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Japan's benchmark Nikkei average .N225 climbed 1 percent and the broader Topix index .TOPX rose 1.2 percent, while Australian shares .AXJ0 also gained.

Buffett, chairman of Berkshire Hathaway Inc (BRKa.N), told shareholders in his widely read annual letter that he saw the need for "major acquisitions," a sign stocks may be cheap.

In many parts of Asia, inflation and measures to combat it continue to dominate policymaking. Inflation is seen as one of greatest risks to the economic growth that has encouraged investment in Asian emerging markets, as much of Europe and other developed economies stagnate.

Chinese manufacturing growth slowed in February, according to an official survey, as the government's sustained campaign to tame inflation weighed on industrial activity.

High global commodity prices complicated the task of monetary tightening, pushing a gauge of industrial input prices to a three-month high in China's official purchasing managers' index (PMI).

The overall PMI, which is designed to provide a snapshot of conditions in the manufacturing sector, fell to 52.2 in February from 52.9 in January, the China Federation of Logistics and Purchasing said.

"Inflation pressures are rising but economic activity is slowing. Slower economic growth is good for cooling inflation," said Wang Hu, economist at Guotai Junan Securities in Shanghai.

China's battle with inflation is a key market factor, and some foreign investors may favor Japanese stocks, analysts said.

"U.S. and European investors have been the main players in the Japanese market. But Asian investors have joined in as Japan is one of the few countries with a low risk of rate hikes," said Shun Maruyama, chief strategist at Credit Suisse.

"They are buying Japanese stocks on a process of elimination as Japan has more tolerance for higher oil prices than other Asian countries."

Australia's central bank kept interest rates steady on Tuesday for a fourth month, and said inflation looked set to remain within its preferred range all year, indicating it would not rush to raise them again.

In Indonesia, annual inflation slowed in February but at 6.84 percent stayed above the central bank's target range of 4-6 percent.

Crude oil traded close to $120 per barrel last week, its highest in more than two years, largely on fears that political upheaval in Libya would spread across oil-producing nations in the Middle East, but Saudi Arabia calmed the market with extra supply.

Brent crude was steady around $112 per barrel, while U.S. crude for delivery in April rose 45 cents to $97.41 per barrel. Gold, which in February recorded its biggest monthly gain since August as worried investors sought safety, was up around $3 to $1,413.60 per ounce.

The U.S. Fed chief, who testifies on the Fed's twice-yearly report on monetary policy before the Senate Banking Committee, will probably nod to improvements in the economy while indicating there is still room for monetary policy to help.

One wildcard is the recent surge in oil prices. Bernanke is likely to see that as more of a headwind to growth than the spark for broad-based inflation as long as consumers and businesses do not become gripped by inflationary psychology.

"We expect continued cautious optimism about the durability of the recovery and the need for ongoing monetary policy accommodation," said Michael Gapen, economist at Barclays Capital.

Some of the Fed's more hawkish officials have said they would consider halting bond purchases ahead of the program's June deadline if a recent growth spurt persists. Bernanke has indicated he would prefer to see the plan through.

The Fed chairman, who will offer a repeat performance on Wednesday before a committee in the House of Representatives, is likely to be peppered with questions about the record U.S. budget gap.

To avoid becoming enmeshed in Washington's heated deficit debate, Bernanke will have to do the usual dodging and weaving. He has repeatedly called for long-term budgetary restraint, with a dose of caution about deep short-run spending cuts.

His testimony comes just days ahead of a possible government shutdown over ongoing budget battles, though inklings of a compromise have emerged from Capitol Hill.

In the past, Bernanke has suggested the U.S. economy might still be too fragile to handle a heavy-handed budget ax. U.S. gross domestic product grew at a 2.8 percent annual rate in the fourth quarter -- not fast enough to put a significant dent in the jobless rate, which closed out the year at 9 percent.

The bond-buying program that the Fed launched in November, which aims to keep down borrowing costs to support the recovery, has proven controversial both at home and abroad.

Emerging economies have accused the Fed of a back door dollar devaluation that amounts to a beggar-thy-neighbor policy. Domestic critics, including many Republican lawmakers, argue the policy sows the seeds of future inflation.

"My fear is that today the chairman is potentially creating a bigger mess for the Fed to mop up," Republican Congressman Jeb Hensarling, a member of the House Financial Services Committee, told a Reuters Summit on Monday.

