* " Fiscal cliff" deadline only hours away
* Some investors betting government can still reach a
" cliff" deal
* Yields well within a range that has held since early
August

By Chris Reese
NEW YORK, Dec 31 (Reuters) - U.S. Treasury debt prices eased
on Monday on some investor optimism that Washington officials
might complete a last-minute deal to avert the " fiscal cliff" of
tax increases and government spending cuts that could push the
U.S. back into recession.
Treasuries prices rose last week as worries over the impact
of the " fiscal cliff" spurred safe-haven buying of U.S.
government debt, but a few investors on Monday were betting the
government could still come up with a plan to at least
temporarily stave off some tax increases and spending cuts.
The U.S. Congress comes back on Monday with only a few hours
of actual legislative time scheduled in which to act if an
agreement materializes.
" Talk of a last minute deal has driven the long-end more
than half a point lower," said Richard Gilhooly, interest rates
strategist at TD Securities in New York.
Benchmark 10-year Treasury notes were trading
10/32 lower in price with their yield rising to 1.74 percent
from 1.70 percent late Friday. Benchmark yields have gained 13
basis points since the beginning of December, and are on track
for the biggest monthly rise since March.
Benchmark yields are set to close out the year down 14 basis
points from the end of 2011, but remain very near the middle of
a range of 1.54 percent to 1.89 percent that has held since
early August.
U.S. Senator Jon Kyl on Monday said a " lot of progress" has
been made in talks to avert the " fiscal cliff" but he cautioned
that it is unclear if the progress will spur legislation the
Senate can vote on before the deadline at midnight EST (0500
GMT).
However, U.S. Senate Majority Leader Harry Reid said on
Monday that congressional negotiators still need to bridge
differences in the last-ditch talks.
" Treasuries remain in a holding pattern as the market awaits
the results of the budget debates," said David Ader, head of
government bond strategy at CRT Capital Group in Stamford,
Connecticut.
Thirty-year bonds, which earlier briefly dropped
a full point, were trading 29/32 lower in price to yield 2.91
percent, up from 2.87 percent late Friday.
The Treasury market will close early at 2 p.m. EST (1900
GMT) on Monday ahead of the New Year's Day holiday on Tuesday.

By Deborah Quinn Hensel

  HOUSTON (Reuters) - Former President George H.W. Bush's condition improved enough for him to be moved on Saturday out of the intensive care unit and into a regular room at the Houston hospital where he was admitted last month for respiratory problems, a spokesman said.

  Bush, 88, who served as president from 1989 to 1993, entered Methodist Hospital on November 23 for treatment of what doctors said was bronchitis, and he was moved into the ICU last Sunday after suffering a number of medical complications, including a persistent fever.

  Bronchitis is an inflammation of the mucous membranes lining the air passages through the lungs.

  " President Bush's condition has improved, so he has been moved today from the intensive care unit to a regular patient room at the Methodist Hospital to continue his recovery," the family said in a statement from his spokesman, Jim McGrath.

  " The Bushes thank everyone for their prayers and good wishes," it added.

  McGrath said on Friday that Bush's condition was getting better and that he was even singing at times in his communications with doctors and nurses.

  He added in an email reply to Reuters on Saturday, " George Bush is the most relentlessly upbeat man you'll ever meet, and his spirits have been good throughout this ordeal." He declined to disclose any information about Bush's prognosis or how much longer he might remain hospitalized.

  Bush, the 41st U.S. president and a Republican, is the father of former President George W. Bush. In a political career spanning four decades, he also served as a congressman, ambassador to the United Nations, envoy to China, CIA director, and vice president for two terms under Ronald Reagan.

  Bush has lower-body parkinsonism, which causes a loss of balance, and has used a wheelchair for more than a year.

  (Additional reporting and writing by Steve Gorman Editing by Peter Cooney)

By Andrew Quinn

  WASHINGTON (Reuters) - U.S. Secretary of State Hillary Clinton was admitted to a New York hospital on Sunday with a blood clot linked to a concussion she suffered earlier this month, the State Department said in an announcement that looked sure to stir up speculation over the health of one of America's best-known political figures.

  Clinton, 65, has been out of the public spotlight since mid-December, when officials said she suffered a concussion after fainting due to a stomach virus.

  " In the course of a follow-up exam today, Secretary Clinton's doctors discovered a blood clot had formed, stemming from the concussion she sustained several weeks ago," State Department spokesman Philippe Reines said in a statement.

  " She is being treated with anti-coagulants and is at New York-Presbyterian Hospital so that they can monitor the medication over the next 48 hours," Reines said. " They will determine if any further action is required."

  U.S. officials said on December 15 that Clinton, who cancelled an overseas trip because of the stomach virus, suffered a concussion after fainting due to dehydration.

  They have since described her condition as improving and played down suggestions that it was more serious. She had been expected to return to work this week.

  Clinton's illness forced her to cancel planned testimony to Congress on December 20 in connection with a report on the deadly attack on the U.S. diplomatic post in Benghazi, Libya. The attack became the subject of heated political debate in the run-up to the U.S. presidential election in November.

  Clinton's two top deputies testified in her place on the September 11 attack in Benghazi, which killed the U.S. ambassador and three other Americans and raised questions about security at far-flung diplomatic posts.

  Clinton indicated that she remained ready to testify and was expected to appear before lawmakers this month before she steps down, as planned, around the time of Obama's inauguration for his second term in late January.

  After narrowly losing the Democratic presidential nomination to Obama in 2008, Clinton has been consistently rated as the most popular member of his Cabinet and is often mentioned as a potential presidential candidate in 2016.

  PRESIDENTIAL CREDENTIALS

  Clinton has said she wants to take a break from public life and has laughed off suggestions that she may mount another bid to become the first woman president of the United States.

  Her stint as secretary of state has further burnished the credentials she earned as a political partner to her husband, former President Bill Clinton, and later as a Democratic senator from New York.

