KARACHI, Nov 4 (Reuters) - Pakistan, which opted out of an extension of a three-year IMF $11 billion emergency loan programme that ended in September, will meet International Monetary Fund officials from Nov 9-16 to review the economy, a finance ministry source said on Friday.

  " We will meet with IMF in Dubai for article IV consultations," the official said, referring to annual talks the fund holds with each member government to assess the health of the economy.

  Pakistan opted out of both the extension of the $11 billion loan programme and a new loan programme, saying it had no balance of payments crisis.

  Analysts say the government is taking the risky move of choosing short-term political gain over long-term economic stability.

  Pakistan's current account deficit in the first three months of the 2011/12 fiscal year widened to $1.209 billion from $597 million in the same period last year.

  Pakistan's foreign exchange reserves stood at $17.15 billion in the week ending Oct. 28 and hit a record $18.31 billion in the week ending July 10. They have since eased due to scheduled debt payments.

  The IMF loan repayments are also due to start from early next year but the country's finance minister said recently that Pakistan will have no trouble repaying a loan from the IMF.

  Analysts, however, have said that Pakistan will eventually have to go back to the IMF for a new loan. (Reporting by Sahar Ahmed Editing by Chris Allbritton and Nick Macfie)

By Paul Taylor and Noah Barkin

  CANNES, France, Nov 4 (Reuters) - Group of 20 nations have agreed to move " more rapidly" towards flexible exchange rates in a draft action plan for growth that adopts stronger language on currency rates than previous statements by the club of leading economies.

  The draft, which went to G20 leaders for final approval at a summit on Friday, also mentions China by name for the first time in the context of greater currency flexibility.

  Beijing has long faced pressure from western nations to allow its yuan currency to float more freely but has refused to bow to those demands.

  " We affirm our commitment to move more rapidly towards market determined exchange rate systems and enhance exchange rate flexibility to reflect underlying fundamentals and refrain from competitive devaluation of currencies," said the draft, a copy of which was obtained by Reuters.

  It welcomed China's determination to increase exchange rate flexibility " consistent with underlying market fundamentals" as well as recent changes to Russia's currency regime.

  G20 officials from emerging economies said the language on currencies could well be diluted in the final version of the document.

  It will be the first time that the G20 has published an " action plan" with specific national commitments to boost growth and rebalance the global economy, a drive that started at the height of the global financial crisis.

  The plan also included a six-point list of measures for strengthening medium-term growth and detailed steps that individual G20 countries pledge to undertake.

  The United States, for example, committed in the draft to put its debt-to-GDP ratio on a declining path no later than the middle of the decade.

  Emerging market economies and Germany promised to implement measures to boost domestic demand-led growth.

  GROWTH THREAT

  French President Nicolas Sarkozy, who faces a tough re-election campaign in 2012, had hoped to use his G20 presidency to pursue an ambitious rethink of the global monetary system.

  But he has had to rein in his ambitions as the euro zone's debt crisis has blown up, threatening to plunge the global economy back into recession.

  The European Central Bank cut interest rates on Thursday for the first time in over two years, saying the 17-nation currency bloc could suffer a " mild recession" in the latter part of the year. A day earlier the U.S. Federal Reserve slashed its forecasts for growth in the world's largest economy.

  " In emerging markets, there are also clear signs of a slowing in growth as developments in advanced economies begin to weigh on these countries," the draft said.

  " In some emerging market economies, financial stability and overheating risks remain," it added. " The lack of exchange rate flexibility in some countries limits policy options to deal with these risks."

  The G20 also reprised its usual line on currency volatility, saying that " disorderly movements in exchange rates have adverse implications for economic and financial stability" .

  In their final communique, G20 leaders were also expected to call for a bolstering of the Financial Stability Board, a task force set up at the height of the global financial crisis to look at global financial regulations. (Reporting by Paul Taylor Writing by Noah Barkin Editing by Ruth Pitchford)

LONDON, Nov 3 (Reuters) - Britons will spend less this Christmas than a year ago as falling disposable incomes temper the traditional urge to splash out, according to a report published on Thursday.

  Retail research group Decipher forecast retail spending would fall 0.6 percent year-on-year in December, or about 200 million pounds ($319 million), with a 1.4 percent rise in food sales offset by a 2.2 percent drop in spending on general merchandise products, particularly electrical goods.

