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WASHINGTON (Reuters) � With just two months left before it has to issue a final report, a U.S. commission looking at ways to cut the federal deficit was to meet again on Wednesday amid questions about its hard-headedness.

Getting the government's budget out of the red and back into the black -- after years of costly wars, tax cuts and recession -- will require spending reductions and tax increases, according to most analysts looking at the issue.

But in a highly charged pre-election political climate, making hard judgments on these fronts may be too much to ask of the panel set up in February by President Barack Obama, said the same analysts, who have watched the commission closely.

Politicians from both parties and a handful of business community figures are led by former White House chief of staff Erskine Bowles and former Senator Alan Simpson on the 18-member National Commission on Fiscal Responsibility and Reform.

Bowles is a Democrat who worked for President Clinton, while Simpson was a top Senate Republican for many years.

As if the panel's job weren't tough enough, the National Organization for Women and other activists plan to picket outside Wednesday's meeting to demand Simpson's ouster.

He angered women's groups last month when, in an email to a critic, he likened the national Social Security retirement pension program to "a milk cow with 310 million tits."

Social Security is one of several areas being eyed by the panel for changes. Others include Medicare, the defense budget and a range of tax policies, including popular tax deductions for mortgage interest and charitable giving, analysts said.

Virtually every item on the commission's hit-list has a political constituency that is bound to be angered by any attempts at reform, said Maya MacGuineas, director of fiscal policy at the New America Foundation, a think tank.

That's what happens when a problem like the budget deficit is left to fester for so long. Easy solutions fade away until only the tough choices remain. "There's no fix now that doesn't include political third rails," MacGuineas said.

The budget deficit as of the end of the federal fiscal year on Thursday is estimated to be $1.3 trillion to $1.5 trillion -- figures that are hard to comprehend and scare voters.

A Reuters/Ipsos poll last week showed that 57 percent of Americans see cutting the deficit as a better way to help recovery than raising government spending, although many economists warn spending cuts now could hurt the economy.

A group of 300 economists, including former Secretary of Labor Robert Reich, earlier this month signed a statement warning of "a grave danger that the still-fragile economic recovery will be undercut by austerity economics."

Although Republicans are dug in to resist tax hikes and Democrats are rushing to defend cherished programs, the stark reality is that the deficit must be dealt with sooner or later, said Brookings Institution fellow Isabel Sawhill.

"The long-term fiscal picture is just horrific ... It may take a crisis before we can break the political stalemate. I have been traveling as part of a 'fiscal solutions' tour and the public is very frustrated about the lack of action," she said.

(Additional reporting by David Lawder and Andy Sullivan. Editing by Eric Walsh)

HONG KONG (Reuters) � Asian stocks hit a two-year high and the dollar was stuck near a seven-month low after poor U.S. data reinforced expectations the U.S. Federal Reserve will take more action to help the struggling economy.

Gold firmed near record peaks as the Fed and Bank of Japan look to pump more funds into global markets via bond purchases and other measures as major economies struggle.

Asian stocks outside Japan rose 0.7 percent and were poised for their biggest monthly gain since July 2009, up 11.9 percent, in what is historically one of the worst months for stocks.

Japan's Nikkei (.N225) rose 0.6 percent, helped by the yen's slight retreat versus the dollar and as a dour outlook from Japanese manufacturers raised hopes for more BOJ easing.

"The Nikkei's rising on the slightly weaker yen, and there's also probably some window-dressing ahead of the end of the first half of the business year," said Norihiro Fujito, general manager at Mitsubishi UFJ Morgan Stanley Securities.

A closely watched survey of Japanese manufacturers showed confidence improved for a sixth straight quarter but they turned negative on the outlook in a sign that yen strength could derail the fragile economic recovery and spur the central bank to ease policy next week.

Spot gold inched up on Wednesday, hovering near a record high hit in the previous session, on expectations of continued dollar weakness and further monetary easing by the Fed.

U.S. consumer confidence fell to its lowest level in seven months with unemployment levels at 26-year highs.

The Federal Reserve said last week it was prepared to put more money into the economy, if needed, to stimulate the recovery and avoid deflation.

The Fed is likely preparing a fresh round of quantitative easing measures to announce at the end of its November 2-3 meeting, hedge fund adviser Medley Global Advisors said in a report on Tuesday, a market source told Reuters.

The Fed is also weighing a more open-ended, smaller-scale bond buying program, the Wall Street Journal reported.

Oil rose on Wednesday after an industry report showed crude and winter fuel stockpiles declined last week in top-consumer the United States, reducing a surplus that has weighed on market sentiment for months.

Shanghai copper opened 0.5 percent higher, chasing prices in London that climbed to near five-month peaks, and continued on dollar weakness.

