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A potential deal, however, would be contingent on Yahoo, the No. 2 U.S. search engine, selling its prized Asian assets that include a 40 percent stake in China's Alibaba, the source said on condition of anonymity because discussions were not public.

Yahoo's plans for its Asian investments have sprung into the investor spotlight since Yahoo Japan (4689.T) -- of which it owns 35 percent -- turned to arch-foe Google Inc (GOOG.O) for its Internet search technology.

But disposing of those assets -- which some of Yahoo's investors favor -- would help reduce Yahoo's market value of more than $20 billion now, making a deal more feasible.

Talks with News Corp and AOL began about two weeks ago and intensified in recent days, but Yahoo had not yet been approached as talks were still in their early stages, the source said.

Yahoo shares, which finished Wednesday up nearly 6 percent, gained another 9.5 percent to $16.71 in extended trading. Shares in Alibaba.com (1688.HK) -- the listed arm of China's largest e-commerce firm -- and Yahoo Japan rose in Asia trading.

Speculation of private equity interest in Yahoo, which is struggling to rekindle growth and stem an exodus of senior executives to rivals, has surfaced sporadically in past months.

Silver Lake Partners SILAK.UL was among the firms in very preliminary, recent discussions about acquisition scenarios, a second source with knowledge of the matter said.

Blackstone (BX.N) had also been pitched the idea but was not currently working on a Yahoo deal, a separate source said.

News Corp, AOL, and Yahoo declined comment.

In Tokyo, Yahoo Japan, owned 34.5 percent by Yahoo Inc, gained 5.5 percent to 30,350 yen. Yahoo Japan's top shareholder Softbank Corp (9984.T) rose 2.9 percent to 2,725 yen.

Softbank, Japan's No. 3 mobile phone operator, also owns 33 percent of Alibaba Group. The heads of the two groups, Jack Ma of Alibaba and Masayoshi Son of Softbank, work very closely, and as one of their latest collaborations, Yahoo Japan and Alibaba's e-commerce website Taobao in June launched online platforms to cross sell into each others' markets.

WANTED: MORE BUZZ

The news comes as Yahoo, the No.2 search engine in the United States behind Google, struggles to revive its revenue growth under the management of Chief Executive Carol Bartz, and to rebuild its buzz among consumers amid competition from social networking sites such as Facebook.

AOL is similarly keen on gaining scale and snagging content to re-kindle growth. The Wall Street Journal cited people familiar with the matter as saying private equity firms were exploring the possibility of teaming up with AOL on a joint bid, which could give AOL the content and online eyeballs it needs to become a news and entertainment powerhouse.

The state attorneys general are looking at allegations some banks did not properly review files or submitted false statements to evict delinquent borrowers from their homes during a foreclosure crisis that is one of the most visible wounds of the 2007-2009 recession.

"We are in the fourth year of a housing and economic crisis that was brought on by lax practices of the mortgage lending industry," Minnesota Attorney General Lori Swanson said.

"The latest allegations of corner-cutting and slipshod paperwork are troubling, but perhaps not surprising."

Iowa's attorney general, Tom Miller, told Reuters the states were seeking redress for affected homeowners and financial penalties "where appropriate." They might also press lenders to change procedures and modify loans for people struggling to make mortgage payments, he said.

Industry analysts warn the investigation could slow foreclosure proceedings. One of every four homes sold in the second quarter was a foreclosed property and any slowing could have an impact on the broader economy, as the housing market traditionally drives recoveries after a downturn.

Underscoring those concerns, the regulator for the government-owned mortgage finance giants Fannie Mae and Freddie Mac called on mortgage servicers not to slow down foreclosure cases that had clean paperwork.

The United States has an $11 trillion residential mortgage market.

The paperwork controversy has refocused attention on the foreclosure crisis just weeks before the November 2 congressional election in which Democrats look likely to suffer major losses due to voter unhappiness over President Barack Obama's economic policies.

The White House has endorsed the investigation by the states but rebuffed calls by some senior Democratic lawmakers and others for a temporary nationwide moratorium on foreclosures, fearing it would do more harm than good.

Miller said the attorneys general were "very conscious of the broader housing market issues and the broader economy issues."

"ROBO-SIGNERS"

The states are investigating the use of "robo-signers" -- people who sign hundreds of affidavits a day -- by banks and companies that collect monthly mortgage payments. It is alleged they did not properly review the documents they were signing.