  " People do like to put their worries to one side at Christmas. However, this year we believe that financial realities will take precedence over emotion," said Decipher lead consultant Matt Piner.

  " The truth is that the average household has seen disposable income slip by 2.1 percent over the past year. That will simply feed into lower overall spending."

  With shop prices tipped to rise 1.6 percent, Decipher forecast sales volumes would fall 2.3 percent in December.

  " With a lack of exciting new electrical products, the maturity of games consoles and televisions and a reluctance to spend on larger items, electricals retailers are likely to fare particularly badly," it predicted.

  " In contrast, lower value 'treats' such as clothing and beauty items, are likely to hold up better."

  Decipher's views contrast with slightly more optimistic forecasts from Britain's Centre of Retail Research and come ahead of a busy week of results from retailers including Marks & Spencer , Carphone Warehouse , J Sainsbury and Wm Morrison . ($1 = 0.626 British Pounds) (Reporting by Mark Potter Editing by David Holmes)

* Same-store sales index up 3.4 pct vs 4.5 pct view

  * Costco, Target, Macy's, Saks, Limited miss Street views

  * Penney, Gap comp sales fall

  * ICSC sees Nov. same-store sales up 3.5-4 pct

  * S& P Retail Index down 0.6 pct Abercrombie down 20 pct (Adds final sales tally and ICSC November forecast)

  By Phil Wahba

  Nov 3 (Reuters) - Most top U.S. store chains reported disappointing October sales on Thursday, showing that consumers up and down the income spectrum are still anxious about the state of the economy as they begin their holiday shopping.

  Major retailers ranging from Macy's Inc and Saks Inc to those catering to more frugal shoppers like Target Corp and J.C. Penney Co Inc all reported lower-than-expected sales at stores open at least a year.

  Even as the stock market rose, unemployment barely budged, and shoppers faced a barrage of scary headlines last month that gave them pause about spending, experts said.

  " This uncertainty, the news changing every day, it causes a freeze," said Wharton School professor Barbara Kahn.

  Overall, the 23 major U.S.-based retailers that report monthly results posted an average 3.4 percent gain in sales at stores open at least a year, according to Thomson Reuters data. That missed the 4.5 percent increase that Wall Street was expecting.

  Retailers that have struggled recently against rivals reported some of the biggest misses: Penney and Gap Inc posted comparable-sales declines.

  Despite the tepid month, retailers by and large did not lower their own sales and profit forecasts.

  Macy's said it still expected a gain of 4 percent to 4.5 percent for the current holiday quarter, while Gap and Limited Brands even raised their outlooks for the just-ended period.

  Costco, a perennial winner as shoppers seek low prices, reported U.S. same-store sales rose 9 percent, which were below Wall Street forecasts of 9.8 percent.

  The Standard & Poor's Retail Index was down 0.6 percent, compared with a 0.7 percent rise for the broader S& P 500. The biggest losers included Saks, down 7 percent, and Target, down 2.3 percent.

  Abercrombie & Fitch was down 20 percent. Although quarterly comparable sales rose 7 percent, the teen retailer reported slower demand in Europe, even at flagship stores that are at the center of its international growth plans. It also said the average price per unit was flat, suggesting it has not been able to raise prices as needed.

  STILL SPENDING, STILL ANXIOUS

  Even companies that have regularly beaten Wall Street forecasts had a disappointing October.

  Macy's said sales suffered because of a warm start to the month, which prompted people to delay buying winter clothes.

  Limited Brands, the parent of Victoria's Secret, narrowly missed analysts' estimates with a 6 percent rise in sales at stores open at least a year and forecast a slower pace of gains for November.

  The International Council of Shopping Centers expects same-store sales to be up 3.5 percent to 4 percent this month. Chief economist Michael Niemira said he expected a " slower but more sustainable pace of growth" in the coming months after several months of large gains.

  Retailers came off a strong back-to-school season, but that doesn't mean shoppers are any less careful, analysts said.

  " Now going into the holiday season, consumers are going to start to be more selective," said Kurt Salmon retail strategist Megan Donadio. " They want to make sure they are getting value."

  Consumer confidence did brighten a bit but was still low compared with historic levels.

