measures to help the euro-zone cope with its crisis.

  APEC leaders, who meet on the weekend, were also expected to keep the heat on China over what many see as an artificially undervalued yuan that hurts competitors like the United States.

  The issue has been a major irritant between Washington and Beijing, which has become increasingly assertive in a region where Obama now wants to refocus U.S. attention.

  Friday's agenda includes executives from Caterpillar, General Electric and Wal-Mart, as well as Australian Prime Minister Julia Gillard and Singapore's Lee Hsien Loong.

  A regional trade deal known as the Trans-Pacific Partnership was high on the list of priorities for business executives, and they urged leaders to sign the agreement by the middle of 2012.

  " ACT NOW"

  Nine countries -- the United States, Australia, New Zealand, Vietnam, Malaysia, Singapore, Brunei, Chile and Peru -- are expected to say on Saturday they have reached the broad outlines of a deal. Japan may also join, giving the pact greater heft.

  But even if a deal is reached, it would not address the immediate problem of sustaining global growth should Europe's debt situation deteriorate further.

  U.S. Treasury Secretary Timothy Geithner urged APEC countries to do whatever they could to boost growth in order to cushion the global economic blow from Europe.

  Unlike the United States, where the Federal Reserve has already lowered interest rates to near zero, many Asian countries still have room to reduce official borrowing costs to try to bolster growth.

  In addition, China, South Korea and other Asian economies hold more than $4 trillion (2.51 trillion pounds) in foreign reserves, giving them financial firepower to boost government spending.

  " There's a very strong rationale for economies that have the capacity to do it to act now to strengthen growth," Geithner said.

  China said it would take steps to support growth but appeared to rule out a rapid rise of its yuan, saying it would pursue a stable policy on its currency.

  " The Chinese government will continue to adopt a proactive financial policy and stable currency policy," China's Vice Finance Minister Wang Jun said at a meeting of the region's finance ministers, according to the Xinhua news agency.

  China would " accelerate the transformation of the mode of economic development, strive to build a long-term and effective mechanism to broaden domestic demand, and boost consumption, while continuing to stabilise and expand external demand, and actively expand imports" , he said.

  (Editing by Robert Birsel)

AMMAN (Reuters) - Syrian security forces killed nine people on Friday as protesters called on the Arab League to suspend Damascus's membership in response to continued violence, activists said.

  Local activists in Homs, which has suffered the highest death toll of any Syrian province since an uprising against President Bashar al-Assad broke out in March, said security forces killed seven civilians and one defecting soldier.

  The British-based Syrian Organisation for Human Rights said another man was killed in the northern province of Idlib.

  Banners at a protest in the Deir Balba district of Homs called on the Arab League, which announced a plan on November 2 to end the violence and start dialogue between Assad and his opponents, to suspend Syria.

  " Has the Arab League initiative stopped our blood from flowing?" one banner at the protest read.

  The United Nations says 3,500 people have been killed in Assad's crackdown on the protests, inspired by uprisings which have toppled autocrats in Egypt, Libya and Tunisia. Human Rights Watch said on Friday Syrian forces had killed at least 104 people in Homs alone since the Arab League plan was agreed.

  Syrian authorities, who have barred most foreign media from the country, blame armed groups for the violence and say 1,100 members of the security forces have been killed.

  Alongside the mainly peaceful protests there have been increasing attacks on security forces by army defectors.

  (Reporting by Dominic Evans and Laila Bassam in Beirut, Khaled Yacoub Oweis in Amman Editing by Mark Heinrich)

BEIJING (Reuters) - China and Iran have normal business ties which should not be targeted by any new sanctions on Iran over its nuclear programme, the Chinese Foreign Ministry said on Friday, repeating that in any case sanctions were not the solution.

  Iran already faces a wide range of U.N. sanctions, as well as some imposed unilaterally by the United States and the European Union.

  New EU sanctions, which the bloc is discussing, would be a significant part of Western efforts to ratchet up pressure on Tehran after the U.N. nuclear watchdog's report this week that laid bare a trove of intelligence suggesting Iran is seeking nuclear weapons.

  " Just like many countries, China and Iran have transparent and normal commercial dealings," Foreign Ministry spokesman Hong Lei told a daily news briefing.

