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U.S. Treasuries prices plunged on Tuesday and yields surged after President Obama proposed a deal to extend tax cuts that would support economic growth but raise national debt levels in the longer term.

The yield on 10-year Treasuries rose more than 4 basis points from overnight U.S. levels in early Asian trade to around 3.188 percent, its highest since late June.

"In the short run this is good news, but two or three years down the road foreign buyers of U.S. Treasuries may start to balk," said David Carter, chief investment officer at Lenox Advisers in New York.

The move in Treasuries made the dollar more attractive to investors looking for higher yields, pushing it up against the yen, the euro and most emerging Asia currencies. The dollar index .DXY against a basket of major currencies was up 0.4 percent.

The weaker yen gave the Japanese stock market a boost. The benchmark Nikkei average .N225 hit its highest in almost seven months, reversing Tuesday's move to rise more than 1 percent.

Major exporters such as Sony Corp (6758.T) and Hitachi Construction (6305.T) were among the biggest gainers, both adding more than 1 percent in early trade. A weaker domestic currency helps exporters who are paid in foreign currency.

The selloff in Treasuries and the Nikkei's rise spurred further losses in Japanese government bonds after the previous day's weak 30-year debt auction. The yield on 10-year JGBs rose to its highest since June.

"A further rise (in Treasuries) would put pressure on some of the higher correlated bond markets in Asia such as Singapore, Hong Kong and Thailand which have seen yields rising in recent weeks due to inflationary pressures and year end profit taking," said Kenneth Akintewe, a fund manager at Aberdeen Asset Management who helps manage $5 billion in Asian fixed income assets.

"Still, inflows into the region are very strong ... which would mean any sharp selloff would be temporary and offer attractive entry points."

Other Asian stock markets stumbled as the suddenness and size of the U.S. bond selloff added to uncertainty heading into year-end.

South Korean stocks .KS11 and the won fell briefly on a report North Korea had fired an artillery round, but partially recovered when it emerged it was a military exercise, while weak resources stocks dragged Hong Kong stocks down around 0.6 percent.

The MSCI Asia index excluding Japan was down 0.7 percent, but with a year-to-date gain of around 12 percent was still well ahead of the main MSCI world index.

Asia has been one of the chief beneficiaries of flows of capital from the United States, where the Federal Reserve is pursuing a policy of printing more cash.

The euro fell to $1.322, wiping out Tuesday's gains, and is expected to remain under pressure given persistent concerns about high debt levels in the single currency zone.

The investigation centers on whether large U.S. banks decided in advance which investment house would win the auctions of guaranteed investment contracts that cities and counties buy with the proceeds from municipal bond sales.

Often, there is a delay between when bonds are floated and when the money is paid out, allowing some time to invest it.

Christine Varney, head of the U.S. Justice Department's antitrust division, said on a conference call with reporters that she expects "a lot more activity in the coming weeks and months" on a sprawling industry probe that dates to 2007.

She declined to say who else might be a subject of the Justice Department's probe.

Bank of America, the largest U.S. bank by assets, was first to report the bid-rigging problems within its Banc of America Securities unit to the Justice Department, before federal law enforcement began an industry-wide investigation.

Bank of America was granted amnesty from any penalties because it reported the violations to regulators and cooperated with the investigation.

"Bank of America is pleased to put this matter behind it, and has already voluntarily undertaken numerous remediation efforts," a Bank of America spokesman said in a prepared statement.

The settlement was a reminder of the bank's legal troubles in recent years, coming on the same day as Chief Executive Brian Moynihan's presentation at the Goldman Sachs U.S. Financial Services conference where he focused on the bank's 2011 prospects.

Moynihan said the bank will raise its dividend "as soon as possible" if it passes a second Federal Reserve stress test in 2011, and is targeting a shareholder payout at 30 percent of earnings.

PENALTIES

Bank of America will pay $36 million in disgorgement and interest to the U.S. Securities and Exchange Commission, while $101 million will go to other agencies.

The Internal Revenue service will receive $25 million, while the 20 state attorneys general involved in the investigation will distribute $62.5 million to investors affected by the bank's practices.

The bank also will pay $4.5 million to cover the attorneys general's investigation into the matter.

Other banks have not helped the Justice Department's investigation, Varney said.

The opt-in feature, called "tracking protection", is based on technology developed for Microsoft's current browser. It was downplayed as the world's largest software company tried to balance consumers' demands for privacy with advertisers' desire to gather data about users.

Microsoft said the technology was based on InPrivate Filtering, a little-used feature in Internet Explorer 8 that allowed certain sites to be blocked, but had to be switched on each time a new browser session was launched.

There is growing concern over websites and advertisers using technology to track sites on the Internet to build up profiles of users, generally without their knowledge or explicit consent.

Last week the Federal Trade Commission backed creation of a "do not track" option that would limit advertisers' ability to collect consumers' data online.

Advertisers generally oppose the idea, and several Republicans, who will control the House of Representatives next year, have criticized legislation as a potential drag on Internet commerce.

Microsoft is trying to satisfy the millions of users of the world's most popular browser while ratcheting up revenue from advertisers as it tries to catch up with Internet leader Google Inc.