"What we have seen are not mere technicalities, as some suggest," Ohio Attorney General Richard Cordray said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp told a conference in Washington that robo-signing was a "serious matter" for the entire mortgage industry. It was the first public comment by a bank regulator on the controversy.

JPMorgan mostly boosted its profit by setting aside less money to cover bad loans. Net income rose 23 percent but Chief Executive Jamie Dimon said returns are "still not particularly good for a company of our size."

Like its major competitors, the second-largest U.S. bank is struggling to find ways to boost growth in its main businesses -- consumer lending and investment banking.

"People are concerned about where the revenue growth is going to come from," said Keith Davies, principal and research analyst at Farr, Miller & Washington. "I don't think this quarter does anything to alleviate those concerns."

JPMorgan, the first major lender to report third-quarter results, also faced numerous questions about the latest headwind to batter the industry -- allegations that thousands of home foreclosures may have been illegal because they were improperly documented.

A prolonged probe into foreclosure processes could damage the fragile housing market, Dimon warned.

Dimon said demand for investment banking services remained weak.

"There continues to be a little more uncertainty out there about both the economy and what the political landscape entails, and so we haven't seen a rush toward activity," he said on a conference call.

Small and mid-sized businesses are starting to borrow more from the banks, but larger companies are choosing to raise money from the capital markets, Dimon said.

Commercial deposit levels remain high as companies hoard cash, a sign that they are wary about the future.

JPMorgan posted third-quarter net income of $4.42 billion, or $1.01 a share, up from $3.59 billion, or 82 cents a share, a year earlier. Analysts on average expected 90 cents a share, according to Thomson Reuters I/B/E/S.

U.S. unemployment is hovering around 9.6 percent but does not seem to be getting worse, which means fewer consumers are falling behind on their credit card bills. This allowed JPMorgan to set aside much less money to cover bad loans -- $1.6 billion in the third quarter, compared with $5 billion in the same quarter last year.

The bank is dipping into reserves set aside for future credit losses because regulations require it to, but "we are taking down as little as we can ... because we're very cautious," Dimon said.

A TOUGH ACT TO FOLLOW

Analysts and investors said Citigroup Inc (C.N) and Bank of America Corp (BAC.N) may have trouble matching JPMorgan's results when they report next week.

The company, which also posted a higher-than-expected profit on Wednesday, is among three of the big mortgage servicers to announce that it has halted some of its foreclosures while it reviews its processes.

JPMorgan has been talking to attorneys general, but does not know what the ultimate outcome of the states-driven probe will be, Chief Executive Jamie Dimon said during a conference call with reporters.

Later on Wednesday about 40 state attorneys general, many facing re-election, are expected to announce a joint investigation into the allegations that some banks used shoddy paperwork to kick struggling borrowers out of their homes.

In recent weeks, scrutiny over mortgage servicers' foreclosure practices has increased. Some prominent Democratic lawmakers have called for a nationwide moratorium while servicers and regulators review potential paperwork problems.

However, the White House rejected those calls on Tuesday, expressing fear that such a move could further derail the already unsteady economic recovery.

While momentum for a nationwide halt has been losing steam, lenders still face pressure from state investigators, a fledgling Justice Department probe, and regulators who have asked the largest servicers to report back on their internal reviews by Monday.

Lenders have so far taken different approaches to the growing foreclosure furor.

Bank of America Corp, the largest U.S. mortgage servicer, has halted evictions nationwide while it reviews its processes. Other lenders have declared more limited suspensions or left their foreclosure policies in place.

GMAC Mortgage, a unit of Ally Financial and one of the nation's largest mortgage servicers, said on Tuesday that an independent review had found no evidence of any inappropriate foreclosures.

Wells Fargo & Co, another major mortgage servicer, said it was doing additional reviews on all pending foreclosures, but had no plans for a moratorium.

"This is in response to requests for information from elected officials, customers and other agencies," said spokeswoman Vickee Adams.

The "robo-signing" controversy has refocused attention on the foreclosure crisis, one of the most visible signs of the U.S. recession, just weeks before elections in which Democrats are widely predicted to suffer major losses because of voter unhappiness over President Barack Obama's economic policies.

Banks repossessed nearly 3 million homes between January 2007 and August 2010, according to RealtyTrac Inc. They are expected to take over a record 1.2 million homes this year alone, the real estate data company said.