  October is the third-smallest month for sales but with holiday shopping starting earlier than ever, the numbers are a foretaste of that all-important season.

  Bright spots included Kohl's Corp, which reported a 3.9 percent gain, and Zumiez Inc, which also beat forecasts.

  Off-price retailers TJX Cos Inc and Ross Stores Inc, which sold designer brands at major discounts, were also big winners. Ross raised its profit forecast.

  Overall, some analysts faulted Wall Street for underestimating how much caution is still out there.

  " This is expectations getting ahead of reality," said AlixPartners managing director Joel Bines. " It's still a solid performance."

  Teen retailers were a mixed bag, showing how intense the battle is for market share. Wet Seal's comparable sales fell 9.7 percent, well below expectations, and the company lowered its quarterly profit outlook.

  But American Eagle Outfitters said on Wednesday that its same-store sales were up 5 percent for the third quarter ended on Oct. 29. It no longer reports on a monthly basis. (Reporting by Phil Wahba in New York Editing by Lisa Von Ahn)

(Repeats story filed earlier with no changes to text)

  * Renewed focus on housing spotlights core problem

  * Bernanke: buying mortgage debt " viable" option

  * Growth of housing sector has beneficial spillovers

  * 7.5 million households in foreclosure or delinquent

  By Mark Felsenthal

  WASHINGTON, Nov. 3 (Reuters) - For the U.S. economy, it all comes back to the housing market.

  A fresh emphasis on healing the housing sector by officials at the Federal Reserve, in the Obama administration and in state capitals reflects the view that a healthier real estate market would go a long way in strengthening the economy.

  Fed Chairman Ben Bernanke said on Wednesday that the U.S. central bank was considering buying more mortgage debt to jolt the broader economy onto a more robust growth path.

  " The housing sector is a very important sector," he said at a news conference after a two-day policy meeting. " Problems in that sector are a big reason why our economy's not recovering more quickly."

  Economists say the Fed could do well to target the housing sector. For one, it is at the center of the economy's ills for another, homebuying can be a catalyst for a wide range of consumer purchases from refrigerators to lawn furniture.

  While many other sectors of the economy have found their feet, housing continues to lag abysmally, held back by high rates of foreclosure and homes that have dropped dramatically in value.

  Around 7.5 million U.S. households are either in foreclosure or delinquent on their mortgage, and 11 million homeowners owe more than their homes are worth.

  The Obama administration and a leading housing regulator announced plans last week to widen a program aimed at helping so-called underwater borrowers refinance.

  At the same time, state attorneys general are pressing for a settlement with top banks over alleged foreclosure abuses that could require the lenders to commit about $15 billion to reduce principal for struggling homeowners and modify loans.

  " Clearly, the housing sector is an obvious candidate for policy intervention," Goldman Sachs economist Andrew Tilton wrote in a recent note to clients.

  WAKE UP CALL

  Fed Governor Daniel Tarullo caught some in financial markets off guard by recommending in a speech on Oct. 20 that the central bank expand its purchases of mortgage-backed securities, reopening a debate many had thought closed.

  His ideas drew quick support from two of the most influential Fed officials -- Vice Chair Janet Yellen and New York Fed President William Dudley -- and has resonated with others.

  But why housing, and why now? At just more than 2 percent of U.S. gross domestic product -- down from 6 percent during the housing boom -- residential investment isn't that big a component of the $15 trillion U.S. economy.

  However, Tilton and others believe housing " punches above its weight" and generates enough momentum to be critical to strong growth. " Housing might be special," Tilton concluded.

  Housing has led the economy out of past recessions. It creates jobs and is a catalyst for spending on goods and services.

  The sector is usually a key avenue for the transmission of monetary policy but the drop in home values has locked many Americans out of refinancing, while leading others to fear taking the plunge by buying a home.

  Coaxing mortgage rates a bit lower could lead potential borrowers into the market. MBS purchases could directly lower housing borrowing costs.

  " Their actions are more effective when they target markets that have wider spreads," said Joseph Gagnon, a former Fed economist now at the Peterson Institute.

  In September, the Fed resumed buying MBS to replace housing debt that was rolling off its balance sheet. Adding to this supply would be " a viable option" if circumstances were right, Bernanke said, although he declined to specify what might spur the Fed into action.