  In the four years since she became Obama's surprise choice as the top U.S. diplomat, Clinton has broken travel records as she dealt with immediate crises, including Libya and Syria, and sought to manage longer-term challenges, including U.S. relations with China and Russia.

  She has repeatedly said that she only intended to serve one term, and aides said she was on track to leave office within the next few weeks, once a successor is confirmed by the Senate.

  Her last months in office have been overshadowed by the Benghazi attack, the first to kill a U.S. ambassador in the line of duty since 1979, which brought sharp criticism of the State Department.

  An independent inquiry this month found widespread failures in both security planning and internal management in the department.

  It did not find Clinton personally responsible for any security failures, although she publicly took overall responsibility for Benghazi and the safety and security of U.S. diplomats overseas.

  The State Department's top security officer resigned from his post under pressure and three other mid-level employees were relieved of their duties after the inquiry released its report.

  The controversy also cost U.S. Ambassador to the United Nations Susan Rice her chance to succeed Clinton as secretary of state.

  Rice drew heavy Republican criticism for comments on several television talk shows in which she said the attack appeared to be the result of a spontaneous demonstration rather than a planned assault. She ultimately withdrew her name for consideration for the top diplomatic job.

  Obama on December 21 nominated Senator John Kerry, the Massachusetts Democrat who heads the Senate Foreign Relations Committee, to fill the position of secretary of state.

  (Reporting By Andrew Quinn Editing by Eric Walsh and Christopher Wilson)

* Predicts " adverse reaction" if no agreement reached

  * Says if necessary first bill of new year will reduce taxes for middle class

  * " We can get that done," Obama says of partial deal

  By Jeff Mason

  WASHINGTON, Dec 30 (Reuters) - Financial markets would be affected adversely if U.S. lawmakers fail to agree on a " fiscal cliff" deal before Tuesday, President Barack Obama said in an interview broadcast on Sunday, while urging Congress to act quickly to extend tax cuts for middle-class Americans.

  Lawmakers are seeking a last-minute deal that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to start within days. If Congress does not make that happen, the first bill brought up in the new year would be to reduce taxes for middle-income families, Obama told NBC's " Meet the Press."

  " Now I think that over the next 48 hours, my hope is that people recognize that, regardless of partisan differences, our top priority has to be to make sure that taxes on middle-class families do not go up. That would hurt our economy badly," Obama said in the interview taped on Saturday.

  " We can get that done. Democrats and Republicans both say they don't want taxes to go up on middle-class families. That's something we all agree on. If we can get that done, that takes a big bite out of the 'fiscal cliff.' It avoids the worst outcomes," Obama added.

  Low income tax rates first put in place under Republican former President George W. Bush are due to expire at the end of the day on Monday - the last day of 2012.

  Obama said that failing to reach a deal would have a negative impact on financial markets.

  " If people start seeing that on January 1st this problem still hasn't been solved, that we haven't seen the kind of deficit reduction that we could have had had the Republicans been willing to take the deal that I gave them ... then obviously that's going to have an adverse reaction in the markets," he said.

  RARE SENATE SESSION ON SUNDAY

  Obama met with congressional leaders at the White House on Friday and declared himself cautiously optimistic about the chances of an agreement, but he noted in the interview that nothing had materialized since then.

  " I was modestly optimistic yesterday, but we don't yet see an agreement. And now the pressure's on Congress to produce," he said.

  The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have fiscal-cliff legislation to act upon.

  Obama sketched out what he believed to be the most likely scenarios the end the back-and-forth between both sides. Either the congressional leaders would come up with a deal, or Democrats in the Senate would bring a bill to the floor seeking an up-or-down vote to extend tax cuts for middle income earners.

  " And if all else fails, if Republicans do in fact decide to block it, so that taxes on middle class families do in fact go up on January 1st, then we'll come back with a new Congress on January 4th and the first bill that will be introduced on the floor will be to cut taxes on middle class families," he said.

  Obama chided Republicans for resisting his call for tax rates to go up for the top two percent of U.S. earners despite what he viewed as significant compromises on his part to cut spending and reform expensive social programs for the poor and elderly.

  " They say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they're behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected. That seems to be their only overriding, unifying theme," Obama said.

  " The offers that I've made to them have been so fair that a lot of Democrats get mad at me. I mean I offered to make some significant changes to our entitlement programs in order to reduce the deficit," he said.

* Predicts " adverse reaction" if no agreement reached

  * Says if necessary first bill of new year will reduce taxes for middle class

  * " We can get that done," Obama says of partial deal

  By Jeff Mason

  WASHINGTON, Dec 30 (Reuters) - Financial markets would be affected adversely if U.S. lawmakers fail to agree on a " fiscal cliff" deal before Tuesday, President Barack Obama said in an interview broadcast on Sunday, while urging Congress to act quickly to extend tax cuts for middle-class Americans.

  Lawmakers are seeking a last-minute deal that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to start within days. If Congress does not make that happen, the first bill brought up in the new year would be to reduce taxes for middle-income families, Obama told NBC's " Meet the Press."

  " Now I think that over the next 48 hours, my hope is that people recognize that, regardless of partisan differences, our top priority has to be to make sure that taxes on middle-class families do not go up. That would hurt our economy badly," Obama said in the interview taped on Saturday.

  " We can get that done. Democrats and Republicans both say they don't want taxes to go up on middle-class families. That's something we all agree on. If we can get that done, that takes a big bite out of the 'fiscal cliff.' It avoids the worst outcomes," Obama added.

  Low income tax rates first put in place under Republican former President George W. Bush are due to expire at the end of the day on Monday - the last day of 2012.

  Obama said that failing to reach a deal would have a negative impact on financial markets.

