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HONG KONG (Reuters) � Expectations that the Federal Reserve is moving closer toward printing more money to support the U.S. economy lifted both stocks and bonds on Wednesday, while the dollar fell to a six-week low against the euro on a dwindling yield advantage.

Gold was in sight of $1,300 an ounce, having hit a record high overnight after the Fed said it was ready if needed to add more stimulus and that inflation was running below where it would like it to be.

Asia ex-Japan stocks (.MIAPJ0000PUS) rose 0.7 percent to a near two-year high, though trading volumes were thinned out by holidays, while U.S. stock futures climbed 0.5 percent.

The increasing possibility that the Fed will buy Treasuries to stimulate demand lifted government bonds, while the prospect of investors having access to even more cheaply borrowed money supported riskier investments such as equities.

"The FOMC seems to be considering more bond purchases predominantly because of concerns over deflation and not over growth. In consequence, Asian risky assets should benefit from the additional liquidity rather than suffering from weakening prospects for regional exports to the United States," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said in a note.

The falling dollar pushed up the yen and kept traders on high alert for signs that Japan was intervening in markets again to push its currency back down.

Japanese Prime Minister Naoto Kan said intervention in the foreign exchange markets would be "unavoidable" if there was a drastic change in the currency. He also told the Financial Times in an interview that Tokyo planned a "total" package of measures that would boost domestic demand and help to weaken the currency.

The dollar fell 0.3 percent against the yen to 84.87 yen, just below where traders had thought Japan's central bank would support it.

Japanese authorities intervened in currency markets last Wednesday to weaken the yen for the first time since 2004, but the dollar has met selling pressure from exporters around 86 yen. Tokyo has not been seen in the market since.

DOLLAR OUTLOOK DARKENS

The euro rose to $1.3310, the highest since Aug 6, while the dollar weakened across the board.

"I doubt the market will step back from selling the U.S. dollar much for the time being until the U.S. data starts to improve," said Greg Gibbs, currency strategist at Royal Bank of Scotland in Sydney.

The relatively high yielding Australian and New Zealand dollars outperformed other liquid currencies, rising 0.3 percent and 0.4 percent, respectively, with dealers focusing on the widening yield advantage of these countries against U.S. bonds.

The 10-year U.S. Treasury future was up 0.3 percent while in the cash market, the benchmark 10-year yield slipped 3 basis points compared with late on Tuesday in New York to 2.55 percent.

The spread of the U.S. 10-year yield over the German 10-year yield has shrank to a negligible 8 basis points from around 40 basis points only two weeks ago.

The Fed's statement increased expectations the Bank of Japan could also ease policy further, pushing up Japanese government bonds. The 10-year JGB future was up 0.3 point in midsession trade.

Japan's Nikkei share average (.N225) was largely unchanged on the day, though it has risen around 9 percent so far in September. Those returns were roughly level with the U.S. S&P 500 index but exceeded the FTSEurofirst 300's 5 percent gain.

The MSCI index of Asia Pacific stocks outside Japan (.MIAPJ0000PUS) was at its highest since April 15. The index has climbed 10 percent in September.

However, some Asian exchange-traded funds, which have been receiving heavy inflows, may be near a peak.

"We believe inflows are likely to slow, as many of these ETFs are now technically overbought. In addition, we expect ETFs investing in Japan and Taiwan to continue to underperform their Asian peers due to persistent outflows," TrimTabs Investment Research said in a research report.

Equity trading volumes in Asia could be light on Wednesday with markets closed in China, South Korea and Taiwan because of public holidays.

Gold in the spot market was up 0.1 percent to $1,287.75 per ounce, near an all-time high of $1,290.70 reached on Tuesday. The precious metal has been driven by speculation that with advanced economies still more likely essentially to print money, inflation may not be too far off.

Crude oil futures drew support from the weaker dollar to edge above $75 a barrel.