If faced with such questions, Bernanke would likely make the case that the labor market is still in too weak for economic momentum to generate inflation.

By some barometers, inflation is still running too low for the Fed's comfort. The core personal consumption expenditures price index, which strips out food and energy costs, rose just 0.8 percent in the 12 months through January, just off a record low and far beneath the Fed's presumed comfort zone of 2 percent or a bit below.

Hiring, meanwhile, remains subdued. Analysts polled by Reuters believe the economy added around 185,000 new jobs in February, up from just 36,000 last month, but not enough to appreciably reduce the jobless rate.

In such an environment, the recent spike in the price of crude oil, which traded around $97 a barrel in New York on Monday, would probably be more of a threat to consumption rather than a catalyst for price increases.

New York Federal Reserve Bank President William Dudley said on Monday that even if job growth picked up to around 300,000 a month, employment conditions would still be quite weak at the end of 2012.

While the modest increase in spending, which accounts for 70 percent of economic activity, likely reflected some weather effects it also suggested spending would slow down after growing briskly in the final three months of 2010.

The Commerce Department said spending edged up 0.2 percent, the smallest increase in seven straight months of gains, after an upwardly revised 0.5 percent rise in December.

Economists polled by Reuters had expected a 0.4 percent rise in January. Real spending fell 0.1 percent, the first decline in a year, after rising 0.3 percent in December.

"On net it really doesn't change much, spending will probably continue to be resilient, stronger than this number going forward as January was affected by being post holidays and with the weather being a factor there," said Sean Incremona, an economist at 4Cast in New York.

Stock index futures held gains after the data, while government bond prices were little changed. The U.S. dollar drifted lower against the euro, but rose against the yen.

Spending in the fourth quarter grew at a 4.1 percent annual rate, the fastest in more than four years.

Incomes rose 1.0 percent last month, the largest increase since May 2009, after increasing 0.4 percent in December. The jump in income partly reflected the tax package enacted last year.

The increase in January outpaced economists' expectations for a 0.4 percent gain. Savings jumped to $677.1 billion, the highest level since August, from $620.9 billion in December.

The report also showed the Federal Reserve's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy - edged up 0.1 percent last month, after being unchanged in December.

In the 12 months through January, the core PCE index rose 0.8 percent after rising by the same margin in December.

Fed officials prefer the core personal consumption expenditures price index as a gauge of consumer inflation because it takes into account changes in spending habits by households.

They have maintained their view that core inflation rates remain too low, even as high food and energy prices have put global central banks on alert for inflation.

Fed Chairman Ben Bernanke testifies to Congress on Tuesday and Wednesday, and analysts do not expect him to depart much from the central bank's view of low inflation.

(Reporting by Lucia Mutikani, Additional reporting by Karen Brettell in New York; Editing by Andrea Ricci)

U.S. crude oil futures rose on Monday, hovering below the $100-a-barrel mark, as protests in Oman fueled concerns about the security of supplies from the Middle East and North Africa.

In Libya rebels awaited a counter-attack by Muammar Gaddafi's forces on Monday, after the country's leader defied demands that he quit to end the bloodiest of the Arab world's wave of uprisings. Rebels holding Zawiyah, only 50 km (30 miles) west of Tripoli, said about 2,000 troops loyal to Gaddafi had surrounded the city.

J.P. Morgan has raised its average forecast for Brent crude by nearly 14 percent for 2011 as the supply-demand situation is expected to tighten on Libyan output losses.

The dollar hovered close to three-month lows on Monday, hampered by expectations that the threat to growth from high oil prices would keep U.S. monetary policy loose, in contrast to the more hawkish outlooks of other major central banks.

Playing for time to overcome a deep partisan impasse over the U.S. budget, senior lawmakers backed away on Sunday from a possible government shutdown.

Private equity firm Blackstone Group (BX.N) will pay about $9.4 billion for nearly 600 U.S. shopping malls and other properties of Australia's debt-laden Centro Properties (CNP.AX), a source with direct knowledge of the transaction said on Monday.

HSBC (HSBA.L) (0005.HK), Europe's biggest bank, cut its profitability targets due to the cost of tougher global bank regulations on Monday, and disappointed investors as its 2010 profits came in slightly below analysts' forecasts. Its shares traded in London were down 3.8 percent.