  " If people start seeing that on January 1st this problem still hasn't been solved, that we haven't seen the kind of deficit reduction that we could have had had the Republicans been willing to take the deal that I gave them ... then obviously that's going to have an adverse reaction in the markets," he said.

  RARE SENATE SESSION ON SUNDAY

  Obama met with congressional leaders at the White House on Friday and declared himself cautiously optimistic about the chances of an agreement, but he noted in the interview that nothing had materialized since then.

  " I was modestly optimistic yesterday, but we don't yet see an agreement. And now the pressure's on Congress to produce," he said.

  The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have fiscal-cliff legislation to act upon.

  Obama sketched out what he believed to be the most likely scenarios the end the back-and-forth between both sides. Either the congressional leaders would come up with a deal, or Democrats in the Senate would bring a bill to the floor seeking an up-or-down vote to extend tax cuts for middle income earners.

  " And if all else fails, if Republicans do in fact decide to block it, so that taxes on middle class families do in fact go up on January 1st, then we'll come back with a new Congress on January 4th and the first bill that will be introduced on the floor will be to cut taxes on middle class families," he said.

  Obama chided Republicans for resisting his call for tax rates to go up for the top two percent of U.S. earners despite what he viewed as significant compromises on his part to cut spending and reform expensive social programs for the poor and elderly.

  " They say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they're behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected. That seems to be their only overriding, unifying theme," Obama said.

  " The offers that I've made to them have been so fair that a lot of Democrats get mad at me. I mean I offered to make some significant changes to our entitlement programs in order to reduce the deficit," he said.

SYDNEY, Dec 31 (Reuters) - Financial markets across Asia and Western Europe were either closed or closing early on Monday, abandoning the field as the U.S. Congress and the White House battled it out for a solution to the impending " fiscal cliff" .

  Market holidays were in force in Japan, South Korea, Taiwan, Indonesia, Thailand, the Philippines and Vietnam, with half-day trading in Australia, New Zealand, Hong Kong and Singapore.

  MSCI's broadest index of Asia-Pacific shares outside Japan was effectively unchanged given the extensive market closures. It has gained about 18 percent this year, a sharp turnaround from an 18 percent plunge in 2011.

  In Washington, Senate Majority Leader Harry Reid said the Senate would resume sitting at 11 a.m. Washington time (1600 GMT), to continue discussions, but there were still significant differences between the two sides.

  S& P 500 futures were up 5.6 points, or 0.4 percent, to 1,389.40 in electronic trading at 0030 GMT. Dow and Nasdaq futures were also slightly higher on news the parties were still talking.

  But traders said the rise in the futures market did not necessarily bode well for a Wall Street rally on Monday after the cash market and futures markets closed far apart on Friday.

  " Hard to predict how or when there will be a deal, but I believe investors will show their displeasure tomorrow by selling stocks if there is no deal," said Mohannad Aama, managing director at Beam Capital Management, an investment advisory firm in New York.

  The U.S. dollar was trading around 85.96-97, off its two-year, four-month highs above 86.63-64 yen seen last Friday as investors sold to take profits amid the fiscal cliff uncertainty.

  The euro inched up 0.14 percent to 1.323 on Monday. An agreement on the U.S. budget would be viewed as positive for riskier currencies such as the euro and Australian dollar, while a deadlock is deemed positive for the haven and highly liquid dollar.

  The Australian dollar was around $1.0365, from $1.0375 in late New York on Friday. It touched a one-month low of $1.0345 last week, but is on track to finish up 1.4 pct this year.

  The Aussie dollar was supported by a bounce in iron ore prices , which hit eight-month highs at $139.40. Prices are now up 61 percent from the lows hit in September.

  Australian shares fell 0.4 percent in a shortened session on Monday ahead of the New Year's Day holiday with big miners and banks losing ground as investors awaited the outcome of the U.S. budget talks.

  The benchmark S& P/ASX 200 index fell 19.4 points to 4,651.9 at 0028 GMT. It rose 0.5 percent to 4,671.3 on Friday, its highest close since June 2, 2011.

  Although iron ore prices had jumped to eight-month high, a weaker U.S. economy could bite into the gains in commodities, said Damien Boey, an equity strategist at Credit Suisse.

  " If you've got a weaker American economy because taxes have gone up and confidence is down, what you will find is that the key driver of commodities prices, which is the Chinese economy, will not actually be able to sustain strong growth," he said.

  Gold added $1.25 an ounce to $1,656.64 by 0004 GMT. Gold is up around 6 percent for the year and is on track for a 12th consecutive year of gains on rock-bottom interest rates, concerns over the financial stability of the euro zone, and diversification into bullion by central banks.

  U.S. crude futures slipped on Monday for a third consecutive session the budget crisis, with failure to reach a solution seen causing a large drop in fuel consumption.

  U.S. crude for February delivery was down 14 cents to $90.66 a barrel by 2353 GMT after a 2.4 percent gain last week. Front-month prices are on track to post an 8 percent fall in 2012, after three straight annual gains. Brent crude slipped 26 cents to $110.36 a barrel, but is set to post a 2.8 percent year-on-year increase in 2012, up for a fourth consecutive year.

  Hong Kong shares could end 2012 off 18-month closing highs on Monday as the United States dithered on a deal that will avert a fiscal crisis, with turnover likely weak in a half day session before shutting for the New Year's Day holiday.

  Last Friday, the Hang Seng Index crept up 0.2 percent to 22,666.6, its highest closing level since July 8, 2011. It is up 23 percent on the year to date after sinking 20 percent in 2011.

  The China Enterprises Index of the top Chinese listings in Hong Kong rose 0.3 percent last Friday to its highest close since Aug. 5, 2011. The H-shares index is up 14.5 percent in 2012 after diving 22 percent last year.

BERLIN (Reuters) - The euro zone sovereign debt crisis is far from over even though reform measures designed to address the roots of the problem are beginning to bear fruit, German Chancellor Angela Merkel has said in her New Year's address.