  NOT UNIVERSALLY POPULAR

  Another reason to spotlight housing may be timing. After blaming Japan's natural disasters, Europe's debt woes, and a spike in oil prices for the slow U.S. recovery, officials at the U.S. central bank have come round to the view that there is a more fundamental problem with the economy.

  " I'd interpret the focus on housing as a result of the wake up call they got this summer," JPMorgan economist Michael Feroli said. " Each time we've been disappointed so far in this expansion they have been saying 'temporary factors.' This summer they finally realized that wasn't credible and took a fresh look at the recovery."

  Even so, any renewed expansion of Fed holdings with new MBS will face opposition within the central bank.

  Some top officials argued that the Fed's previous $1.25 trillion in MBS purchases blurred the line between monetary and fiscal policy by targeting a specific sector. Those complaints resonated more broadly, as well, and the Fed eventually decided its ultimate goal would be to return to an all-Treasury portfolio.

(Adds details, background)

  WASHINGTON, Nov 3 (Reuters) - New orders for U.S. factory goods unexpectedly rose in September and capital spending plans by businesses surged, according to a government report on Thursday that showed underlying strength in manufacturing.

  The Commerce Department said orders for manufactured goods increased 0.3 percent after a revised 0.1 percent gain in August, previously reported as a 0.2 percent fall. Economists had expected orders to slip 0.1 percent.

  Orders excluding transportation rose 1.3 percent in September after edging down 0.1 percent the prior month.

  Orders for non-defense capital goods excluding aircraft -- seen as a measure of business confidence and spending plans -- jumped 2.9 percent in September after advancing 0.9 percent the prior month.

  The increase in this category was the largest in six months. Data this week showed a cooling in manufacturing activity in October, but the strength in orders pointed to resilience in a sector that has shouldered the economy's recovery.

  The Commerce Department report showed orders for transportation equipment fell 7.1 percent, pulled down by a big drop in passenger aircraft. Civilian aircraft orders tumbled 25 percent, reversing the prior month's 26.2 percent increase. Motor vehicle orders fell 2.5 percent.

  Outside transportation, there were gains in machinery, computers and electronic products, primary metals, and electrical equipment and appliances.

  Unfilled orders rose 0.9 percent after rising 0.9 percent in August, suggesting factories will have to ramp up production in the near-term. Shipments rose 0.3 percent after gaining 0.1 percent the prior month.

  Inventories rose 0.1 percent after advancing 0.3 percent in August. The careful management of inventories bodes well for continued production.

  The department also said orders for durable goods -- manufactured products expected to last three years or more -- fell 0.6 percent instead of the 0.8 percent decline reported last week.

  Durable goods orders excluding transportation were up 1.8 percent rather than 1.7 percent. (Reporting by Lucia Mutikani, Editing by Chizu Nomiyama)

(Recasts, add comments, details, pvs Singapore)

  * Freeport Indonesia is producing copper at 5 pct of full capacity

  * LME copper stocks hit lowest since February

  * Coming Up: U.S. durable goods 1400 GMT

  By Silvia Antonioli

  LONDON, Nov 3 (Reuters) - Copper cut losses on Thursday after the European Central Bank cut its main interest rate to tackle a worsening debt crisis affecting the eurozone, a move that will boost credit availability and brightens metals demand prospects.

  Benchmark copper on the London Metal Exchange pared previous losses and trade at $7,865 in official rings, little changed from a $7,885 close on Wednesday, when it rose about 2 percent.

  The metal hit a session high of $7,930 per tonne shortly after the European Central Bank announced the interest rates cut.

  The ECB cut interest rates by a quarter point to 1.25 percent in a surprise move on Thursday, acting boldly to support the ailing euro zone economy at President Mario Draghi's first policy meeting in charge.

  " The market is gaining because risk has been reintroduced after the ECB cut rates," said Gianclaudio Torlizzi from metals consultancy T-Commodity.

  " The market took the cuts as a significant change in the policy making so it has actually improved the mood and is convincing more players to get involved."

  The ECB announcement boosted metals buying and offset worries about a possible Greek default.

  Supporting copper the euro turned higher again against the dollar in volatile trading in the wake of the unexpected rate cut from the European Central Bank.

  A slightly weaker dollar makes dollar-priced commodities more affordable for holders of other units.