(Additional reporting by Elaine Lies in TOKYO; Editing by Alex Richardson)

WASHINGTON/NEW YORK (Reuters) � Johnson & Johnson's (JNJ.N) massive recall of popular medicines, including a stealthy recall of some Motrin packages, has eroded the company's reputation and put pressure on chief executive Bill Weldon who appears before a congressional committee on Thursday.

J&J recalled 40 widely used nonprescription products for children and infants, such as Tylenol, in late April after Food and Drug Administration inspectors found filthy equipment and contaminated ingredients at a Pennsylvania factory.

The plant operated by J&J's McNeil unit is still closed, crimping sales, cutting the consumer standing of well-known J&J brands and marring Weldon's generally successful eight years at the helm.

Combined with several other recalls since January, the company has pulled nearly 200 million bottles of various medicines.

No injuries from recalled products have been reported but industry analysts say consumers have turned to cheaper, store brand alternatives.

How "is J&J going to rebuild a product loyalty and product identity when the products have been off the market for so long," asked Ira Loss, who follows FDA matters for Washington Analysis Corp.

It will be Weldon's first major appearance on the recalls. He did not appear at a congressional hearing in May; the company said he was recovering from back surgery.

Other witnesses due to appear before the U.S. House of Representatives Oversight and Government Reform Committee on Thursday include FDA Deputy Commissioner Joshua Sharfstein and Colleen Goggins, the company's longtime consumer healthcare chief who is due to leave March 1.

J&J's recalls have prompted Committee Chairman Edolphus Towns to push legislation giving the FDA greater recall power.

WELDON'S FUTURE

There is no mandatory retirement age for CEOs at J&J. Weldon, the silver-haired native New Yorker who joined the company 39 years ago, has not announced plans to retire.

Some analysts said Weldon could stay for another year or so to get improvements in place before making what could be seen as a natural exit.

"This will be just a minor blemish on what's been a steadily growing company," said Gabelli & Co analyst Jeff Jonas, who said a leading Weldon successor is Dominic Caruso, the company's gregarious chief financial officer who is often front and center at company investor meetings.

Investors have so far been forgiving. Since the April recall, its shares have roughly matched the overall market, falling 3.5 percent compared with the 3.8 decline in the S&P 500 index (.SPX).

But a survey released Tuesday showed consumer opinion of Tylenol products, even those not recalled, slipping among consumers from 2009.

Out of 500 brands polled this year, Tylenol allergy products dropped nearly 200 places in the rankings from 289 to 488 while Tylenol pain products fell 76 spots from 243 to 319, according to Brand Keys Inc, a consumer and brand loyalty consulting firm that has conducted the survey for 14 years.

While few analysts see Weldon's performance Thursday as harming the 61-year-old executive's tenure, it could have a real effect on whether consumers return when the products do.

"The well of loyalty is not bottomless," said Robert Passikoff, president of Brand Keys. "The J&J thing has been going on for a while, and as that happens there is this erosion of the emotional link between the brand and the consumer."

'SOFT' RECALL

J&J declined to offer any update, ahead of the hearing, on its efforts to fix McNeil's Fort Washington, Pennsylvania plant. Company spokesman Jeffrey Leebaw said the factory is not expected to not reopen until the second half of next year.

The FDA has said it is weighing possible civil and criminal action against J&J for its actions.

Weldon is expected to face sharp questioning over the manufacturing issues and also whether the company had FDA permission to conduct a soft recall of Motrin in 2009 from 4,000 stores across 40 states. It hired a contractor to send out employees posing as buyers for an eight-caplet package sold at convenience stores.

Last week, lawyers for J&J said the purchases were legal and that FDA knew about them despite the lack of a formal agreement.

But the FDA has said that is not the case.

"Right now, there is no independent evidence that showed anybody at the FDA approved it," said a congressional source familiar with the committee investigation.

More documents submitted since the May hearing, including several released on Tuesday, show J&J directed the buyback, the source said, adding that the contractors have also submitted numerous documents.

On Tuesday, Committee Ranking Republican, Representative Darrell Issa, asked the Department of Health and Human Services' inspector general to investigate the FDA's role.

Gabelli analyst Jonas said Weldon's best strategy would be to take responsibility and come out publicly and admit J&J made mistakes.

"He needs to stick with that message and be as specific as possible about how they're overhauling the plants," he said.

(Reporting by Susan Heavey in Washington and Ransdell Pierson in New York; Editing by Tim Dobbyn)

WASHINGTON (Reuters) � A commission looking at ways to cut the federal deficit is considering changes to the Social Security retirement program and a variety of tax increases, but doubts about its potential to come up with a solid deficit-cutting plan are widespread.