(Reporting by Elinor Comlay in New York and Joe Rauch in Charlotte; writing by Karey Wutkowski; Editing by Lisa Von Ahn)

She could not have been more wrong. The process was as arduous as it was protracted. Eventually, Shipe had to move out of her old home and couch surf with friends while she waited, and waited, for approval.

"What I had thought would be a fairly straightforward loan application turned into the Inquisition," she said in her office in downtown Chicago.

Two years after the depths of the financial crisis, the pendulum is still swinging away from the days of supereasy credit, when bankers required almost no proof that a customer would be able to repay a loan. Before the housing market crashed, even industry insiders ridiculed certain popular mortgages as "NINJas" -- "no income, no job loans."

Banks are a lot pickier today. To protect themselves from defaults, they have sharply increased underwriting requirements -- and paperwork -- needed to get a loan. They've adopted less agreeable views on credit cards and other forms of revolving debt, investor properties and income history.

The crackdown comes as major banks find themselves mired in controversy at the other end of the credit spectrum. What is described by some as a technical error -- signing thousands of affidavits for foreclosures without proper review -- has turned into a political scuffle ahead of next month's U.S. elections. Facing pressure from U.S. lawmakers, Bank of America said on Friday it would halt foreclosures in all states, fueling concern that zombie outstanding loans will further hinder housing's rebound from its worst crisis since the 1930s.

Yet, as Shipe's case suggests, the market for new loans is not much more encouraging. And while foreclosures are capturing most of the headlines, barriers to credit affect far more Americans and could be a bigger drag on any recovery.

QUESTIONS FLY

Shipe never gave a moment's thought to the possibility that she would struggle to secure a mortgage.

After all, she has a credit score above 800, far higher than most Americans. And as the chief executive of the Council of Real Estate Brokerage Managers, an industry group that is affiliated with the National Association of Realtors, she happens to be an insider.

Shipe is also debt-free. In her last home she not only paid her mortgage on time, but also put an extra $1,000 per month toward the principal. To top it off, she has banked with JPMorgan Chase -- whom she approached for a mortgage -- for more than a quarter of a century.

But when Shipe applied for a jumbo loan -- over $417,000 -- toward a $630,000 town house in Chicago's affluent Lakeview neighborhood, she was told she needed 20 percent down instead of the 10 percent she was expecting. So she reluctantly used cash savings and withdrew money from her money market account.

Then came the documentation -- an onerous process that has recently become almost unbearable for solid borrowers trying to take advantage of a sluggish market and eye-poppingly low mortgage rates.

For a month, Shipe's bank proceeded to demand tax returns going back a couple of years, plus financial statements. The latter were then scrutinized closely and she was asked personal questions about old transactions.

"I could have joined the FBI in a shorter period of time and with less documentation than it took to get that mortgage," she quipped. "After what I had to go through to get that house, by the time my loan was approved I almost didn't want it anymore."

U.S. stocks hit fresh 5-month highs on Tuesday and the dollar came under pressure as details from the Fed's latest meeting showed the U.S. central bank may once again flood markets with cheap cash "before long" to boost growth.

The dollar came under broad selling pressure on Wednesday, and approached key lows against the euro, the Swiss franc and a basket of currencies on more signs of U.S. monetary easing. The dollar index .DXY shed 0.4 percent.

"It's a continuation of several factors, the Fed minutes, and certainly that induced a rally right across the board. We are seeing the dollar lower, gold and oil prices higher. That is adding risk flavor to the market," said Peter Cardillo, chief market economist at Avalon Partners in New York. "Plus, of course the news from Intel last night."

JP Morgan Chase & Co (JPM.N) rose 1 percent to $40.79 in premarket trade after the second largest U.S. bank by assets said quarterly profits jumped 22 percent, helped by lower loan losses in its retail and credit card units.

Intel Corp (INTC.O) forecast upbeat fourth-quarter sales and margins late Tuesday as resilient demand from emerging markets and corporations offset weak consumer spending. That raised hopes the technology sector could end 2010 on a strong note. Intel gained 1.2 percent to $20 premarket.

S&P 500 futures were up 8.9 points and above 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 jumped 80 points, and Nasdaq 100 futures advanced 17 points.