 

 

 

  STILL ROBUST

  From a fundamental point of view things looked price positive.

  Declining copper ore grades and strikes at some of the largest copper mines have cut supply significantly this year.

  " The fundamentals should support copper and other metals: inventories have been falling across the board lately, Chinese imports are healthy and cancelled warrants have been rising but commodity markets at the moment are almost ignoring fundamentals they are politically-driven," Commerzbank analyst Daniel Briesemann said.

  Freeport McMoRan Copper & Gold's massive Grasberg mine in Indonesia is producing copper at 5 percent of its full capacity, a senior official at the energy and mineral resources ministry said.

  A decline in metals stocks and a rise in cancelled warrants < 0#MCUSTX-LOC-GRD> in the last few weeks underlined demand for industrial metals was still robust.

  Copper inventories in LME-monitored warehouses < MCU-STOCKS> fell by 1,150 tonnes to 422,125 tonnes, the lowest since February, latest data showed. Inventories have fallen by about 10 percent in the last 5 weeks.

  " If we look at industrial metals' specific fundamentals, we find that they are mostly positive for prices," Credit Suisse said in research note.

  " For instance, inventories of aluminum, copper, nickel,tin and even zinc have continued to fall. Availability is deteriorating... This positive fundamental backdrop contrasts the prevailing uncertainty regarding the economic outlook and the policy measures surrounding the European debt crisis."

  Aluminium was untraded in rings but was bid at $2,145 from $2,127 at the close on Wednesday. Zinc , used to galvanize steel, also untraded, was bid at $1,930 from $1,927 a tonne.

  Battery material lead , untraded in rings, was bid at $2,010 from $2,024 tin was bid at $22,100 from $22,000 and nickel traded at $18,775 in official rings from $18,580.

 

  Metal Prices at 1325 GMT Comex copper in cents/lb, LME prices in $/T and SHFE prices in yuan/T Metal Last Change Pct Move End 2010 Ytd Pct

By Dina Kyriakidou and Lefteris Papadimas

  ATHENS (Reuters) - The Greek government teetered on the brink of collapse on Thursday over plans for a referendum on a euro zone bailout with turmoil in the ruling party casting grave doubt on whether Prime Minister George Papandreou can survive a confidence vote.

  Conservative opposition leader Antonis Samaras demanded that a transitional government be formed immediately to run the country until snap elections, with the current parliament ratifying the financial rescue for debt-choked Greece.

  State television and the state ANA news agency said that Papandreou would meet the Greek president after an emergency cabinet session on Thursday, without giving further details.

  Papandreou would have to submit his resignation or a request for a unity government to President Karolos Papoulias.

  Papandreou's chief of staff denied the prime minister intended to resign although sources within his PASOK socialist party said some senior lawmakers wanted a Greek former top official at the European Central Bank to head a new government.

  " I don't think the government will last until tonight," said Costas Panagopoulos, managing director of pollsters ALCO.

  Papandreou's surprise decision to call a referendum on the 130 billion euro (112 billion pound) bailout to save Greece from bankruptcy and prevent a global financial crisis provoked an uproar at home and across the euro zone.

  Rejection of the package, which includes yet more austerity measures for the long suffering Greek electorate, would unravel the euro zone's plan for tackling its wider debt crisis, and cut off Greece's international financial lifeline.

  Finance Minister Evangelos Venizelos broke ranks with Papandreou, coming out against holding the referendum after a bruising meeting with the German and French leaders, who made clear that Greece would not receive a cent more in aid until it votes to meet its commitments to the euro zone.

  " REFERENDUM IS DEAD"

  Chaos over Greece's role in the euro zone swept financial markets with early losses in stocks and the euro turning to gains on hopes Athens might ditch its referendum plans.

  The Greek stock exchange rose 4 percent on speculation the referendum would be abandoned. World stocks as measured by MSCI were flat after earlier being sharply lower.

  In Europe, the FTSEurofirst 300 lost 1 percent initially but later stood close to 1 percent higher. Earlier, Japan's Nikkei closed down 2.2 percent.

  " The referendum is dead," Greek ruling party lawmaker Nikos Salayannis said on state radio.

  The cabinet was due to hold an emergency session followed by a likely meeting of PASOK lawmakers amid speculation that they will call on him to resign.