Amid rising pre-election rhetoric over government red ink, the commission set up in February by President Barack Obama will hold another meeting on Wednesday. Its much-anticipated final report is due to come out on December 1.

Analysts are skeptical about the bipartisan group's ability to agree on a formula in an election year that would tilt Washington back into the black.

Under the order creating the panel, 14 of its 18 members must vote to approve "a final report containing a set of recommendations" to balance the budget, excluding interest payments on the national debt, by 2015 and to "meaningfully improve the long-run fiscal outlook."

Failure to meet this mandate could spook the bond markets, although some analysts believe such a credit event is unlikely as expectations for the panel have been low all along.

"They're looking at Social Security. Everyone has made that very clear," said Dean Baker, co-director of the Center for Economic and Policy Research, a think tank. "They have been looking at the tax code ... at the system for tax expenditures for healthcare, for the home mortgage interest deduction."

He added: "My guess is the final report is not going to be a concrete proposal ... that Congress can literally vote on. It's more likely to be recommendations that can be pursued."

That would be better than nothing, but nothing is also possible in the divisive political climate, analysts said.

"The commission is not likely to be able to agree on very much," said Brookings Institution fellow Isabel Sawhill.

"We need everything to be on the table and Republicans are not likely to agree to any new revenues, leading to a stalemate both on the commission and in Congress," Sawhill said.

VOTERS WORRIED

Dozens of U.S. lawmakers signed a letter released on Tuesday urging the panel not to tinker with Social Security.

The program "does not belong as part of" the panel's recommendations, said the letter addressed to Obama, adding to the challenges faced by the commission on Capitol Hill.

The budget deficit as of the end of the federal fiscal year on Thursday is estimated to be $1.3 trillion to $1.5 trillion -- figures that are hard to comprehend and that have voters scared as the economy struggles to recover from recession.

A Reuters/Ipsos poll last week showed that 57 percent of Americans see cutting the deficit as a better way to help recovery than raising government spending, although many economists warn spending cuts now could hurt the economy.

Acknowledging the importance of the deficit situation, Obama earlier this year appointed the National Commission on Fiscal Responsibility and Reform, led by former White House chief of staff Erskine Bowles and former Senator Alan Simpson.

At least two other panels of experts in Washington have been working in recent months on the deficit-and-debt issue, with members of these panels saying both spending cuts and tax changes will be needed in any serious strategy.

The White House sees total U.S. public debt rising to 68.6 percent of gross domestic product in fiscal 2011. That level of total indebtedness, to which the budget deficit adds every year, would surpass Britain's projected debt-to-GDP ratio of 61.9 percent, but be well below France's 86.5 percent.

Greece, hammered earlier this year by bond markets, is struggling to tame a debt load forecast at 139.4 percent of GDP next year, while Japan's debt is expected to top 235 percent of GDP for 2011, said International Monetary Fund forecasts.

REPUBLICAN CAP

U.S. budget hawks are demanding action, with some Republicans in Congress urging a "hard cap" on spending.

Republican Representative Jeb Hensarling, a commission member, last week called for canceling unspent stimulus funds, capping discretionary spending, ending government control of mortgage giants Fannie Mae and Freddie Mac, and a net hiring freeze on non-security federal employees.

Republican Senator Bob Corker said on Thursday he is working on legislation to cap spending.

"We need to change the conversation, and I think that means focusing on the big picture first ... agreeing on the amount of spending we can sustain," Corker said in a statement.

Such broad proposals may appeal politically, but they gloss over the tough specifics, analysts said.

"A lot of the caps the Republicans have called for apply only to non-defense, non-homeland, non-veterans discretionary spending, which is one-seventh of the federal budget," said Brian Riedl, a fellow at the Heritage Foundation.

"Capping one-seventh is better than nothing, but the more spending that can be brought under a cap, the better."

Riedl speculated that changes to Social Security, Medicare and Medicaid would be the focus of the commission. "I'm not sure that significant tax changes would be able to get agreement from 14 of the 18 commission members," he said.

Republican Senator Judd Gregg told Reuters last week that the panel would emphasize spending cuts over tax increases and that he was confident it would agree on an outline by December 1.

He said a failure to reach consensus would "be a very bad signal to the American people and the markets."

But a soft report from the panel was unlikely to cue creditors to suddenly lose faith in U.S. debt instruments, said American Enterprise Institute resident scholar Alan Viard.

That scenario "might be a bit of a stretch. The problem is not imminent enough that you would be likely to see a mass movement away from Treasuries," he said.

"The fact that it happened to Greece certainly doesn't mean that it could happen here anytime soon."

(Additional reporting by David Lawder, Donna Smith and Andy Sullivan, editing by Mohammad Zargham)

NEW YORK (Reuters) � The Federal Reserve is preparing a fresh round of quantitative easing measures to battle lackluster economic performance, hedge fund advisor Medley Global Advisors said in a report on Tuesday, a market source told Reuters.