  In a taped interview to be broadcast on Monday evening, Merkel urged Germans to be more patient even though the euro zone crisis has already dragged on for three years. She drew a line linking German prosperity to a prosperous European Union.

  " For our prosperity and our solidarity we need to strike the right balance," Merkel said. " The European sovereign debt crisis shows how important this balance is.

  " The reforms that we've introduced are beginning to have an impact," she said. " Nevertheless we need to have further continued patience. The crisis is far from over."

  Merkel indirectly contradicted Finance Minister Wolfgang Schaeuble with those comments. In an interview on Friday in Bild newspaper Schaeuble said the worst of the crisis was over.

  Germany has been the paymaster in the euro zone crisis, to the chagrin of many German voters and a growing bloc of conservative lawmakers in Merkel's coalition. Germans remain wary of euro zone bailout efforts but give Merkel high marks for what they consider to be her judicious handling of the crisis.

  Merkel, who is seeking a third term in an election in September, proudly pointed out that unemployment in Germany had fallen to its lowest level since reunification in 1990 while the number of people employed had also risen to record highs.

  " That means that many hundreds of thousands of families have a secure future," said Merkel. " And that means that a lot of young people have the security of training and jobs and thus will get off to a good start in their careers."

  But in face of slowing economic growth, Merkel also warned that conditions could be more difficult in 2013 than in 2012.

  " I know that many people are naturally concerned going into the new year," she said. " And the economic environment will not in fact be easier but rather more difficult next year. But we shouldn't let that get us down rather it should spur us on."

  Even though Merkel's conservative party holds a commanding 10-point lead in opinion polls over the Social Democrats (SPD), the centre-left opposition SPD and their Greens allies have a chance of taking power because Merkel's coalition allies, the Free Democrats (FDP) have slumped badly and may not win seats.

  Political analysts believe Merkel nevertheless still has the most options to form a government after the vote. She could lead a right-left grand coalition with the SPD as she did from 2005 to 2009 or a coalition with the pro-environment Greens party.

  Merkel said she hoped there would be more controls next year on international financial markets - a popular issue in Germany that the SPD is planning to make a central plank of its 2013 election campaign.

  " The world hasn't sufficiently learned the lessons of the devastating 2008 financial crisis," she said. " Never again can we allow irresponsibility like back then to happen. In a social market economy, the state is the guardian of order - and that is something people should be able to count on."

  (Reporting By Erik Kirschbaum Editing by Robin Pomeroy)

By Alissa de Carbonnel and Yara Bayoumy

  MOSCOW/AZAZ, Syria (Reuters) - The international mediator touting a peace plan for Syria warned on Saturday of " hell" if the warring sides shun talks, and Moscow accused enemies of President Bashar al-Assad of blocking negotiations.

  U.N.-Arab League envoy Lakhdar Brahimi said in Moscow that responsible people inside and outside Syria should " help the Syrians stop their descent into more and more bloodshed, into more and more chaos and perhaps a failed state" .

  Efforts to find a negotiated solution to a 21-month-old war that has killed some 45,000 people have floundered, with the opposition, buoyed by rebel military advances, demanding that Assad be excluded from power before any talks can proceed.

  In a sign that the war may not quickly be won, government forces - in retreat for much of the past few months - scored a victory in the strategically important central city of Homs, where they pushed rebels from a district after days of fighting.

  But in the north, Syria's national airline had to cancel a flight from Cairo to Aleppo, according to Egyptian airline officials, due to insecurity at an airport that rebels have declared as a target and where explosions were heard overnight.

  Brahimi spent five days in Damascus this week as part of a push to promote a months-old peace plan that calls for a transitional government, without specifying Assad's role.

  " If the only alternative is really hell or a political process, then all of us must work ceaselessly for a political process," Brahimi said in Moscow. " It is difficult, it is very complicated, but there is no other choice."

  Western and some Arab states that back the revolt are hoping that Russia, Assad's main international protector and arms supplier, will drop its support.

  " WRONG, COUNTERPRODUCTIVE"

  They have been searching for signs that Moscow, an ally of Syria since Assad's father seized power 42 years ago, is changing its stance - so far mostly in vain.

  After meeting Brahimi, Russian Foreign Minister Sergei Lavrov firmly repeated Moscow's position that Assad's removal cannot be a precondition for negotiations, calling the Syrian opposition's refusal to talk to Damascus a " dead end" .

  " When the opposition says only Assad's exit will allow it to begin a dialogue about the future of its own country, we think this is wrong, we think this is rather counterproductive," he said. " The costs of this precondition are more and more lives of Syrian citizens."

  Having seized much of northern and eastern Syria over the last six months, Assad's opponents seem even less likely to accept talks with the government now than when the Geneva agreement first flopped in June.

  Rebels say they expect to win the war on the ground. But if both sides intend to fight to the bitter end, the longest and deadliest war to have emerged from last year's Arab revolts may have a long time left to run its course.

  Despite its setbacks, the government still has the bigger arsenal and a potent air force. It controls most of the densely populated southwest of Syria, the Mediterranean coast, most of the main north-south highway and military bases countrywide.

  In Azaz, a rebel-held town in the north, Abu Badri, 38, surveyed the damage of his home two hours after it was destroyed in an airstrike. He said four children and an elderly man were among the dead. Relatives trying to salvage what they could carried out drinking glasses, a fridge and an oven.

  " We'll have to find a tent to stay in near the border with Turkey. What else can we do?" he said. At least six houses were destroyed by two bombs on the town, which was just beginning to recover from earlier bombardment by Assad's forces.

  Eleven people were killed according to local activist Abu Zaid, who saw new graves dug in the cemetery nearby.

  Blood was spattered on the bricks that littered the area. A child's teddy bear lay in the wreckage. A bulldozer cleared the heavy rubble while young boys dug through the debris with their hands, hoping to find people still alive.