  However, his chief of staff Regina Vartzeli rejected the idea. " The prime minister has not resigned and does not intend to resign," she told the website of Proto Thema newspaper.

  Nevertheless, plotting was in full swing. A small group of senior PASOK lawmakers are preparing a proposal for a coalition government headed by former European Central Bank Vice President Lucas Papademos, party sources told Reuters.

  The group was trying to convince Papandreou to quit and open the way for Papademos, a respected figure in Greece, to head a so-called " unity" government to pull the nation from the brink.

  One PASOK lawmaker said she would not support the government in a parliamentary vote of confidence on Friday, cutting its majority for that vote to just one.

  PASOK has 152 deputies in the 300-member parliament. Lawmaker Eva Kaili announced she would stay in the party but refused to support the government in the confidence vote expected late on Friday, meaning Papandreou could count at most on the support of 151 deputies.

  If the government fell and snap elections were called, the referendum would be cancelled. The bailout would have to be approved by the next parliament that emerges from elections.

  Some lawmakers are calling for a government of national unity which would have the job of getting the bailout through parliament before calling early elections. But the main opposition New Democracy has repeatedly refused cooperation.

  Venizelos, one of the most powerful men in the PASOK government, originally supported Papandreou's plan. His change of mind came after he and Papandreou attended an emergency summit in Cannes on Wednesday with German Chancellor Angela Merkel and French President Nicolas Sarkozy.

  A finance ministry source told Reuters on condition of anonymity that Venizelos believed the vote on the bailout, which was agreed by euro zone leaders only last week, should not be held while immediate funding to keep Greece afloat still had to be secured.

  A VERY DIFFICULT MEETING

  " Under these conditions a referendum is exactly what the country does not need. He would not have objections if all our pending issues such as the loan instalment and the completion of the bailout plan had been sorted out," the source said after the meeting with Merkel and Sarkozy.

  " It was a very difficult meeting," the source added.

  Papandreou's bombshell announcement on Monday of the referendum and parliamentary vote of confidence pitched Greece into a political as well as an economic crisis.

  About 10 PASOK lawmakers have publicly called for a coalition government to approve the EU bailout deal and proceed to new elections. About 15, including five ministers and deputy ministers, have rejected the referendum idea.

  PASOK lawmaker Costas Gitonas said the referendum should not take place. " No, by no means," he told Mega TV. " It's a madhouse."

  The spectre of a hard Greek default and euro exit hung over a meeting of G20 leaders beginning in Cannes on Thursday.

  The French Riviera summit had been meant to focus on reforms of the global monetary system and steps to curb speculative capital flows, but the shock waves from Greece have upended the global talks.

By James Mackenzie

  ROME (Reuters) - Pressure mounted on Italy's besieged Prime Minister Silvio Berlusconi to quit on Thursday, as six former parliamentary loyalists called for a new government and the squabbling cabinet failed to agree an urgent economic reform programme.

  The rebel deputies, three of whom have already left Berlusconi's crumbling coalition, wrote to the premier saying Italy needed a " new political phase and a new government."

  " We are asking you to take an initiative which is appropriate to the situation," the deputies wrote, according to the letter published in the daily Corriere della Sera.

  " Be the backer of a new political phase and a new government which would have the task, from now until the end of the legislative term, of implementing the agenda agreed with our European partners and with it, the indications which came from the European Central Bank."

  Berlusconi has rejected calls to stand aside and make way for an interim government, saying the only alternative would be to hold early elections next spring, which he says would be irresponsible while the crisis continues.

  But as the number of party rebels grew, another deputy in the ruling PDL, Giuliano Cazzola, gave an interview to the online Affaritaliani daily saying Berlusconi should leave and allow another centre-right government to take power.

  " The government should resign and the PDL should manage a different solution without clinging to the alternative 'Us or new elections'," he said, suggesting that Berlusconi's chief of staff Gianni Letta could lead a new administration.

  President Giorgio Napolitano said on Tuesday he was sounding out support for reform from political forces outside the ruling centre right, suggesting he was contemplating the possibility of a broad-based national unity government.

  But in a statement on Thursday he said the ruling coalition had insisted Berlusconi could continue, there was no alternative to him, and he could carry through on his commitment to economic reform. On the other hand, opposition leaders wanted a unity government, Napoletano said.