(Additional reporting by Charlotte Cooper in Tokyo)

(Editing by Kim Coghill)

TOKYO (Reuters) � Japanese Prime Minister Naoto Kan said Tokyo was ready to act again if the yen moved sharply, keeping traders on guard against further intervention as expectations of U.S. monetary easing weighed on the dollar.

Japan intervened in the currency market last week by selling yen for the first time in more than six years as its surge to a 15-year high against the dollar threatened to derail Japan's slowing economy and worsen deflation.

In an interview with the Financial Times published on Wednesday, Kan said currency intervention would be unavoidable if there were a drastic change in the yen exchange rate.

The comments coincided with the dollar's drop below 85 yen to its weakest level since last week's intervention, after the Federal Reserve signaled it was ready to stimulate the U.S. economy more.

Traders said the yen was still below levels that would trigger another intervention, but more yen selling could not be ruled out.

"I don't think markets are bracing for imminent intervention with the dollar still above 84.00 yen. But if the dollar falls further to test 82 yen, markets will focus on whether authorities will step in again to defend that level," said Ayako Sera, market strategist at Sumitomo Trust & Banking.

"Japanese authorities will intervene in the event of sharp market moves, regardless of whether Kan will be away from Japan or not."

Kan, who is traveling to New York this week for a U.N. General Assembly meeting, said there was an agreement among G20 nations that overly rapid currency movements were undesirable, and that he would seek to defend Japan's action.

Bank of Japan Governor Masaaki Shirakawa declared further support for the country's economy, saying in a newspaper interview the central bank would provide ample funds to the market.

That would include liquidity supplied through intervention, Shirakawa said, suggesting that the BOJ would continue to refrain from draining funds released into the market when authorities sell the yen.

The BOJ also stands ready to ease policy further at its next rate review on October 4-5, although there is a debate within the bank on what exactly it should do next with its policy options limited, sources familiar with the bank's thinking said.

BOJ'S OPTIONS

Those options include increasing government bond purchases, buying private sector assets or expanding a cheap fund-supply scheme targeting growth industries, sources say.

Shirakawa told the Yomiuri newspaper that greater uncertainty about the global economy meant increased risks to Japan's recovery, a warning echoed by BOJ board member Ryuzo Miyao.

Miyao, who joined the board in March, told business leaders in western Japan that a possible extended spell of sluggish U.S. economic growth could force the BOJ to alter its forecast of a sustained moderate recovery in Japan's economy.

He also said the BOJ was not ruling out any policy option, including increasing its government bond buying from the current 21.6 trillion yen ($254.5 billion) per year.

With its hands tied by public debt double the size of Japan's $5 trillion economy, the government has mainly counted on the BOJ to come up with ways of revving up the sagging economy.

But Kan said Tokyo planned a comprehensive package of measures that would stimulate domestic demand and help to weaken the currency.

While he did not elaborate on measures to boost domestic demand, he said one option was to use the yen's strength to invest in natural resources overseas.

"I think it is necessary to combine economic policy and monetary policies that will be conducive to ... (a yen exchange rate) slightly lower than the current level," he added.

Kan has instructed his cabinet to compile an extra budget for the current fiscal year to March, although the size of spending will likely be too small to significantly boost the economy.

Unsterilized interventions are a departure from the usual central bank practice of absorbing the extra funds through issuance of government bills, effectively making intervention a part of a monetary loosening mix.

($1=84.88 Yen)

(Additional reporting by Masayuki Kitano, Yoko Nishikawa, Kaori Kaneko and Rie Ishiguro in Tokyo, Karolina Tagaris in London; Editing by Tomasz Janowski and Edmund Klamann)

HONG KONG/TORONTO (Reuters) � China's Sinochem Corp has hired investment banks to look at toppling BHP Billiton's $39 billion bid for Potash Corp, sources said, as the miner warned it would not be caught in an expensive bidding war for the world's largest fertilizer group.

State-owned chemicals group Sinochem has hired Deutsche Bank and Citigroup to evaluate measures to foil BHP's bid for Potash, sources with direct knowledge of the matter told Reuters. The sources were not authorized to speak publicly on the matter.