"Fed leadership has all but run out of patience with economic data it believes is not propelling the U.S. recovery sufficiently to dent the unemployment rate. The FOMC will work through the next couple of weeks to prepare additional easing measures to announce at the end of its November 2-3 meeting," the source said, reading directly from the report.

"The decision will bring an end to market speculation about QE, or QE2 as it has become known. Policy makers are no longer willing to wait for the pace to pick up unaided. Unemployment is just too high," the report said, according to the source.

The Federal Open Market Committee is the U.S. central bank's monetary policy-setting body. It next meets for two days on November 2-3. Investors have been on edge over talk of a second round of quantitative easing, parsing both economic data and market chatter because of the potential wide-ranging impact.

"The dollar definitely was hit by the report, but I think it was more a compounding of the selling we saw from the pretty bad consumer (confidence) report," said the source.

"Investors are very sensitive to the data looking for any clues on whether QE2 is something the Fed is going to bring back," the source said.

In midday trade, the U.S. dollar was down 0.5 percent to 83.84 yen. The euro climbed 0.91 percent to $1.3576.

U.S. consumer confidence fell in September to its lowest since February, underscoring lingering worries about the strength of the economic recovery. Home prices also fell, the S&P/Case Shiller composite index of 20 metropolitan areas showed.

The Fed last week said it was prepared to put more money into the economy if needed to stimulate the recovery and avoid deflation.

To battle the financial crisis, the Fed has already bought $1.7 trillion of longer-term Treasury and mortgage-related bonds, supplementing its pledge to keep benchmark U.S. interest rates near zero for a long time.

Medley spokeswoman Hannah Little would neither confirm nor deny the firm had issued the 1-1/2-page report, entitled "Fed: Bait and Switch", citing the firm's subscription policy.

(Editing by James Dalgleish)

NEW YORK (Reuters) � September consumer confidence sagged to its lowest levels since February, driven by deteriorating labor market and business conditions, according to a private report released on Tuesday.

The Conference Board, an industry group, said its index of consumer attitudes fell to 48.5 in September from a revised 53.2 in August.

"September's pull-back in confidence was due to less favorable business and labor market conditions, coupled with a more pessimistic short-term outlook," said Lynn Franco, director of The Conference Board Consumer Research Center.

After the report's release, safe haven Treasury debt prices securities gained, with the 30-year bond rising more than a point in price. The dollar and stocks extended losses.

"Overall, consumers' confidence in the state of the economy remains quite grim," Franco said.

The median of forecasts from analysts polled by Reuters was for a main September reading of 52.5. Forecasts ranged from 48.0 to 55.0.

The August reading was revised down slightly from an original 53.5.

Consumers' labor market assessment worsened. The "jobs hard to get" index rose to 46.1 from 45.5, while the "jobs plentiful" index decreased to 3.8 from 4.0.

Inflation expectations eased slightly, even after the Federal Reserve has said it is ready to take action to keep yields down in an effort to stimulate growth. Consumers' oneyear inflation expectations edged down to 4.9 percent from 5.0 percent the previous month.

The expectations index slipped to 65.4 from 72.0 last month.

The present situation index slipped to 23.1 from 24.9 in August.

(Reporting by John Parry and Wanfeng Zhou; Editing by Chizu Nomiyama)

NEW YORK (Reuters) � Single-family home prices dipped in July, hovering above multi-year lows absent the homebuyer tax credit that ended in April, according a Standard & Poor's/Case-Shiller home price report on Tuesday.

High U.S. unemployment and millions of foreclosed homes and distressed borrowers keep stalling a home price recovery, overshadowing high affordability and record low mortgage rates, economists agree.

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.1 percent in July from June on a seasonally adjusted basis, as expected in a Reuters poll. The dip followed a 0.2 percent June rise, which was revised down from a 0.3

percent increase.

Prices measured by S&P/Case-Shiller's 20-city index remain 27.9 percent below the peaks set in mid-2006, having edged up about 7 percent from a trough in April 2009.

"We still have a large oversupply of homes for sale and that's likely to keep prices soft well into next year," said Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey.

Unadjusted for seasonal impact, the 20-city index gained 0.6 percent after June's 1 percent gain. A 0.4 percent rise was expected.

S&P, which publishes the indexes, also said home prices in the 20 cities index rose 3.2 percent from July 2009, a slower annual pace than the 4.2 percent increased in June.

Ten of the cities had annual gains and only Las Vegas set a new low, as the impact of the homebuyer tax credit faded away, S&P said. But the year-over-year growth rates slowed in 16 of the cities and both the 10- and 20-city composite indexes in July from the prior month.