On the macro front, investors are expected to keep an eye on the National Association of Realtors' pending home sales for January, while on the earnings front, companies due to report results include AES Corp. (AES.N), Edison International (EIX.N) and Range Resources (RRC.N).

U.S. stocks rose on Friday, bouncing back from a three-day sell-off as oil prices stabilized, but unease over the Libyan rebellion was seen as likely to keep buying in check.

The Dow Jones industrial average .DJI gained 61.95 points, or 0.51 percent, to end at 12,130.45. The Standard & Poor's 500 Index .SPX advanced 13.78 points, or 1.06 percent, to finish at 1,319.88. The Nasdaq Composite Index .IXIC rose 43.15 points, or 1.58 percent, to close at 2,781.05.

(Reporting by Blaise Robinson; Editing by Greg Mahlich)

The bank's pretax profit for the year ending December 31 more than doubled from 2009 to $19 billion, but this figure came in below the average pretax profit forecast of $20 billion, according to analysts polled by Reuters Estimates.

HSBC said on Monday it had made a good start to the year but new chief executive Stuart Gulliver cut the bank's long-term return on equity (ROE) target to 12-15 percent from a previous 15-19 percent target.

HSBC shares, which had been trading up 2 percent before the results, fell back and were down 4.5 percent at 679.5 pence by 1005 GMT.

TOUGHER CAPITAL RULES

HSBC's shares were at their lowest level in nearly a month, and were the among the worst performers on Britain's benchmark FTSE 100 index, which was down by 0.6 percent.

HSBC also weighed on the European banking index, which fell 1.3 percent.

"The underlying pretax profit is significantly disappointing," said Canaccord Genuity analyst Cormac Leech.

Banks around the world are under pressure from regulators to raise capital to strengthen their balance sheets, in order to prevent a return of the 2008 credit crisis which resulted in the collapse of Lehman Brothers.

HSBC CEO Gulliver said he did not think that HSBC would need a rights issue to raise new capital.

However, its finance director Iain Mackay said the bank's new, scaled back return on equity target reflected the tougher capital requirements for banks, as well as global economic uncertainty, as highlighted by recent political tensions in the Middle East and north Africa.

"We've targeted 12 to 15 percent through the cycle for return on equity, principally taking into consideration what we view as a somewhat unstable and uneven economic recovery over the coming years as well as much higher capital requirements," said Mackay.

HSBC's decision to cut back its return on equity targets followed a similar move by rivals Barclays and Credit Suisse.

Both those lenders scaled back their profitability expectations, saying their returns would be held in check by regulatory requirements to hold more capital.

Gulliver took over as CEO from Michael Geoghegan at the start of the year. Gulliver, Chairman Douglas Flint and Finance Director Iain MacKay took the helm after a boardroom power struggle erupted in September.

Blackstone beat rival bidders including Morgan Stanley Real State (MS.N) which had teamed up with Starwood Capital Group and New York-based NRDC, the source said.

Blackstone agreed to pay book value for the assets which Centro has valued at around $9.4 billion, the source said, confirming media reports.

Shares in Centro were earlier placed in a trading halt ahead of an announcement about a potential transaction. Centro narrowed down bidders for the U.S. shopping mall assets to three consortiums, including Blackstone, sources told Reuters on February 9. with final bids for the 600 U.S. properties due in late February.

The Australian property giant was also weighing up a number of potential outcomes for a company-wide restructuring. The company's total portfolio is valued at A$16.5 billion, while it has A$16 billion in debt.

Debt-laden Centro was one of corporate Australia's first casualties of the global credit crisis.

Any asset sales need the approval of Centro's lenders which are now largely made up of hedge and distressed debt funds.

UBS and JPMorgan are running the sale process for Centro. Moelis & Co is financial adviser to Centro.

A Centro spokeswoman declined to comment.

Officials for Blackstone were not immediately available to comment.

The source could not be named because they were not authorized to speak to the media about the matter.

(Reporting by Michael Smith; Editing by Ed Davies)

London crude prices rose by more than $2 at one point to $114.50 a barrel as worsening turmoil in Libya spurred fresh concern about disruptions to oil production.

Recent unrest in the Middle East pushed London crude prices to nearly $120 last week, their highest level since August 2008, exacerbating worries about inflationary pressures in emerging Asian economies.