  In the central city of Homs, government forces pushed insurgents from the Deir Ba'alba district after several days of fierce fighting, opposition activists said.

  Homs controls the strategically vital highway linking Damascus to the Alawite heartland on the coast. There were unconfirmed reports dozens of rebel fighters had been killed, said Rami Abdelrahman, head of the British-based, pro-opposition Syrian Observatory for Human Rights, a monitoring group.

  WEST SEEKS RUSSIAN CHANGE OF HEART

  The United States and its allies hope a change of heart in Moscow could prod Assad to yield power, much as Russia's withdrawal of support for Serbian leader Slobodan Milosevic heralded his downfall a decade ago.

  Lavrov noted that Assad has repeatedly said he would not go, adding that Russia " does not have the ability to change this" .

  Brahimi's peace plan has stalled on the demand by the opposition that Assad be excluded from any transitional government, a precondition also backed by the United States, European countries and most Arab states.

  Egypt's President Mohamed Mursi, repeating the most populous Arab country's public support for the rebellion, said there was " no place for the current regime in the future of Syria" .

  " The revolution of the Syrian people, which we support, will go forward, God willing, to realise its goals of freedom."

  Most Arab states are ruled by Sunni Muslims, who form the majority in Syria and are the foundation of the revolt against Assad, a member of the Shi'ite-linked Alawite minority sect.

  Brahimi's plan was formally agreed in Geneva in June by world powers, but Washington and Moscow argued from the outset over the core question of whether the plan meant Assad must go.

  In Damascus, Brahimi advocated a transitional government " with all the powers of the state" , but his wording did not exclude a role for Assad.

  The envoy's credibility with the rebels appears to have withered. In the rebel-held town of Kafranbel, demonstrators held up banners ridiculing Brahimi with English obscenities.

  " We do not agree at all with Brahimi's initiative. We do not agree with anything Brahimi says," the rebel chief in Aleppo province, Colonel Abdel-Jabbar Oqaidi, said on Friday.

  Moscow has invited the main opposition leader, Moaz Alkhatib, to visit for talks, but Alkhatib rejected the invitation outright on Friday, instead demanding Lavrov apologise for Russia's support of Assad. He did, however, say he could meet Russian officials in a third country.

  Brahimi said a political solution had to be based on the Geneva agreement negotiated by his predecessor, Kofi Annan, shortly before Annan quit in frustration at the divisions among veto-wielding powers on the U.N. Security Council.

  " There may be one or two little adjustments to make here and there, but it is a reasonable basis for a political process that will help the Syrian people," Brahimi said of the Geneva plan.

  Brahimi is to meet senior U.S. and Russian diplomats together in the coming weeks. Two such meetings this month produced no signs of a breakthrough.

  (Additional reporting by Peter Graff and Dominic Evans in Beirut, Steve Gutterman in Moscow and Tom Perry in Cairo Writing by Peter Graff Editing by Louise Ireland)

By Deborah Quinn Hensel

  HOUSTON (Reuters) - Former President George H.W. Bush's condition improved enough for him to be moved on Saturday out of the intensive care unit and into a regular room at the Houston hospital where he was admitted last month for respiratory problems, a spokesman said.

  Bush, 88, who served as president from 1989 to 1993, entered Methodist Hospital on November 23 for treatment of what doctors said was bronchitis, and he was moved into the ICU last Sunday after suffering a number of medical complications, including a persistent fever.

  Bronchitis is an inflammation of the mucous membranes lining the air passages through the lungs.

  " President Bush's condition has improved, so he has been moved today from the intensive care unit to a regular patient room at the Methodist Hospital to continue his recovery," the family said in a statement from his spokesman, Jim McGrath.

  " The Bushes thank everyone for their prayers and good wishes," it added.

  McGrath said on Friday that Bush's condition was getting better and that he was even singing at times in his communications with doctors and nurses.

  He added in an email reply to Reuters on Saturday, " George Bush is the most relentlessly upbeat man you'll ever meet, and his spirits have been good throughout this ordeal." He declined to disclose any information about Bush's prognosis or how much longer he might remain hospitalized.

  Bush, the 41st U.S. president and a Republican, is the father of former President George W. Bush. In a political career spanning four decades, he also served as a congressman, ambassador to the United Nations, envoy to China, CIA director, and vice president for two terms under Ronald Reagan.

  Bush has lower-body parkinsonism, which causes a loss of balance, and has used a wheelchair for more than a year.

  (Additional reporting and writing by Steve Gorman Editing by Peter Cooney)

By Adnan Abidi

  NEW DELHI (Reuters) - The body of a woman whose gang rape provoked protests and rare national debate about violence against women in India arrived back in New Delhi in the early hours of Sunday morning.

  The unidentified 23-year-old medical student died from her injuries on Saturday, prompting promises of action from a government that has struggled to respond to public outrage.

  She had suffered brain injuries and massive internal damage in the attack on December 16, and died in hospital in Singapore where she had been taken for treatment.

  She and a male friend had been returning home from the cinema, media reports say, when six men on a bus beat them with metal rods and repeatedly raped the woman. The friend survived.

  Six suspects were charged with murder after her death.

  A Reuters correspondent saw family members who had been with her in Singapore take her body back to their Delhi home in an ambulance with a police escort.

  Indian Prime Minister Manmohan Singh's convoy was at the airport when the plane landed and left soon afterwards, the witness said.

  The outcry over the attack caught the government off-guard. It took a week for Singh to make a statement, infuriating many protesters.

  Issues such as rape, dowry-related deaths and female infanticide rarely enter mainstream political discourse in India.

  Analysts say the death of the woman dubbed " Amanat" , an Urdu word meaning " treasure" , by some Indian media could change that, although it is too early to say whether the protesters calling for government action to better safeguard women can sustain their momentum through to national elections due in 2014.