Many ads or invisible elements on Web pages, from weather information to stock quotes and embedded videos, can automatically load a user's Internet address and Web page being viewed. Using "cookies," or strings of data saved by the browser, websites can build a profile of a user over time.

Microsoft said its "tracking protection" feature would meet demands being discussed by the FTC by allowing users the option of blocking content from certain advertisers within a Web page. Users can build their own lists of sites to block, or subscribe to lists prepared by outside sources.

Microsoft likens its new feature to a "do not call" list used to prevent unsolicited telephone marketing.

Once a user blocks a site or element within a site, the browser limits data requests to that site to prevent exchange of information.

The new feature will be included in IE9, the latest version of Microsoft's Internet Explorer browser, expected to be released some time next year. Microsoft's browser has about 60 percent market share.

(Reporting by Bill Rigby; editing by John Wallace)

After five hours of talks on Monday, the 16 ministers said they would take no new measures to tackle the risk of contagion, arguing that the existing safety net was sufficient, and they had not even broached a proposal for issuing joint bonds.

"We don't have any new decision to announce to you," Jean-Claude Juncker, the chairman of the Eurogroup, told reporters after the talks.

The premium investors demand to hold the bonds of Portugal and Spain rose in response to the ministers' inaction. Traders said the ECB, which engineered a fall in both countries' borrowing costs last week by stepping up its purchases of government debt, stayed on the sidelines.

"Ministers left the ball with the ECB," said Carsten Brzeski, senior economist at ING in Brussels. "Currently, the ECB is buying time for politicians. However, the ECB will not want to remain the only crisis manager and is eager to play the ball back to politicians."

An ECB source, speaking on condition of anonymity, said the central bank did not want to take on all the risk of supporting euro zone debtors by massive bond-buying, and wanted governments to take additional measures such as increasing the rescue fund.

Luxembourg Finance Minister Luc Frieden summed up the ministers' approach, telling Reuters Insider television: "We have all the tools to make sure that despite the temporary turbulence, financial markets should understand that there is no major risk for the stability of the euro zone."

The European Financial Stability Facility (EFSF) has the capacity to issue bonds worth up to 440 billion euros to help out troubled euro zone member states, as part of an overall EU/IMF rescue fund of 750 billion euros ($1 trillion).

"My gut feeling is that spreads are going to carry on widening for a while yet," said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.

"Anyone in the market who is expecting someone, somewhere to fund more support for the periphery, whether it be the EFSF or the ECB -- they're going to be disappointed."

INVESTORS ON EDGE

Investors remain on edge about the debt crisis spreading from Greece and Ireland, which have already been granted EU bailouts, to Portugal and possibly Spain.

All 27 European Union finance ministers formally endorsed an 85 billion euro EU/IMF assistance package for Ireland on Tuesday, clearing the way for the first loans to flow to Dublin once a tough austerity budget passes parliament.

The budget is expected to be approved later on Tuesday after a key independent lawmaker promised to vote for it, giving Prime Minister Brian Cowen a majority.

Before Monday's meeting, the IMF had urged the ministers to increase the size of the 750 billion euro bailout mechanism for debt-stricken states and suggested the ECB step up purchases of government bonds.

At 0950 GMT, futures for the S&P 500, Dow Jones and Nasdaq 100 futures were up 0.7-0.9 percent.

The FTSEurofirst 300 .FTEU3 index of leading European shares was up 1.1 percent at 1117.37 points, within a whisker of a two-year high, with sectors across the board rising.

Irish Prime Minister Brian Cowen was expected to get his fiscal plan through parliament and avert the risk of a snap election.

Obama announced a framework agreement with Republicans that would renew tax cuts for wealthier Americans as well as the middle class, as Republicans had wanted. The deal was expected to extend breaks on dividends and capital gains.

Japanese group Daikin Industries (6367.T), the world's second-biggest maker of air conditioners, is in talks to buy U.S.-based rival Goodman Global Group from a U.S. buyout firm, Bloomberg reported.

Oil fell from a 26-month high on reports China, the world's second-largest crude user, will raise interest rates as soon as this weekend, dampening investor enthusiasm for commodities driven by Asian demand.

The China Securities Journal reported this weekend offered a "sensitive window" for a rate rise, which would be the country's second in its current tightening cycle.

The U.S. government sold its remaining shares in Citigroup Inc (C.N) on Monday for $4.35 apiece, marking an exit from ownership in the bailed-out bank, with a $12 billion gross profit for taxpayers.

Economic indicators on tap for Tuesday included the weekly ICSC/Goldman Sachs chain store sales, the Retail Sales Index of department and chain store sales, and the IBD consumer confidence index for December. Also, the Federal Reserve will issues October consumer credit.

On the earnings side, AutoZone (AZO.N) and H&R Block (HRB.N) featured among companies set to report quarterly results.

Worries about Europe's debt crisis frustrated investors looking for a reason to take stocks to new highs for the year as major indexes ended flat on Monday.

The Dow Jones industrial average .DJI dropped 19.90 points, or 0.2 percent, to 11,362.19. The Standard & Poor's 500 Index .SPX shed 1.59 points, or 0.1 percent, to 1,223.12. The Nasdaq Composite Index .IXIC gained 3.46 points, or 0.1 percent, to 2,594.92.

(Reporting by Blaise Robinson and Brian Gorman; Editing by Dan Lalor)