Both banks declined comment. Sinochem could not be immediately reached for comment on Wednesday, a public holiday in China.

Though it was still unclear whether a serious rival bid from a Chinese consortium would emerge, news of the banking mandates underscored China's willingness to try and stymie the deal with a rival offer or by buying a blocking stake in Potash.

Late on Tuesday in Canada, BHP Chief Executive Marius Kloppers said he was unconcerned by the possibility of a rival bid emerging for the Potash, and said the miner would rather drop its bid than raise the offer to a level that exceeded good value for its shareholders.

"If somebody offers a price at which we cannot demonstrate value for our shareholders, we're probably not going to show, and I think that continues to be the case," Kloppers said in an interview with Canada's Business News Network.

BHP shares in Sydney edged up 0.3 percent by 0215 GMT in line with the broader market. Investors suggested BHP might raise its offer but it was still unclear whether a serious white knight would emerge.

"It is all part of the game. BHP has made a bid at $130 and you would suspect that's not their final bid or otherwise they would have said it is final," said James Bruce, a portfolio manager at Perpetual Investments, which owns BHP shares.

"Our view remains unchanged. As a BHP shareholder, we think they are offering a full price for the assets and a far more value-accretive move by the BHP board would be to buy back their own stock rather than pay up for Potash Corp."

On Tuesday, Potash's U.S.-listed shares closed at $147.5, a 13.5 percent premium to BHP's offer.

Sinochem had not yet decided whether to proceed with a formal bid and was exploring its options, one of the sources said.

Chinese officials have ordered state-owned companies to meet investment bankers to explore options. Sinochem has approached Singapore's Temasek Holdings to join a consortium that may make a bid, sources have told Reuters.

BHP BOSS LOBBIES CANADA

Kloppers, in a separate interview with Canada's Globe and Mail newspaper, said BHP was sticking with its plan to drop out of the Canpotex potash marketing cartel -- effectively triggering its demise -- if BHP's bid succeeds.

He spent the day in Toronto, Canada's financial hub, aiming to drum up support for the bid and seeking to allay concerns that BHP's strategy would hurt Potash's home province of Saskatchewan.

BHP says all of Saskatchewan's low-cost producers would benefit from market-based pricing, generating more revenue for the province, but sources working on the deal told Reuters that the miner would not move quickly to dismantle Canpotex.

Potash shares on Tuesday fell 95 cents to $147.52 in New York but remain well above the $130 offer price, suggesting investors anticipate a richer offer will eventually emerge.

Kloppers said BHP was focused on clearing regulatory hurdles in Canada and the United States, not on potential rivals.

BHP this week extended its offer by a month to November 18 after Canada's competition regulator sought more information.

The sources working on the deal said regulators wanted more details about BHP's plans for its existing Jansen potash project in Saskatchewan and its marketing strategy.

The regulatory process is taking on political overtones, with some opponents of the deal fearing a breakup of Canpotex, which accounts for a third of global potash exports and has helped buoy prices for years. Potash Corp is one of three Canpotex members.

Kloppers is due to meet Canada's leading opposition parties on Wednesday, but will not meet Prime Minister Stephen Harper.

BHP has hired three former advisers to Canadian prime ministers, including one who worked for Harper, to help build political support.

(Additional reporting by Michael Erman in New York and Euan Rocha and Cameron French in Toronto; Writing by Michael Flaherty; Editing by Frank McGurty and Anshuman Daga)

WASHINGTON (Reuters) � Residential construction rose more than expected in August to a four-month high, suggesting the embattled housing market was starting to stabilize following the end of a homebuyer tax credit.

The Commerce Department said on Tuesday housing starts rose 10.5 percent, the largest increase since November, to a seasonally adjusted annual rate of 598,000 units.

July's residential construction was revised down to show a 0.4 percent gain, which was previously reported as a 1.7 percent increase.

