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Benchmark 10-year U.S. Treasury yields held at 3.44 percent in Asia and futures rose after a push overnight toward a seven-month high close to 3.6 percent enticed bond buyers back into the market, confounding investors hoping for a trend to cling to in the final weeks of 2010.

December's reduced trading volumes and holidays typically cause whippy price action and make big bets difficult to hold for long.

Still, stocks in advanced markets were poised to keep a year-end rally going, even though Japanese equities unofficially closed marginally lower.

The Nikkei share average .N225 edged down 0.1 percent but was still up 10 percent in the final quarter of the year. It was on course for its biggest quarterly rise since the June quarter of 2009, lifted by foreign investors hovering up cheap shares.

Japan's gains have contributed to the 6.7 percent rise of the MSCI all-country world index .MIWD00000PUS, which exceeded the 3.8 percent advance of the emerging markets index.

Year-to-date, the U.S. S&P 500 index is up 11.5 percent .SPX compared with 11.9 percent for the MSCI Asia-Pacific ex-Japan index and 8.7 percent for the MSCI world index.

If the S&P were to end the year outperforming the MSCI Asia ex-Japan index, it would be first time that that had happened in a non-crisis year since 2000.

REVERSAL OF FORTUNE

The outperformance of developed markets has been a reversal of a trend in place for most of the year: the fundamental strength of emerging markets drawing money from advanced economies.

That is not to say the outlook for emerging markets, particularly in Asia, is anything but bright.

"Loose monetary policy in the U.S., debt concerns in Europe and strong growth in Asia coupled with rising inflationary pressures should maintain the status quo of Asian currency strength in 2011," Commerzbank analysts said in a note.

For now though clear signs of improvement in the U.S. economic outlook have taken some gloss off of developing markets.

After two days of falls, the MSCI index of Asia Pacific stocks outside Japan rose 0.4 percent .MIAPJ0000PUS on Friday, with gains evenly spread across the sectors.

Momentum-driven investors helped South Korean and Taiwanese stocks lead the small regional gains, with benchmark indexes climbing 0.8 percent .KS11 and 0.6 percent .TWII, respectively.

"It will result in a shift of more than six percent of quota shares to dynamic emerging market and developing countries and more than six percent from over-represented to under-represented countries," the IMF said in a statement.

Voting share in the global lender is important because it gives countries a chance to influence decisions about how money, raised through subscriptions from IMF members, is used.

The IMF said the 10 IMF members with the largest voting share in future will be the United States, Japan, the key emerging-market powers of China, Brazil, India and Russia as well as France, Germany, Italy and Britain.

By giving more voting power to countries like China and other emerging powers, "this reform will result in a Fund that better reflects realities," the IMF said.

Developed countries have stepped up efforts to have countries like China accept greater responsibility in global councils like the IMF while Beijing has chafed at contributing more unless its rising economic heft is recognized.

Emerging economies already have gained more clout in the IMF over the past five years, but the shift in voting power effectively amounts to a major overhaul of the global economic order established when the IMF was set up after World War Two.

The IMF said the changes will strengthen the lending institution's "legitimacy and effectiveness." The changes also double IMF member quotas, or subscriptions, boosting the lender's resources by about $733.9 billion at current exchange rates, the fund said.

The next step is for member countries to accept the proposed quota increases -- which in some cases will require parliamentary approval. The IMF said its members "will make best efforts to complete this" by October 2012.

"I urge all our members to proceed rapidly with the steps required to implement this package within the agreed timeline," IMF Managing Director Dominique Strauss-Kahn said.

(Reporting by Glenn Somerville, Editing by Kazunori Takada)

Stocks that performed well in 2010 were among Thursday's biggest gainers as investors sought to boost returns by the year's end. Advancing stocks outnumbered decliners by more than two to one on both the New York Stock Exchange and Nasdaq.

Package shipper FedEx Corp (FDX.N) raised its full-year outlook, though its quarterly profit and revenue missed expectations. Shares rose 2 percent to $94.22 while larger rival United Parcel Services (UPS.N) gained 2.1 percent to $73.76 and the Dow Jones Transportation Average .DJT gained 1.3 percent.

"The fact that FedEx missed its earnings is overshadowed by its very strong outlook, which is a good indicator that we're looking for good economic times ahead," said Kimberly Foss, president at the Sacramento, California-based Empyrion Wealth Management, which has more than $200 million in assets under management.