  PROTESTS

  Protesters have staged peaceful demonstrations in the capital New Delhi and in cities across India in the last few days to keep the pressure on Singh's government to get tougher on crimes against women. Last weekend protesters fought pitched battles with police.

  Authorities, worried about the reaction to the news of her death on Saturday, deployed thousands of policemen, closed 10 metro stations and banned vehicles from some main roads in central New Delhi.

  Most sex crimes in India go unreported, many offenders go unpunished, and the wheels of justice turn slowly, according to social activists, who say that successive governments have done little to ensure the safety of women.

  Commentators and sociologists say the rape has tapped into a deep well of frustration many Indians feel over what they see as weak governance and poor leadership on social issues.

  New Delhi has the highest number of sex crimes among India's major cities, with a rape reported on average every 18 hours, according to police figures. Government data show the number of reported rape cases in India rose by nearly 17 percent between 2007 and 2011.

  (Additional reporting by Devidutta Tripathy Writing by Louise Ireland Editing by Kevin Liffey)

(Repeating with no change in text)

  * Obama impatient as " fiscal cliff" deadline nears

  * Senators Reid and McConnell are key players

  * " Fiscal cliff" tax hikes, spending cuts just days away

  By Richard Cowan

  WASHINGTON, Dec 29 (Reuters) - Following a Friday meeting with congressional leaders, an impatient and annoyed President Barack Obama said it was " mind boggling" that Congress has been unable to fix a " fiscal cliff" mess that everyone has known about for more than a year.

  He then dispatched Senate Majority Leader Harry Reid, a Democrat, and Minority Leader Mitch McConnell, a Republican, on a mind-boggling mission: coming up with a bipartisan bill to break the " fiscal cliff" stalemate in the most partisan and gridlocked U.S. Congress of modern times - in about 48 hours.

  Reid and McConnell, veteran tacticians known for their own long-running feud, have been down this road before.

  Their last joint venture didn't turn out so well. It was the deal in August 2011 to avoid a U.S. default that set the stage for the current mess. That effort, like this one, stemmed from a grand deficit-reduction scheme that turned into a bust.

  But they have never had the odds so stacked against them as they try to avert the " fiscal cliff" - sweeping tax increases set to begin on Tuesday and deep, automatic government spending cuts set to start on Wednesday, combined worth $600 billion.

  The substantive differences are only part of the challenge. Other obstacles include concerns about who gets blamed for what and the legacy of distrust among members of Congress.

  Any successful deal will require face-saving measures for Republicans and Democrats alike.

  " Ordinary folks, they do their jobs, they meet deadlines, they sit down and they discuss things, and then things happen," Obama told reporters. " If there are disagreements, they sort though the disagreements. The notion that our elected leadership can't do the same thing is mind-boggling to them."

  CORE DISAGREEMENT

  The core disagreement between Republicans and Democrats is tough enough. It revolves around the low tax rates first put in place under Republican former President George W. Bush that expire at year's end. Republicans would extend them for everyone. Democrats would extend them for everyone except the wealthiest taxpayers.

  The first step for Reid and McConnell may be to find a formula acceptable to their own parties in the Senate.

  While members of the Senate, more than members of the House of Representatives, have expressed flexibility on taxes, it's far from a sure thing in a body that ordinarily requires not just a majority of the 100-member Senate to pass a bill, but a super-majority of 60 members.

  With 51 Democrats, two independents who vote with the Democrats and 47 Republicans, McConnell and Reid may have to agree to suspend the 60-vote rule.

  Getting a bill through the Republican-controlled House may be much tougher. The conservative wing of the House, composed of many lawmakers aligned with the Tea Party movement who fear being targeted by anti-tax activists in primary elections in 2014, has shown it will not vote for a bill that raises taxes on anyone, even if it means defying Republican House Speaker John Boehner.

  Many Democrats are wedded to the opposite view - and have vowed not to support continuing the Bush-era tax rates for people earning more than $250,000 a year.

  Some senators are wary of the procedural conditions House Republicans are demanding. Boehner is insisting the Senate start its work with a bill already passed by the House months ago that would continue all Bush-era tax cuts for another year. The Democratic-controlled Senate may amend the Republican bill, he says, but it must be the House bill.

  For Boehner, it's the regular order when considering revenue measures, which the U.S. Constitution says must originate in the House.

  SHIFT BLAME

  As some Democrats see it, it's a way to shift blame if the enterprise goes down in flames. House Republicans would be able to claim that since they had already done their part by passing a bill, the Senate should take the blame for plunging the nation off the " cliff."

  And that could bring public wrath, currently centered mostly on Republicans, onto the heads of Democrats.

  Voters may indeed be looking for someone to blame if they see their paychecks shrink as taxes rise or their retirement savings dwindle as a result of a plunge in global markets.

  If Reid and McConnell succeed, there could be political ramifications for each side. For example, a deal containing any income tax hikes could complicate McConnell's own 2014 re-election effort in which small-government, anti-tax Tea Party activists are threatening to mount a challenge.

  If Obama and his fellow Democrats are perceived as giving in too much, it could embolden Republicans to mount challenge after challenge, possibly handcuffing the president before his second term even gets off the ground.

  It could be a sprint to the finish. One Democratic aide expected " negotiation for a day." If the aide is correct, the world would know by late on Saturday or early on Sunday if Washington's political dysfunction is about to reach a new, possibly devastating, low.

  If Reid and McConnell reach a deal, it would then be up to the full Senate and House to vote, possibly as early as Sunday.

  Reid and McConnell have been through bitter fights before. The deficit reduction and debt limit deal that finally was secured last year was a brawl that ended only when the two leaders agreed to a complicated plan that secured about $1 trillion in savings, but really postponed until later a more meaningful plan to restore the country's fiscal health.

  That effort led to the automatic spending cuts that form part of the " fiscal cliff."