Dutch chip equipment maker ASML Holding NV (ASML.AS)(ASML.O) beat estimates with a big rise in quarterly profits on a surge in demand and said it should end the year with a record order book. Its U.S.-traded shares were up 4.9 percent to $32.06.

Minutes of the Fed's meeting in September revealed officials thought the struggling recovery might soon need more help and discussed options, including possible adoption of a price-level target.

The prospect of the additional Fed stimulus has created an inverse correlation between the dollar and equities, with a decline in the greenback triggering a move into equities.

Chevron Corp (CVX.N) forecast third-quarter earnings would be lower than the previous quarter, weighed down by a drop in U.S. production, higher costs and the effects from a weaker dollar. The stock edged up 0.1 percent to $83.93.

European shares .FTEU3 rose 1.3 percent and touched a three-week high after the news from the U.S. Fed minutes. .EU. Asian stocks rose with technology-linked shares leading the way following the Intel forecast.

(Editing by Jeffrey Benkoe)

New York-based JPMorgan, the first of the banks to report third-quarter earnings, has like its peers struggled to make new loans this year, even as losses on bad mortgages and credit cards have eased.

JPMorgan shares climbed slightly in early trading after the bank reported third-quarter net income rose to $4.4 billion, or $1.01 a share, from $3.6 billion, or 82 cents a share in the year earlier period.

Analysts on average expected a profit of 90 cents a share, according to Thomson Reuters I/B/E/S. It could not immediately be determined if that figure compared with the $1.01 the bank reported.

JPMorgan's card services unit reported a profit of $735 million compared to a year-earlier loss of $700 million and its retail unit reported a profit of $907 million, compared to just $7 million a year earlier.

Profit in its mortgage banking and other consumer lending business slipped to $207 million, down 50 percent on the previous year, even as the bank set aside less money against loan losses in the unit.

Chief Executive Jamie Dimon expects mortgage losses to remain high for the next several quarters. "If economic conditions worsen, mortgage credit losses could trend higher," he said in a statement.

REFORM

Like its peers, JPMorgan is facing changes to its business after the U.S. financial reform measures passed by President Obama in the summer.

Worries that regulatory changes will trim some of the bank's most profitable business have weighed on JPMorgan shares.

JPMorgan shares are down 3 percent year-to-date, through Tuesday, while the broader KBW Bank Index .BKX is up 12.5 percent.

The bank is working with regulators and devoting substantial resources to implementing reforms, Dimon said in a statement.

As a result of financial reform, the bank said last month it is moving about 45 traders that previously traded for its own account into a new unit within its asset management business.

JPMorgan shares were up 1.2 percent at $40.90 in pre-market trading on Wednesday.

(Reporting by Elinor Comlay; Editing by Derek Caney)

He told the Charlie Rose Show in an interview that China would work against its basic development objectives if it kept its currency undervalued.

"I'm very confident over time that this is going to happen," he said of Chinese currency appreciation. "We just want to make sure it's happening at a gradual but still significant rate."

Asked to respond to talk and media reports of a "currency war," with multiple countries taking action to stem the rise in their currencies, Geithner said, "No risk of that."

Asked to explain, the Treasury chief said that many other emerging markets were seeing major capital flows.

"And that's unfair to them because what's happening is, as China holds its currency down, their currencies are moving up," Geithner said. "And they're having to work very hard to make sure they're not at an unfair disadvantage with China. And that's why this issue, which people like to frame as uniquely an American preoccupation, is really much more important to the rest of the world and is really a global problem as a whole."

Geithner did not mention a Treasury report due on Friday on whether China or any other country manipulates its currency. He has said recently that declaring China a manipulator at this time would be not be productive because it would require consultations with Beijing that were already underway.

Turning to a domestic scandal involving allegations that some mortgage lenders used shoddy paperwork to justify thousands of home foreclosures, Geithner said that declaring a national foreclosure moratorium would be "very damaging" because it would halt the recovery process for many neighborhoods hard-hit by the housing collapse.

Some Democratic U.S. lawmakers, including Senate Majority Leader Harry Reid, who faces a tough re-election battle in Nevada, have called for the largest lenders to halt foreclosures in all 50 states.

Geithner said this would have unintended consequences by delaying the sales of homes with failed mortgages and foreclosures that are justified.

"What it means is those communities will be living longer with houses unoccupied, with more pressure on their house prices for the people still in their houses," he said

(Reporting by David Lawder; Editing by Tomasz Janowski)