  BOSSI OPPOSES TECHNOCRAT GOVERNMENT

  Umberto Bossi, leader of the devolutionist Northern League and Berlusconi's key ally, confirmed his opposition to a technocrat government after talking to Napoletano and said the party would prefer early elections, a year ahead of schedule.

  The head of state does not have the power to dismiss a government with a parliamentary majority but as growing numbers of PDL deputies desert Berlusconi, the opposition believe they could have the numbers to topple him as early as next week.

  With doubts over Greece's future in the euro zone already causing havoc in the markets, the renewed political uncertainty in Rome racked up pressure on Italian government bonds.

  Yields on 10-year BTP bonds hit more than 6.3 percent, creeping closer to the level of 7 percent which many analysts believe could lead to a so-called " buyers' strike" where investors take fright and refuse to buy the paper.

  The risk premium over benchmark German Bunds rose at one point as high as 462 points, the widest spread since 1995, reflecting the growing worries about the euro zone's third biggest economy.

  With Greece teetering on the brink of possibly leaving the euro, the future of the single currency could now depend on preventing a meltdown in Italy, which would overwhelm the bloc's current defence mechanisms.

  Berlusconi, struggling to contain divisions in his centre-right coalition, failed to win support at a cabinet meeting late on Wednesday for the comprehensive reforms to stimulate growth and cut Italy's massive debt that he wanted to take to a G20 meeting in Cannes.

  His supporters accused Economy Minister Giulio Tremonti, a constant thorn in his side, of blocking a deal.

  Instead of a decree that could have been put into action immediately, the meeting merely agreed on a so-called maxi amendment, containing a number of measures to add to a budget bill currently before the Senate.

  A government statement said the amendment was in line with what had been agreed with EU partners at a summit last week but contained no details.

  An official said the package included tax breaks for infrastructure investment, simplifying bureaucracy and helping youth employment though apprenticeships.

  " Italy can absolutely manage this situation and save itself if it does its work properly," said Corrado Passera, head of Intesa San Paolo, Italy's biggest retail bank, adding that it required a government " which acts differently from this one."

  Rome's borrowing costs have been capped since August by the European Central Bank's bond-buying programme but as the crisis has spread and concerns about Italy's towering public debt have grown, its intervention has become less and less effective.

  Market concern about Italy was underlined by French bank BNP Paribas, which reported on Thursday that it had slashed its sovereign exposure to Italy by 8.3 billion euros, or 40 percent.

  Berlusconi is due to meet leaders including German Chancellor Angela Merkel and French President Nicolas Sarkozy at the Cannes meeting on Thursday.

  He has rejected a growing chorus of calls to step aside, from groups ranging from the centre-left opposition to business and banking associations, unions, the Catholic church and now rebels in his own PDL party.

By Crispian Balmer and Nidal al-Mughrabi

  GAZA (Reuters) - The Palestinian militant group Islamic Jihad, which traded deadly fire with Israel at the weekend in Gaza, does not expect a subsequent truce to last long and has at least 8,000 fighters ready for war, a spokesman said.

  Islamic Jihad is the second largest armed group in Gaza, after Hamas, which rules the tiny Mediterranean enclave. The two share a commitment to the destruction of Israel and both are classified as terrorist groups by most Western governments.

  However, while Hamas has recently spent much of its energy on the business of government, Islamic Jihad has kept its focus firmly on the conflict, gaining in prominence and enjoying significant backing from Muslim supporters, including Iran.

  " We are proud and honoured to say that the Islamic Republic of Iran gives us support and help," Abu Ahmed, the spokesman for Islamic Jihad's armed wing, the Jerusalem Brigades, told Reuters in a rare, long interview.

  He denied widespread reports that Iran had provided his group with arms and smiled at suggestions it now receives more sophisticated weaponry from Tehran than Hamas. He also declined to comment on rumours that the Jihadists were trained by Iran.

  " What I will say is that we have every right to turn to every source of power for help," said the burly, bearded Abu Ahmed, occasionally flicking a string of yellow prayer beads.

  Islamic Jihad's latest confrontation with Israel left 12 Palestinian gunmen and one Israeli civilian dead. The fighting ended only after neighbouring Egypt brokered a cease-fire with both parties, but Abu Ahmed did not see it lasting long.