Analysts polled by Reuters had expected housing starts to rise to a 550,000-unit rate. Compared to August last year, housing starts were up 2.2 percent.

"Housing starts are at very low levels but we're clearly seeing a solid bottom in the housing market. It's too early though to call it a housing market recovery," said Matthew Strauss, a senior currency strategist at RBC Capital in Toronto.

The data came as Federal Reserve policymakers were due to meet to assess the economy. The U.S. central bank is largely expected to reaffirm its bias toward further monetary policy easing to help the recovery.

However, the Fed is not expected to announce a fresh round of purchases of longer-term government debt to keep interest rates low as economic data such as retail sales for August have eased fears of a double-dip recession.

U.S. stock index futures extended gains on the housing data, while Treasury debt prices trimmed gains. The U.S. dollar pared losses versus the yen.

New building permits for future home construction rebounded 1.8 percent to a 569,000-unit pace last month, lifted by a 9.8 percent rise in permits for multi-family units, after an unrevised 4.1 percent drop in July. Analysts had expected a 560,000-unit pace in August.

The housing market has hit a soft patch following the end of a popular homebuyer tax credit in April and a survey on Monday showed sentiment among home builders remained mired at an 18-month low in September.

A combination of high unemployment and an oversupply of homes are also weighing on the sector, which was the main catalyst of the worst recession since the Great Depression.

The downturn ended in June last year, but the economic recovery has since lost momentum, sparking fears in financial markets of a renewed recession.

Residential construction in August was bolstered by a 32.2 percent jump in groundbreaking activity in the volatile multi-family segment to an annual rate of 160,000 units.

Single-family starts increased 4.3 percent to a 438,000-unit pace, the highest since June.

Home completions increased 5.6 percent to a 603,000-unit pace, also the highest since June. The inventory of total houses under construction was unchanged at 444,000 units last month, while the total number of units authorized but not yet started fell 3.1 percent to a record low 87,000 units.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

NEW YORK (Reuters) � Stock index futures were flat on Tuesday ahead of expectations of a Federal Reserve debate over whether to expand its monetary easing policy at a meeting later in the day.

The Fed is expected to tread water, with a renewed promise to keep its portfolio from shrinking but no new steps to ease its monetary policy. The central bank acknowledged in August the U.S. recovery had lost momentum and Fed Chairman Ben Bernanke said the Fed would renew efforts to stimulate growth if the outlook soured appreciably.

Economic data on tap includes August housing starts at 8:30 a.m. EDT. Economists expect a modest gain to an annualized pace of 550,000 units from 546,000 units in the previous month. The report will give investors a better idea of whether or not the housing market can stand on its own feet after months of government support.

S&P 500 futures were down 0.9 points and slightly below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dipped 6 points, and Nasdaq 100 futures fell 0.75 points.

Banking stocks will be in view after a source told Reuters that Bank of America Corp (BAC.N) is laying off about 5 percent of its investment banking staff and will inform employees this week.

Global airlines are likely to post sharply higher 2010 profits than previously forecast as the industry rebounds from economic recession, the International Air Travel Association said.

Nokia (NOK1V.HE)(NOK.N), the world's top cellphone maker, decided for the second time to delay the launch of its N8 smartphone, which is intended to challenge Apple Inc's (AAPL.O) iPhone.

Real estate investment trust Home Properties Inc (HME.N) raised its outlook for third-quarter funds from operations.

Barnes & Noble Inc (BKS.N) failed to win the support of an influential shareholder advisory firm but got the backing of another in its fight with billionaire investor Ron Burkle over the future of the nation's largest bookseller.

European shares rose 0.2 percent in morning trade, supported by mining stocks as investors awaited a Federal Reserve statement.

(Reporting by Angela Moon; editing by Jeffrey Benkoe)

SYDNEY/SASKATOON (Reuters) � BHP Billiton's (BHP.AX) $39 billion battle to take control of Canada's Potash Corp (POT.TO) is expected to drag on into next year after it failed to win immediate backing from Canadian authorities.