"While we could still see some residual support from the homebuyers' tax credit, which covers purchases closing through September 30th, anyone looking for home prices to return to the lofty 2005-2006 levels might be disappointed," David M. Blitzer, Chairman of the Index Committee at S&P, said in a press release.

Average single-family home prices have fallen to levels last seen in late 2003, according to S&P.

"Housing starts, sales and inventory data reported for August do not show signs of a robust market, and foreclosures continue," he said, adding "stable prices seem more likely."

(Additional reporting by Ryan Vlastelica, Editing by W Simon

NEW YORK (Reuters) � Single-family home prices dipped in July, and are seen stabilizing near the lows without the homebuyer tax credit that ended in April, Standard & Poor's/Case-Shiller home price indexes showed on Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.1 percent in July from June on a seasonally adjusted basis, as expected in a Reuters poll. The dip followed a 0.2 percent June rise, which was revised down from a 0.3 percent increase.

Unadjusted, the 20-city index gained 0.6 percent after June's 1 percent gain. A 0.4 percent rise was expected.

S&P, which publishes the indexes, also said home prices in the 20 cities index rose 3.2 percent from July 2009, a slower annual pace than the 4.2 percent increased in June.

Ten of the cities had annual gains and only Las Vegas set a new low, as the impact of the homebuyer tax credit faded away, S&P said. But the year-over-year growth rates slowed in 16 of the cities and both the 10- and 20-city composite indexes in July from the prior month.

"While we could still see some residual support from the homebuyers' tax credit, which covers purchases closing through September 30th, anyone looking for home prices to return to the lofty 2005-2006 levels might be disappointed," David M. Blitzer, Chairman of the Index Committee at S&P, said in a press release.

"Housing starts, sales and inventory data reported for August do not show signs of a robust market, and foreclosures continue," he said, adding "stable prices seem more likely."

The 20-city index showed home prices remain 27.9 percent below the peaks set in mid-2006.

(Reporting by Lynn Adler; Editing by James Dalgleish)

CHICAGO (Reuters) � Walgreen Co (WAG.N) reported higher-than-expected quarterly earnings on Tuesday, helped by strong prescription drug sales, sending its shares up nearly 8 percent in premarket trading.

The biggest U.S. drug store chain said prescription sales at stores open more than a year rose 1.6 percent despite difficult comparisons to last year, when a swine flu pandemic boosted demand for medicines, tissues and other products.

Walgreen, which acquired New York chain Duane Reade earlier in the year, said gross profit margins increased, helped by stronger prices for general merchandise and a plan to cut costs.

Net earnings for the fourth quarter ended August 31 rose to $470 million, or 49 cents per share, compared to $436 million, or 44 cents per share, for the same quarter in 2009.

Analysts on average expected earnings of 44 cents per share, according to Thomson Reuters I/B/E/S.

Walgreen, which operates about 7,500 stores in the United States, said revenue increased 7.4 percent to $16.87 billion. Analysts were expecting $16.84 billion.

Sales at stores open at least a year rose 1.5 percent.

The company, along with competitors CVS Caremark Corp (CVS.N) and Rite Aid Corp (RAD.N), initiated a flu shot push late in the quarter to draw customers into stores well before the flu season peaks. Walgreen hopes to deliver as many as 15 million shots during this flu season.

Walgreen shares rose to $32.71 in premarket trading, up 7.8 percent from a close of $30.35 on Monday.

(Reporting by Emily Stephenson; editing by John Wallace)

PARIS (Reuters) � Stock index futures pointed to a lower open on Wall Street on Tuesday, with futures for the S&P 500 down 0.44 percent, Dow Jones futures down 0.35 percent and Nasdaq 100 futures down 0.1 percent at 0918 GMT (5:18 a.m. EDT).

Research In Motion (RIM.TO) (RIMM.O) will be in the spotlight after it unveiled a tablet computer aimed at its core business customers, as it tries to gain a foothold in a fast-growing market dominated by Apple's (AAPL.O) consumer-friendly iPad.

Shares in financial institutions will also be in focus after London-based Man Group (EMG.L) said clients pulled out assets for an eighth straight quarter, confounding hopes that a recovery in its flagship fund would help it follow the wider hedge fund industry and attract investors once again. Man said clients withdrew a net $600 million in the three months to September.

European shares dropped 1 percent in morning trade, dragged by persistent worries over sovereign debt levels in peripheral euro zone countries, and with nervousness lingering ahead of macro data.

Standard & Poor's warned on Tuesday it may cut Ireland's credit rating again due to the rising cost of recapitalizing nationalized Anglo Irish Bank (ANGIB.UL), pushing Dublin's borrowing costs to fresh peaks.