Visa Inc (V.N) and MasterCard Inc (MA.N) tumbled on heavy volume after the Federal Reserve issued a proposal that would force banks and card networks to slash the fees they charge retailers on debit cards. Visa sank 13 percent to $67.19 while MasterCard slumped 10 percent to $223.49.

The Dow Jones industrial average .DJI was up 41.78 points, or 0.36 percent, at 11,499.25. The Standard & Poor's 500 Index .SPX was up 7.64 points, or 0.62 percent, at 1,242.87. The Nasdaq Composite Index .IXIC was up 20.09 points, or 0.77 percent, at 2,637.31.

Stocks gained momentum after a slow start to the day, with big gainers for the year boosting the Nasdaq.

Intuit Inc (INTU.O), known for its tax-filing software, gained 3 percent to $49.35 after rising about 60 percent for the year.

Some shares raised hopes consumers will be less frugal over the holiday shopping season. Amazon.com Inc (AMZN.O) rose 1.4 percent to $178.10 and its stock was up 32 percent for the year.

After the closing bell, Oracle Corp (ORCL.O) reported a surge in new software sales in its second quarter, lifting its shares 3.2 percent to $31.24.

Starbucks Corp (SBUX.O) rose 2.3 percent to $32.59 after Goldman Sachs gave the coffee chain a "conviction buy" rating with a $44 price target.

Economic data added to the positive mood. Factory activity in the U.S. mid-Atlantic region unexpectedly rose in December, while jobless claims dipped for a second week. November housing starts rose, but permits for future home construction dropped to a 1-1/2 year low.

U.S.-listed shares of Research in Motion (RIM.TO)(RIMM.O) rose 1.8 percent to $60.28 after it reported its third-quarter results after the close.

"While we expect the market to continue growing, the slower growth we expect is going to be good for those companies that execute well, but challenging for the ones that have been struggling," said Alan Gayle, senior investment strategist at RidgeWorth Investments in Richmond, Virginia.

About 7.54 billion shares were traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq, well below the year's daily average of 8.62 billion.

(Reporting by Ryan Vlastelica; Editing by Kenneth Barry)

The Commodity Futures Trading Commission's proposal to set position limits showed the agency had taken heed of objections raised since January, when it first put forward a plan to cap the influx of investor capital that some blamed for driving oil and grain prices to record highs in 2008.

But the core principle was unchanged: restricting the number of swaps and futures contracts that speculators can hold in energy, metals and agricultural derivative markets, a rule it estimated could affect nearly 80 agricultural traders and dozens of metals and energy players.

"This is going to help us ensure these markets are efficient and effective and devoid of fraud abuse and manipulation," CFTC Commissioner Bart Chilton, a proponent of the news rules, told Reuters Television.

The proposal is part of broader efforts to boost oversight of the $600 trillion global over-the-counter derivatives market required under the Dodd-Frank bill passed by the U.S. Congress in July, which has expanded the CFTC's mandate but also complicated its work.

It has already been forced to slow down the timeline. As expected, the proposal set out general formulas for calculating the limits and applying those to the spot month contract, but it suggested waiting until the agency has more data on the opaque swaps market before expanding that to all months.

The plan, which commissioners must vote to release for 60 days of public comment, likely offers some relief for companies such as Goldman Sachs and Royal Dutch Shell that argued overly strict rules could reduce market liquidity, elevate volatility and make the markets more risky.

"This is the CFTC trying to stick to the letter of the law ... but at the same time ease their way into the rulemaking process with the market, recognizing that the markets are kind of jittery about whatever comes down the line," said Chad Hart, an agricultural economist at Iowa State University.

Compared to the previous proposal offered in January, which applied only to energy markets, the new rules attempted to draw a clearer line between financial players who have flooded commodity markets with over $350 billion over the past decade, and the traditional traders who often take large positions to hedge their own -- or customers' -- physical trading.

Under the rules, the big banks can now claim an "unlimited bona fide hedge exemption" -- allowing them to engage in hedging on behalf of big producers or raw material customers without counting against their own limits.

This replaced a more limited risk management exemption that had been proposed in January.

But trades to offset swap deals with speculators or investors would still be subject to the limits, and the CFTC narrowed the bona fide hedger definition, seeking to limit it only to those who have a legitimate physical business.