  Just months later, in December 2011, Reid and McConnell were going through a tough fight over extending a payroll tax cut.

  In both instances, it was resistance from conservative House Republicans that complicated efforts, just as is the case now with the " fiscal cliff." (Editing by Fred Barbash and Will Dunham)

* Reid, McConnell and aides in last-ditch effort

  * Negotiators described as " still very far apart"

  * Taxes set to rise Tuesday, spending cuts due Wednesday

  * Temporary " fiscal cliff" patches being discussed

  By Richard Cowan and Rachelle Younglai

  WASHINGTON, Dec 29 (Reuters) - Congressional negotiators burrowed into their offices on Saturday to see if they could stop the U.S. economy from falling off of a " fiscal cliff" in just three days when the biggest tax increases ever to hit Americans in one shot are scheduled to begin.

  Aides to Senate Majority Leader Harry Reid, a Democrat, and Senate Republican leader Mitch McConnell worked through the day on a possible compromise that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to kick in next week.

  A variety of lower taxes are scheduled to expire at the end of Monday, the last day of the year. If allowed to rise, the approximately $500 billion value of the revenue increases would represent a historic hike when taken together.

  The combined punch of the tax increases and spending cuts could push the U.S. economy back into recession.

  " We're now at the point where, in just a couple days, the law says that every American's tax rates are going up. Every American's paycheck will get a lot smaller. And that would be the wrong thing to do for our economy," President Barack Obama said in his weekly radio and Internet address, which was broadcast on Saturday.

  McConnell left the U.S. Capitol after spending seven hours in his office. " We've been trading paper all day and talks continue into the evening," he told reporters on his way out.

  A source with knowledge of the talks, speaking on condition of anonymity, said: " We are still very far apart with almost no time left on the clock."

  TEMPORARY PATCHES One congressional aide close to the talks said that most of what was being discussed late on Saturday would provide temporary patches to the " fiscal cliff" dilemma. The negotiations, the aide said, likely could extend into Sunday.

  " They continue to go round and round," the aide said of the negotiations, with ideas constantly in flux.

  The aide, who asked not to be identified, said negotiators were discussing the possibility of putting off for a few months the $109 billion in automatic spending cuts due to start on Wednesday. Those cuts would be divided equally between military and non-military programs. It is feared that they could cause severe disruptions inside federal agencies if allowed to occur.

  Earlier this week, talk of a temporary delay in the spending cuts was met with derision by some congressional aides.

  The extension of the low income tax rates first put in place under Republican former President George W. Bush would also be on a temporary basis, probably one year, the aide said.

  No deal had been reached on the most difficult question: Democrats' demand that upper-income earners - families making more than $250,000 a year - see their tax rates go up.

  Republicans had been opposed to any rate increase, but lately have signaled a willingness to go along with a higher threshold - and a $400,000 figure has been floating around for days.

  Under proposals being discussed, top earners could see their income tax rate rise to 39.6 percent, from the current 35 percent, in order to help tame budget deficits.

  The aide added that Republicans still had not agreed to Obama's call for extending long-term unemployment benefits, but that they were demanding some spending cuts to be included in a stop-gap deal.

  Disagreements over what to do about low estate taxes that are expiring also had not been worked out, the aide said.

  Unless Congress acts, the tax is set to jump on Tuesday - the first day of 2013 - to 55 percent with the first $1 million exempted for individuals. Currently, there is a 35 percent tax and a $5 million exemption.

  A Senate Republican leadership aide said that it might not be known until sometime on Sunday whether these talks bear fruit. That is when the leaders are expected to brief their rank-and-file members.

  The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have " fiscal cliff" legislation to act upon.

  One Democratic aide was pessimistic that McConnell would come up with a counteroffer that Reid would find acceptable. Such a counteroffer would have to be calibrated in a way that also could attract votes from conservative House of Representatives Republicans, many of whom have balked at tax rate increases on anyone.

  'HARD TO SEE'

  A senior House Republican aide on Saturday voiced pessimism about prospects for a deal.

  " It's hard to see Reid agreeing to anything that can get the votes of the majority of the (Republican) majority in the House, thereby allowing a bipartisan accomplishment," the aide said. A " majority of the majority" refers to the 241 Republicans who are in the 435-member House.

  The Republican aide placed the blame squarely on Democrats, as many Republican members have done publicly, saying that going off the " fiscal cliff" is a " policy upside" for them. " Higher taxes, devastating defense cuts. The polls tell them they can win the PR (publican relations) war in January. From their perspective, why stop the cliff dive?"

  Democrats, in turn, have publicly accused House Speaker John Boehner, the top Republican in Congress, of preferring to put off any tough " fiscal cliff" votes until after a Jan. 3 House election in which he is expected to win another two-year term as speaker.

  If McConnell and Reid can manage to reach a deal on inheritance taxes and raising income tax rates on the wealthiest Americans, they likely would throw into the compromise some other " fiscal cliff" solutions.

  Those could include extending an array of other expiring tax breaks such as one that encourages companies to conduct research and development. Also, Congress wants to prevent a steep pay-cut in January for doctors who treat elderly patients under the Medicare health insurance program.

  Lawmakers also want to prevent middle-class taxpayers from inadvertently creeping into a higher t ax bracket, known as the alternative minimum tax, intended for the wealthiest.

  If the Reid-McConnell effort fails, Obama has asked the Senate to hold a vote on Monday on a " basic package" that would stop taxes from going up on the middle class and would extend long-term unemployment benefits that are about to expire. If it passes the Senate, its fate would be in the hands of the Republican-controlled House.

(Updates column with White House meeting details and quotes, fall in futures)

  By Ryan Vlastelica and Edward Krudy and Doris Frankel

  Dec 28 (Reuters) - Investors fearing a stock market plunge - if the United States tumbles off the " fiscal cliff" next week - may want to relax.