On the macro front, investors will keep an eye on the S&P Case/Shiller Home Price Index, as well as the Conference Board's monthly consumer confidence data.

Pfizer Inc (PFE.N) discontinued a late stage study of its Sutent for advanced prostate cancer after it became clear that the drug was unlikely to improve overall survival, the company said on Monday.

Oracle Corp (ORCL.O) has sued Micron Technology Inc (MU.O) for fixing prices of computer memory chips, in a continuance of litigation it inherited from Sun Microsystems.

Technology distributor Jabil Circuit Inc's (JBL.N) quarterly revenue missed Wall Street expectations, and the company forecast first-quarter 2011 sales below estimates, sending its shares down 2 percent in extended trade.

U.S. stocks slipped on Monday as investors took a break from a four-week rally, but they remained optimistic the advance would resume as a flurry of deals suggested companies were seeing value in the market.

The Dow Jones industrial average (.DJI) was down 48.22 points, or 0.44 percent, at 10,812.04. The Standard & Poor's 500 Index (.SPX) was down 6.51 points, or 0.57 percent, at 1,142.16. The Nasdaq Composite Index (.IXIC) was down 11.45 points, or 0.48 percent, at 2,369.77.

(Reporting by Blaise Robinson; Editing by Hans Peters)

LONDON (Reuters) � Bob Dudley faces a delicate task when he becomes chief executive of BP Plc on Friday: convincing investors BP will boost safety, while persuading government and the courts that its safety regime is as good as any in the industry.

Tens of billions of dollars are at stake.

BP has suffered three major safety accidents in recent years, including the 2005 Texas City blast which killed 15 workers, oil leaks in Alaska in 2006 and the explosion on the Deepwater Horizon rig in April which killed 11 men and caused the United States' worst ever oil spill.

Investors see a pattern, and are worried.

"Dudley really needs to restore trust in the operational ability ... That's the absolute top priority," Adrian Jackson, fund manager at Investec, said.

BP accepted the Alaskan leaks were partly due to cost cutting but denied economies played a role in either Texas City or the April 20 rig blast, instead blaming mistakes which were the result of practices common across the oil industry.

But investors, sore at the loss of $65 billion in BP's market value due to the oil spill, want evidence of change.

"We will want to see what are they doing to tighten things up," Jackson added.

ILL ADVISED

When a new CEO takes over an underperforming company, he or she often damns their predecessor's failings and promises change -- as Tony Hayward did when he succeeded John Browne atop BP, saying the latter had lost sight of day-to-day operations.

However, lawyers said American Dudley would be ill advised to adopt this strategy. To admit to shortcomings in BP's safety practices or even to promise a major overhaul could be seen by regulators or represented by trial lawyers as admissions BP was to blame for the oil spill, inviting huge liabilities.

BP, Europe's second-largest oil group by market value, capped the leaking well on July 15 after it gushed almost 5 million barrels of crude into the sea.

The most immediate matter on Dudley's plate is how he will deal with official investigations and lawsuits over the spill. Critically, BP must refute claims it was grossly negligent.

If it is successful, its partners in the blown-out well, including 25 percent owner Anadarko and 10 percent owner Mitsui , will be forced to share up to 35 percent of the cost of plugging the leak, cleaning up and compensating those affected.

Analysts estimate the total cost will exceed $30 billion.

If BP is found grossly negligent, it would have to pay these costs alone and would face fines of over $21 billion, rather than a 65 percent share of a $4.5 billion fine.

Earlier this month, BP published an internal investigation which pinned most of the blame for the accident on its contractors. Pushing this line will reassure some investors BP is not fundamentally unsafe.

Other measures that could ease concerns without offering any legal hostages to fortune could include staff changes. BP sources reported speculation inside the company that head of exploration Andy Inglis, within whose unit the accident occurred, and U.S. Chief Operating Officer Doug Suttles may lose their positions.

BP has already said it did not do as much as it could to oversee its contractors and this could be held against the men.

IMAGE BOLSTERING

BP may restructure its portfolio to emphasize its focus on safe operations in the United States, potentially by taking a leaf out of rival Royal Dutch Shell Plc's book, and breaking its upstream oil production arm into two units, one for North America and another for the rest of the world.

With 40 percent of its assets in the U.S., BP needs to also focus on rebuilding its tarnished image with lawmakers and regulators there if it wishes to execute the ambitious growth plans it had before the Macondo well disaster.

"The next step in our view will likely be a major brand recovery exercise," Evgeny Solovyov, oil analyst at Societe Generale, said.

Part of the renewed focus on the BP brand will be a shakeup of BP's communications effort.

Many public relations experts said BP's handling of the oil spill was severely flawed, but so far the blame has been laid mainly on Hayward, whose gaffes enraged America.