  " These dealings benefit the peoples of both countries. They do not harm the interests of other countries nor the international community and they do not violate Security Council resolutions. Even less do they detract from China's stance on nuclear proliferation," he added.

  " I wish to reiterate that dialogue and cooperation are the most effective channel for resolving the Iran nuclear issue. Pressure and sanctions do not help to fundamentally resolve the problem."

  He did not give a direct answer when asked whether new unilateral U.S. sanctions would harm ties with Beijing, saying only that dialogue and cooperation were the pressing task.

  Western governments would prefer further Security Council measures against Tehran. But Russia and China, both permanent Security Council members with veto power, are opposed and say new sanctions would not work.

  Tehran says its nuclear programme is for producing electricity and other peaceful purposes.

  China, which has kept close ties with Iran, has also backed past U.N. Security Council resolutions criticising Iran's position on nuclear issues and authorising limited sanctions.

  Iran is China's third-largest crude oil supplier, shipping 20.3 million tonnes in the first nine months of the year, up by almost a third on the same period last year, according to Chinese data.

  China has repeatedly resisted Western proposals for sanctions that could seriously curtail its energy and economic ties with Iran.

  (Reporting by Chris Buckley Writing by Ben Blanchard)

  * U.S. jobless claims fall to 390,000 in wk ending Nov 5

  * Sept trade deficit unexpectedly narrows to $43.1 bln

  * Import prices fall 0.6 percent in Oct

  (Adds import prices, economist's quote and byline)

  By Jason Lange

  WASHINGTON, Nov 10 (Reuters) - New U.S. claims for jobless benefits fell last week to their lowest level since early April and the trade deficit unexpectedly shrank in September, pointing to a slight improvement in the sluggish economy.

  The Labor Department said on Thursday that initial claims for state unemployment benefits fell for the second straight week, dropping 10,000 to a seasonally adjusted 390,000.

  That is still well above levels seen before the 2007-2009 recession, but below a 400,000 claims level which economists say could likely prompt some acceleration in hiring.

  " Clearly, the labor market is improving, but at a very slow pace," said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.

  In a separate report, the Commerce Department said the U.S. trade deficit shrank 4 percent to $43.1 billion in September.

  The gap was the narrowest since December thanks to record-high exports, and suggested the U.S. economy closed the third quarter a little stronger than previously believed.

  The government could raise its estimate for third quarter growth to a 2.8 percent annual rate from 2.5 percent, said Paul Dales, an economist at Capital Economics in Toronto.

  Still, economists say the economy must grow much faster to put a big dent in the jobless rate, which has been stuck at or above 9 percent for most of the last two years.

  " (The data) are not strong enough to make it clear that we are in a solid recovery but they are not weak enough to show that we are falling into a recession," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

  While companies are cutting back on layoffs, they aren't stepping up hiring much. Nonfarm payrolls rose a tepid 80,000 last month, the government said last week.

  Prices for U.S. government debt extended losses on the claims and trade data, although traders were more focused on Europe's unfurling debt crisis, which threatens the global economy. U.S. stocks gained.

  CHINESE IMPORTS

  The trade report also showed a narrowing of the politically sensitive deficit with China. China has allowed its yuan currency to appreciate 4.3 percent over the last year as the Asian giant tries to rebalance its economy toward domestic consumption and depend less on exports.

  The U.S. data showed Chinese imports fell 2.5 percent in September. A report in Beijing showed the country's imports surged in October as exports grew at their slowest rate in months.

  Still, the United States and other countries are pressing China to let the yuan strengthen more, and many of the Republican candidates eyeing the White House have vowed to turn up the heat on China.

  A separate report showing a 0.6 percent fall in import prices during October also painted a bright spot for the economy.

  Americans' wages have not kept up with high inflation in recent months, making it harder for consumers to step up spending and power the economy. Many analysts, however, think inflation may have peaked. (Additional reporting by Lisa Lambert in Washington and by Steven C. Johnson and Angela Moon in New York Editing by Chizu Nomiyama Editing by Andrew Hay) (jason.lange@thomsonreuters.com +1 202 310 5487 Reuters Messaging: jason.lange.reuters.com@reuters.net))