The biggest change was the removal of a "crowding out" provision that would've made it hard for any company to run both speculative and hedging books. This had drawn widespread criticism and was generally expected to be removed.

"We looked at the comment letters we received, and staff did not propose that provision," an agency official said in a background briefing.

CFTC also appeared to relax a provision around aggregation, which requires companies to combine positions across any firms in which they own more than 10 percent. It said a firm may be allowed to exclude those positions if the investment is passive and the stakeholder does not participate in management.

The Commerce Department said on Thursday housing starts rose 3.9 percent to a seasonally adjusted annual rate of 555,000 units. October's starts were revised up to a 534,000-unit pace from the previously reported 1-1/2 year low rate of 519,000 units.

Analysts polled by Reuters had expected housing starts to rise to a 550,000-unit rate.

Despite last month's pick-up in residential construction, housing remains weak as a 9.8 percent unemployment rate weighs on demand and homeowners' ability to hang on to their properties, lagging an acceleration in broader economic activity.

A survey on Wednesday showed sentiment among home builders was mired at record low levels this month, suggesting residential construction will again be a drag on gross domestic product growth in the fourth quarter.

New building permits fell 4.0 percent to a 530,000-unit pace last month, the lowest since April 2009, after a 0.9 percent increase in October. Permits were dragged down by a 23 percent plunge in the volatile multi-family segment. Permits for single-family homes rose 3 percent last month.

Analysts had expected overall building permits to rise to a 560,000-unit pace in November.

Groundbreaking last month was lifted by a 6.9 percent rise in single-family home construction. Starts for the multi-family segment, however, fell 9.1 percent. New home completions tumbled 14.1 percent to a record low 513,000 units in November.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Initial claims dipped slightly to 420,000 in the week ended December 11, matching the median forecast in a Reuters poll of economists, from a revised 423,000 in the prior week.

However, continuing claims, which exclude the millions of Americans relying on extended benefits, rose to 4.14 million in the week ended December 4. That was far higher than the reading of 4.07 million analysts had expected, and the prior week's figure was also revised up considerably.

The total number of Americans claiming benefits, including those relying on a federal emergency program of extended benefits that has been the subject of heated political debate in Washington, rose by nearly 900,000 to 9.2 million on a non-seasonally adjusted basis in the week to November 27.

The further extension of the emergency benefit program is part of a deal struck between President Barack Obama and Republicans in Congress.

(Reporting by Pedro Nicolaci da Costa; Editing by Theodore d'Afflisio)

Trading was expected to be volatile due to the expiry of index and individual stock futures and options, known as "quadruple witching."

Investors will be keeping an eye on developments in the euro zone, as European Union leaders meet on Thursday to try to agree the next steps in tackling a year-long debt crisis that has consumed Greece and Ireland and threatens to spread to Portugal and Spain.

U.S. stocks suffered a third straight late-day sell-off on Wednesday, suggesting it may be difficult to chalk further gains as the year comes to a close.

In company news, firms scheduled to release quarterly corporate results include Oracle (ORCL.O) and FedEX GFS.N

BP (BP.N) is expected to be in focus, after the Obama administration on Wednesday launched a legal battle against the oil major and its partners by suing them for the worst offshore oil spill in U.S. history, which could cost the companies billions of dollars.

Citigroup Inc (C.N) will officially open a new, high-tech branch in New York City on Thursday, in an effort to woo more business from wealthy, urban customers.

The U.S. aerospace industry is headed for continued sales growth in 2011, but warplanes are likely to play a smaller role than in recent years due to possible Pentagon cutbacks, the industry's main trade and lobbying group said on Wednesday.

Google Inc's (GOOG.O) YouTube is in talks to buy Web show maker Next New Networks in what would be the video sharing site's first foray into content production, the New York Times reported on Wednesday.

A deal that President Barack Obama struck with Republicans to extend tax cuts for nearly every working American and spur job growth moves to the U.S. House of Representatives for passage as early as Thursday.

The market is likely to get some direction from weekly U.S. jobless claims figures at 1330 GMT, with investors looking for further signs of the labor market's health.

Also of interest at 1330 GMT will be U.S. housing starts data.

In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares was up 0.3 percent at 1,130.62 points, though gains were limited by falls in heavyweight BP and Tansocean (RIGN.VX).