BP sources said Dudley is expected to reinstate the role of head of communications, into which BP's heads of internal, external media and investor relations would all report.

Oswald Clint, oil analyst at Bernstein, said BP should also increase its spending on lobbyists after recent cuts.

"This may be saving immediate cost (but) we would be somewhat concerned about this," Clint said in a research note. "In our view BP needs to work to keep the U.S. government from being too hostile toward it in the future."

(Editing by David Holmes)

NEW YORK (Reuters) � The upcoming flash crash report will show that regulators have a "very deep understanding" of the marketplace, giving the public a measure of confidence, the head of the Securities and Exchange Commission said on Monday.

"It will paint a very clear picture of how the markets operated on that day," SEC Chairman Mary Schapiro said in an interview, adding she expects regulators will issue the report "in the next several days."

The May 6 crash knocked some 700 points off the Dow Jones industrial average before it sharply rebounded, all in about 20 minutes. No full explanation of the unprecedented breakdown has yet been given, stirring concerns among investors about the stability of the high-speed electronic marketplace.

"I think they will feel confident, and they'll feel confident that the SEC and the CFTC staffs have a very deep understanding of the markets as a result of this inquiry, and that we have some ideas on how to go forward," Schapiro said in the interview with Reuters Insider.

Funds have exited mutual fund accounts in every week since the crash, according to data to the beginning of this month, fueling speculation that the crash continues to undermine investor confidence. Earlier this month, Schapiro said that trend was "troubling."

Schapiro said on Monday she still hopes the SEC and the Commodity Futures Trading Commission will issue the joint report this month.

The report is intended to lay the groundwork for a special commission to make rule recommendations -- a process Schapiro said should not take too long. "These are important issues, they're very much front and center for us right now," she said.

The SEC is dealing with the flash crash at the sometime that it begins to write the 100 some rules required by the landmark U.S. Wall Street reform legislation, signed into law this summer.

(Reporting by Jonathan Spicer, Editing by Leslie Gevirtz, Carol Bishopric and Bernard Orr)

DUBLIN (Reuters) � Standard & Poor's warned on Tuesday it may cut Ireland's credit rating again due to the rising cost of recapitalizing nationalized Anglo Irish Bank, pushing Dublin's borrowing costs to fresh peaks.

Ireland is battling to convince investors it can afford to prop up its ailing banking sector and cut the biggest budget deficit in the European Union in the face of a faltering economy and growing risks of a political crisis.

So far it appears to be losing the argument.

Coming a day after credit agency peer Moody's slashed its ratings on Anglo Irish's lower-grade debt, S&P's fresh warning sent Irish credit spreads to new highs and the cost of insuring Irish debt from default hit a new peak.

The news also drove other euro zone peripheral spreads higher.

Ireland's rising borrowing costs are unsustainable over the medium term and are putting mounting pressure on Prime Minister Brian Cowen as he heads into a new parliamentary term on Wednesday, with his coalition and deficit-cutting mandate looking shaky.

The 25 billion euros of aid so far earmarked for Anglo Irish would already push Ireland's 2010 budget deficit to around 25 percent of gross domestic product, compared with an EU limit of 3 percent that Dublin aims to reach by 2014.

In August, S&P cut Ireland's long-term rating by one notch to 'AA-' on fears of a substantially higher bill for supporting the banking sector and assigned a negative outlook, meaning another cut was likely over the next one or two years.

On Tuesday, an S&P analyst said the agency's estimate Ireland would have to pour 35 billion euros into Anglo Irish looked increasingly realistic and any amount beyond that could trigger rating downgrades.

"Estimates which were previously strongly against our 35 billion now seem to be becoming more in line with that level of recapitalization cost," S&P analyst Trevor Cullinan told state broadcaster RTE.

"The government's plan B with Anglo means that this 35 billion could even be exceeded. If that were to be the case, then potentially there would be further downward rating actions."

SENIOR DEBT PLEDGE

The premium investors demand to hold 10-year Irish government bonds rather than euro zone benchmark German Bunds

widened by five basis points on Monday to hit a euro lifetime high at 456 bps.

The government is expected to announce later this week its estimates for the cost of winding down the bank via a two-way split into a "funding bank" and an "asset recovery bank."

Ratings agency Moody's downgraded Anglo Irish's unsecured senior debt on Monday, citing a small residual risk the government might not support this debt.

A finance ministry spokesman said on Tuesday Ireland will honor its obligations to senior bondholders.

The Irish Independent newspaper reported subordinated debt holders faced a discounted buyback and put the final cost of state aid to the bank at around 30 billion euros.