  " Theoretically the calm has been restored, but in practice it hasn't really," he said. Israel, he said, is itching for a fight in Gaza following last month's prisoner-swap accord, in which Israel released 477 Palestinian prisoners in exchange for Gilad Shalit, an Israeli soldier held by Hamas since 2006.

  Israel says it attacks only in self-defence.

  TRADING BLOWS

  It killed five senior Islamic Jihad militants on Saturday in retaliation for a rocket attack two days earlier that it blamed on the group. That rocket caused no casualties, but landed deep enough into Israel to set off sirens on Tel Aviv's outskirts.

  Abu Ahmed denied responsibility for the missile, saying this was how Israel had managed to find five top fighters together in the open -- because they had not expected to be targeted.

  But the Jerusalem Brigades soon hit back, firing numerous rockets into southern Israel, piercing the country's defensive missile shield. One Israeli man died, at least four others were injured, while cars and a building were also set ablaze.

  The group posted a video online showing a missile-launcher on the back of a truck firing a salvo of rockets. It was the first time the group has claimed to have such firepower, although there was no independent confirmation of its use.

  " The Jerusalem Brigades really surprised Israel, forcing them to rethink their assessment of us ... I don't think they realised we had that weaponry," said Abu Ahmed, indicating the vehicle was immediately hidden underground after the attack.

  Jerusalem Brigades cells are dotted around Gaza and Abu Ahmed said there was huge demand from youngsters to join.

  " We take some, but can't accept everyone ... It is a question of quality, not quantity," he said, giving for the first time an estimate of the strength of the force. " We have at least 8,000 fighters, who are fully equipped."

  The group got a boost to its standing in August when the new rulers in Egypt started dealing with it directly over truces, rather than through Hamas. Abu Ahmed said Hamas was not involved in the latest fighting and that all the talking was with Egypt.

  He played down reports of tensions with Hamas, which since Israel's military offensive in Gaza in late 2008 has appeared reluctant to go head-to-head with its sworn enemy.

  " Certainly in terms of ideology, there is no difference between Hamas and the Islamic Jihad. The difference is in the methodology," Abu Ahmed said, adding that Hamas's governmental role meant that it was " more vulnerable to outside pressure."

  He said Islamic Jihad's biggest problem was the Israeli armed drones that regularly buzz over Gaza seeking out militants. " Warfare has changed. You can't just hide a gun in your jacket like you could in the 1980s," he said, adding that the Jihadist fighters were not afraid of sudden death.

  " It is a good feeling to be under drone attack. When we chose the path of resistance, we opted either for martyrdom or victory. Martyrdom is the more desirable."

BRUSSELS (Reuters) - NATO vowed on Thursday to put " severe military pressure" on the Haqqani military network, suspected of being behind recent attacks on Western troops in Afghanistan.

  NATO Secretary-General Anders Fogh Rasmussen said that despite the violence seen at the weekend, the NATO mission was heading in the right direction and insurgent attacks were down in the July-September period, compared with last year.

  " Spectacular attacks capture the headlines, but they don't capture more ground," he told a news briefing. " And the bigger picture is different: overall enemy attacks are decreasing and the enemy has been weakened."

  Rasmussen said NATO was determined to put a stop to attacks on its soldiers by the Haqqani network.

  " To that end we will keep the Haqqani network under severe military pressure," he said.

  " The best way to ensure the insurgents and the terrorist networks realise they need to go to the negotiating table and find a peaceful resolution... is to keep up a strong military pressure."

  Officials in Afghanistan say the Haqqani network -- a powerful insurgent group which says it owes allegiance to the Afghan Taliban, but has traditionally been seen as close to Pakistan's intelligence agency -- may have been involved in a weekend bombing in Kabul that killed 13 Western troops.

  It was the deadliest single ground attack on foreign troops in their 10-year Afghan war and the involvement of the Haqqanis would complicate efforts to involve Pakistan more directly in efforts to stabilise the country.

  Rasmussen said NATO's plans to continue with a gradual handover of security responsibility to Afghan forces remained on track and Afghan President Hamid Karzai would soon announce the next group of provinces and districts to undergo this process.

  NATO aims to phase out its combat role in Afghanistan by 2014, but Rasmussen reiterated that the alliance would continue to support Afghanistan after that date.