  But they should be scared if a few weeks later, Washington fails to reach a deal to increase the nation's debt ceiling because that raises the threat of a default, another credit downgrade and a panic in the financial markets.

  Market strategists say that while falling off the cliff for any lengthy period - which would lead to automatic tax hikes and stiff cuts in government spending - would badly hurt both consumer and business confidence, it would take some time for the U.S. economy to slide into recession. In the meantime, there would be plenty of chances for lawmakers to make amends by reversing some of the effects.

  That has been reflected in a U.S. stock market that has still not shown signs of melting down. Instead, it has drifted lower and become more volatile.

  In some ways, that has let Washington off the hook. In the past, a plunge in stock prices forced the hand of Congress, such as in the middle of the financial crisis in 2008.

  " If this thing continues for a bit longer and the result is you get a U.S. debt downgrade ... the risk is not that you lose two-and-a-half percent, the risk is that you lose ten and a half," said Jonathan Golub, chief U.S. equity strategist at UBS Equity Research, in New York.

  U.S. Treasury Secretary Tim Geithner said this week that the United States will technically reach its debt limit at the end of the year.

  INVESTORS WARY OF JANUARY

  The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

  Markets posted several days of sharp losses in the period surrounding the debt ceiling fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of " no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

  Credit ratings agency Standard & Poor's lowered the U.S. sovereign rating to double-A-plus, citing Washington's legislative problems as one reason for the downgrade from triple-A status. The benchmark S& P 500 dropped 16 percent in a four-week period ending Aug. 21, 2011.

  " I think there will be a tremendous fight between Democrats and Republicans about the debt ceiling," said Jon Najarian, a co-founder of online brokerage TradeMonster.com, in Chicago.

  " I think that is the biggest risk to the downside in January for the market and the U.S. economy."

  There are some signs in the options market that investors are starting to eye the January period with more wariness. The CBOE Volatility Index, or the VIX, the market's preferred indicator of anxiety, has remained at relatively low levels throughout this process, though on Thursday it edged above 20 for the first time since July.

  More notable is the action in VIX futures markets, which shows a sharper increase in expected volatility in January than in later-dated contracts. January VIX futures are up nearly 23 percent in the last seven trading days, compared with a 13 percent increase in March futures and an 8 percent increase in May futures. That's a sign of increasing near-term worry among market participants.

  The CBOE Volatility Index closed on Friday at 22.72, gaining nearly 17 percent to end at its highest level since June as details emerged of a meeting on Friday afternoon of President Barack Obama with Senate and House leaders from both parties where the president offered proposals similar to those already rejected by Republicans. Stocks slid in late trading and equity futures continued that slide after cash markets closed.

  " I was stunned Obama didn't have another plan, and that's absolutely why we sold off," said Mike Shea, a managing partner and trader at Direct Access Partners LLC, in New York.

  Obama offered hope for a last-minute agreement to avoid the fiscal cliff after a meeting with congressional leaders, although he scolded Congress for leaving the problem unresolved until the 11th hour.

  " The hour for immediate action is here," he told reporters at a White House briefing. " I'm modestly optimistic that an agreement can be achieved."

  The U.S. House of Representatives is set to convene on Sunday and continue working through the New Year's Day holiday. Obama has proposed maintaining current tax rates for all but the highest earners.

  Consumers don't appear at all traumatized by the fiscal cliff talks, as yet. Helping to bolster consumer confidence has been a continued recovery in the housing market and growth in the labor market, albeit slow.

  The latest take on employment will be out next Friday, when the U.S. Labor Department's non-farm payrolls report is expected to show jobs growth of 145,000 for December, in line with recent growth.

  Consumers will see their paychecks affected if lawmakers cannot broker a deal and tax rates rise, but the effect on spending is likely to be gradual.

  PLAYING DEFENSE

  Options strategists have noted an increase in positions to guard against weakness in defense stocks such as General Dynamics because those stocks would be affected by spending cuts set for that sector. Notably, though, the PHLX Defense Index is less than 1 percent away from an all-time high reached on Dec. 20.

  This underscores the view taken by most investors and strategists: One way or another, Washington will come to an agreement to offset some effects of the cliff. The result will not be entirely satisfying, but it will be enough to satisfy investors.

  " Expectations are pretty low at this point, and yet the equity market hasn't reacted," said Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities USA, in New York. " You're not going to see the markets react to anything with more than a 5 (percent) to 7 percent correction."

  Save for a brief 3.6 percent drop in equity futures late on Thursday evening last week after House Speaker John Boehner had to cancel a scheduled vote on a tax-hike bill due to lack of Republican support, markets have not shown the same kind of volatility as in 2008 or 2011.

  A gradual decline remains possible, Golub said, if business and consumer confidence continues to take a hit on the back of fiscal cliff worries. The Conference Board's measure of consumer confidence fell sharply in December, a drop blamed in part on the fiscal issues.

  " If Congress came out and said that everything is off the table, yeah, that would be a short-term shock to the market, but that's not likely," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.

  " Things will be resolved, just maybe not on a good time table. All else being equal, we see any further decline as a buying opportunity."

  (Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: david.gaffen(at)thomsonreuters.com)

  (Reporting by Edward Krudy and Ryan Vlastelica in New York and Doris Frankel in Chicago Writing by David Gaffen Editing by Martin Howell, Steve Orlofsky and Jan Paschal)

SINGAPORE, Dec 29 (Reuters) - The Indian gang-rape victim whose assault in New Delhi triggered nationwide protests has died, the Singapore hospital treating her said on Saturday.

  " We are very sad to report that the patient passed away peacefully at 4.45 a.m. on Dec 29, 2012 (1645 GMT Friday). Her family and officials from the High Commission of India were by her side," Mount Elizabeth Hospital Chief Executive Officer Kelvin Loh said in a statement.