"Subordinated debt management exercises have been a key feature of Irish bank restructuring in 2009 and 2010, with Allied Irish Banks, Bank of Ireland, Anglo Irish, EBS Building Society and Irish Nationwide Building Society all engaging in debt buybacks and/or debt swaps," Davy analyst Emer Lang said in a note.

"Hence a further debt management exercise in relation to Anglo's remaining subordinated debt (total 2.4 billion euros) looks likely," Lang added.

(Editing by Patrick Graham, John Stonestreet)

TOKYO (Reuters) � Japan's Takefuji Corp (8564.T) will file for bankruptcy on Tuesday owing $5.2 billion, sources said, making it the biggest consumer lender to fail since courts ordered them to repay borrowers for excessive interest charges.

Takefuji, which has been considered at risk of failing as it lacks the financial backing of a big Japanese bank, will ask the courts to protect it from creditors, two sources close to the matter told Reuters on condition they were not identified.

Takefuji and other consumer lenders have struggled to survive after the Japanese courts ruled in 2006 that they had charged too much interest and had to repay borrowers. A recent government cap on interest rates has further hobbled the industry.

The ruling on interest repayments has already claimed several smaller casualties among consumer lenders. The fear now for Takefuji's rivals is that its failure will spark a run of claims by their borrowers worried that they will not get the refund the court ruling promised.

Analysts said Takefuji's problems posed little wider threat to the overall system, however, because depositor's funds were not at risk.

"Takefuji has raised most of its capital in bonds, which are largely held by foreign investors, mostly hedge funds, so the bankruptcy would not have a big impact on the financial system," Deutsche Securities credit analyst Junichi Shimizu said.

UNDER PRESSURE

A Takefuji spokesman declined to comment. The company on Monday said that it had not decided to file for bankruptcy.

Shares of Takefuji, which have fallen about 56 percent this year, did not trade for a second day on Tuesday on a glut of sell orders. The Tokyo Stock Exchange, which suspended trade of the consumer lender's shares for most of Monday, placed it on watch for potential delisting, citing the possibility of it failing.

Shares in rivals slipped further after sharp falls on Monday.

Acom Co (8572.T), 37 percent owned by Mitsubishi UFJ Financial Group (8306.T) and considered the strongest among Japan's top four consumer lenders, fell 1.3 percent. Unaffiliated Aiful Corp (8515.T) slid 3.3 percent, while Promise (8574.T), 20 percent owned by Sumitomo Mitsui Financial Group (8316.T), declined 0.9 percent.

Shinsei Bank (8303.T), Japan's first foreign-owned lender, operates two consumer finance units under the brands Aplus and Lake, which, unlike its competitors, it funds with deposits.

By affiliating with banks, consumer lenders have secured a steady funding source, according to Takehito Yamanaka, senior analyst at MF Global FXA Securities

"Takefuji did not have the money to make new loans, but others are not in such a situation," he said.

BONANZA OVER

Consumer finance companies emerged as big lenders in the 1990s as Japan's economy tanked and commercial banks reined in credit. Able to borrow at very low rates, they charged interest of nearly 30 percent, allowing them to absorb high default rates on uncollateralized loans. Reimbursements and the state intervention ended the bonanza.

"Lenders may need to boost their reserves and impairment of their capital as a result of any increases in demands for interest refunds," said Deutsche Securities' Shimizu.

"Aiful has a relatively thin equity capital cushion compared with Acom and Promise. Promise is weaker than Acom but the market has seen that SMFG could help the firm raise funds," he added.

Late last year, Aiful staved off bankruptcy by convincing its creditors to defer about 280 billion yen in bank loan principal payments.

Starting as a small money lender in 1966, Takefuji grew to become Japan's biggest consumer finance company. Its founder Yasuo Takei was ranked by Forbes as Japan's second-richest person in 2005, worth $5.6 billion.

But a series of scandals over heavy-handed debt collection and a conviction for Takei in 2004 for ordering wiretaps on journalists, marked the beginning of a state crackdown on a business seen by industry critics as little better than loan sharking. Takei died in 2006.

Japan's consumer finance squeeze culminated this year with a state-engineered credit crunch. In June, the government capped interest rates at 20 percent, down from 29.2 percent, and limited the amount individuals can borrow to one-third of their income.

Japan's banking minister Shozaburo Jimi said on Tuesday his government would study the impact that interest reimbursements were having on consumer lenders, but didn't comment on whether that could mean a relaxing of regulations.

Takefuji had 433.6 billion yen ($5.2 billion) in liabilities as of the end of June, research firm Tokyo Shoko Research said, including about 135 billion yen in bonds.

(Reporting by Taro Fuse, Taiga Uranaka, Noriyuki Hirata and Nobuhiro Kubo; Writing by Tim Kelly; Editing by Edmund Klamann and Lincoln Feast)