(Reporting by Harpreet Bhal; Editing by Mike Nesbit)

German Chancellor Angela Merkel said she had settled a dispute with Jean-Claude Juncker, the chairman of the Eurogroup of countries, over the idea of issuing euro area bonds, but differences still looked likely to arise at the summit.

"Jean-Claude Juncker and I had a long telephone conversation and cleared up the issue a while ago," Merkel said in an interview with Germany's Bild newspaper published on Thursday. "With so much at stake, the emotions sometimes get involved."

Juncker, who is a strong advocate of issuing so-called E-bonds, which Merkel says are unnecessary and would dent Germany's credit standing, also said the disagreement was resolved, but has hinted he could raise the proposal anyway.

He said he regretted "dissonances in public" which had given financial markets more cause for concern, and said he was focused on trying to achieve unity ahead of the two-day summit, as well as getting Spain and Portugal to improve their finances.

"They would do well... to present in detail structural reforms to be introduced beyond the plans of consolidation already announced," he told Corriere della Sera.

DOWNGRADE THREAT

Ratings agency Moody's warned Spain on Wednesday that its debt could be downgraded, saying it was worried about its high debt funding needs, indebted banks and regional finances, although it did not expect Madrid to have to follow Greece and Ireland in seeking an EU bailout.

Spain's Treasury paid just slightly less than expected for long-term bonds on Thursday in a key test of investors' appetite for euro zone peripheral debt and a day after Moody's said it may cut the country's rating.

Portugal on Wednesday announced extra measures to cut red tape and bolster structurally slow growth, in a move to convince EU officials and financial markets it is doing enough to stave off the pressure to seek EU financial aid.

EU leaders will gather at 1500 GMT on Thursday for the end-of-year summit, having spent most of 2010 desperately trying to stem a contagion that has consumed Greece and Ireland and now threatens Portugal, Spain and others.

Apart from agreeing to make a small change to the EU's treaty to set up a permanent system for handling financial crises after 2013, they are not expected to take other concrete decisions, inaction that could be interpreted as weakness and exploited by financial markets unconvinced by the euro zone.

Throughout 2010, EU leaders have struggled to show unity and clear communication in handling the crisis, either putting forward half-formed or contradictory proposals, or not agreeing quickly enough on the right course of action.

Repeated statements of unity at half-a-dozen summits have sometimes not been backed up by action, leaving markets skeptical and piling more pressure on the euro and debt yields.

TREATY CHANGES, ECB CAPITAL

Legal experts have said that BP's $40 billion estimate for the cost of capping and cleaning up the oil leak, compensating those affected and paying penalties could double if the U.S. government took a hard line against the company and convinced a court that the company was grossly negligent.

BP and analysts have dismissed this possibility so far, but the harshly-worded lawsuit filed on Wednesday by the Department of Justice spooked investors.

"Just when it looked like BP had turned a corner and was beginning to move on from the Gulf oil spill, it's dealt another blow to its recovery efforts," Manoj Ladwa, senior trader at ETX Capital said.

BP was down 2.7 percent in morning trade in London, having closed down 1.3 percent in the U.S. overnight.

Investors expect BP to reinstate its dividend -- cut in the wake of the spill to help pay costs -- in early 2011. However, if the outlook for fines and penalties worsens, the level of dividend paid could be lower than some expect.

The lawsuit seeks damages from the well owners BP, Anadarko Petroleum Corp and Mitsui & Co Ltd unit MOEX, and well driller Transocean Ltd and its insurer QBE Underwriting/Lloyd's Syndicate 1036, part of Lloyds of London, for their roles in the Gulf of Mexico disaster.

However, London-based analysts were not fretting over the Obama administration's move, believing that the company has made provisions for any damages connected to what was the worst offshore oil spill in U.S. history.

"This action comes as no surprise and at this stage BP appears to have made adequate provisions to cover likely costs providing gross negligence is not proven," say brokers at Oriel Securities, who have a "buy" rating on the stock.

Reuters reported earlier in December that BP's oil spill costs could double from the company's $40 billion estimate if the Department of Justice find BP was "grossly negligent" in the run-up to the disaster.

(Reporting by Sarah Young and Tom Bergin in London and Blaise Robinson in Paris; Editing by Hans Peters)