The Anglo-Australian miner, which wants to use the world's largest fertilizer-maker as its entry into the global food industry, also said it had no plan to change its $130-a-share offer and shrugged off talk of a China-backed rival bid emerging.

BHP Billiton extended its offer by a month to November 18 after Canada's competition regulator sought more information. However, investors said on Tuesday the delay was expected and could work in the miner's favor unless a serious rival offer comes up.

"There was always the impression it was going to be a long-winded process and at this point in time we have not had any competing bids yet," said Peter Chilton, an analyst at Constellation Capital Management, which owns BHP shares.

"To some extent the longer it drags on, it might be better for BHP because it reduces the tension, although if someone else comes in like the Chinese it is another game."

A source familiar with the transaction did not rule out further extensions to the offer period if they were necessary to clear regulatory hurdles. There have been indications from some BHP executives that the deal could drag out as far as Easter.

A company with a takeover offer on the table, however, does not want the proposal to sit for too long, as it not only lengthens the time for a rival bid to emerge but also invites added regulatory red tape and shareholder fatigue.

BHP's Australian listed shares edged up 0.2 percent by 10:24 p.m. ET, in line with the broader market (.AXJO). On Monday, Potash's US-listed shares closed at $148.5, a 14.2 percent premium to BHP's offer of $130-a-share.

There has been speculation of a rival offer after the bid process began. Media reports early this week included one bolstering the case that China's Sinochem Group is still hot on the trail.

Another report said Sinochem executives visited London last week seeking financing for a bid and that Beijing was nearing a decision on whether to make a rival offer.

Analysts and investment bankers say it is still unclear whether a rival bid will emerge. If China does make a run for some kind of offer, it would likely involve a consortium of bidders, which would only add layers of complications that could impede a successful bid.

The premier of Potash's home province of Saskatchewan failed to give his seal of approval to the deal on Monday, after talks with BHP Billiton Chief Executive Officer Marius Kloppers.

"We're going to be very careful and deliberate about this," Saskatchewan Premier Brad Wall said after meeting with Kloppers.

"As of today, I don't see how Saskatchewan is better with this deal, or frankly a subsequent deal."

Wall will advise Canada's federal government on whether to approve a Potash takeover on the basis of net benefit to the nation. Potash employs thousands and produces royalties for the province from sales of potash, a fertilizer that China, India and other emerging economies need to feed growing populations.

"I would not read too much into it," Tim Schroeders, fund manager at Australia's Pengana Capital, said of the regulator's request and consequent offer extension. "I don't think we will be putting this (deal) to bed this side of Christmas."

NO PLAN TO ALTER OFFER

Kloppers said BHP Billiton had no intention of changing its $130-a-share takeover offer for Potash Corp. At $39 billion, the offer's value is the highest in any industry this year.

He also brushed aside reports that China was attempting to assemble a rival bid.

"We have no plans to change what is currently the only offer on the table," Kloppers said. "I've seen a lot of speculation and rumors (about a China-backed offer) but the reality is there is only one cash bid on the table and that's ours at the moment."

In Canada, BHP Billiton may need to address concerns over its potash marketing plans before it can gain political support for its bid.

Saskatchewan province's chief concern is BHP Billiton's preference to market its commodities independently, rather than through the Canpotex consortium which sells the province's potash in foreign markets. Saskatchewan fears this would lower prices and thus the royalties the province makes on potash sales.

Saskatchewan Premier Wall said Kloppers had repeated his past position on Canpotex in their meeting. Earlier, Kloppers told reporters BHP Billiton preferred to market its own products but "nothing is static forever."

Kloppers said he would meet Canadian politicians this week as he sought to build support for his move on Potash Corp.

(Additional reporting by Rod Nickel in Winnipeg, Cassandra Kyle in Saskatoon, Louise Egan in Ottawa, Mark Bendeich in Sydney; Editing by Anshuman Daga)