Market players said emerging Asian stock markets may continue to underperform compared to developed markets such as Japan and the United States.

Underscoring the recent trend, MSCI's index of Japanese shares .MIJP00000PJP rose 1 percent, taking its gains for far in 2011 to nearly 6 percent, while its Indonesian index has shed some 7.5 percent .MIID00000PID.

"There are strong concerns about inflation based on excessive liquidity and emerging markets have been hurt more by this," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management in Tokyo.

"Developed countries...are not raising interest rates while emerging markets are in the midst of doing so. That is negative for (emerging market) equities and that trend will probably still continue," Akino added.

The Nikkei .N225 recouped early losses to end 0.9 percent higher on Monday, with some traders attributing the bounce to futures-led buying on a weaker yen against the euro and to month-end window dressing. .T

Some Japanese financial shares saw strong gains with Mizuho Trust & Banking Co Ltd (8404.T) jumping 6 percent after a source told Reuters that its parent Mizuho Financial (8411.T) planned to buy it out along with two other units.

MSCI's index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up 0.2 percent after hitting three-month lows last week on worries that anti-government protests would spread to other Middle East oil producing countries. The ex-Japan index has lost more than 3 percent so far this year.

Part of the divergence with developed markets likely reflects position unwinding, said Adrian Foster, head of financial markets research with Rabobank International in Hong Kong.

Late last year, massive liquidity driven rallies in global equity markets helped give a boost to emerging market shares, Foster said.

"That largely explains why (emerging) equity markets this year have been quite weak. Just the unwinding of these... particularly in India and also in Indonesia," Foster added.

A growing aversion to risky assets in the week to February 23 fueled the biggest flows to global bond funds in more than three months, and turned more investors away from emerging market stocks, according to fund tracker EPFR Global.

With more than $20 billion leaving emerging market stock funds since mid-January, it is the longest period of outflows since the financial crisis deepened in September 2008.

Crude prices creeping back into the triple digits have sparked concern about slower economic growth and will no doubt reignite two long-running monetary policy debates:

Should central banks have a single inflation-fighting mandate, as the ECB does, or dual goals of price stability and full employment, like the Fed?

Should policymakers focus on headline inflation rates or strip out volatile food and energy prices?

Fed Chairman Ben Bernanke can expect questions on both topics when he delivers his twice-yearly testimony to Congress on Tuesday and Wednesday.

A day later, the ECB holds its policy-setting meeting and will have to judge whether oil prices pose an immediate threat when year-over-year inflation is already above its target. Economists widely expect the ECB to hold rates steady, but they will be hanging on President Jean-Claude Trichet's every word for clues on whether he is leaning toward a hike soon.

Nigel Gault, chief U.S. economist with IHS Global Insight in Lexington, Massachusetts, said persistently high oil prices would curb consumer spending and drive up the still-lofty jobless rate -- which would make the Fed less inclined to raise interest rates.

"The inflation-phobic European Central Bank might react differently, which may explain why the euro has been rising in recent days," Gault said.

Indeed, back in mid-2008, when oil prices briefly approached $150 a barrel, the ECB raised rates while the Fed held steady.

DUAL MANDATE

In his testimony, Bernanke will probably give Congress an economic assessment that sticks closely to his recent comments that the recovery is strengthening but still not enough to bring about a significant improvement in the job market.

He may also repeat a warning he gave earlier in February that sharp cuts in government spending now could harm the recovery. Republicans in Congress have pressed for deep cuts while Democrats want to keep spending at current levels.

If the parties cannot agree on a spending bill by Friday, the federal government will run out of money for nonessential operations and be forced to close.

Between the spending debate and oil prices, lawmakers will have no shortage of controversial topics for Bernanke. Pricey oil will draw questions on whether the Fed has overstimulated the economy and planted the seeds of runaway inflation.

Bernanke was already under pressure from some in Congress who want to restrict the Fed to a single mandate of price stability. Bernanke has said in the past that the Fed was not seeking any change in its mandate but would "honor" any decision Congress made.

Following the S&P 500's worst week in 15 last week, investors are trying to determine whether the predictions of a correction have been fulfilled or if there's still downside ahead as oil prices remain at elevated levels.

Shares could find some support Monday after positive commentary from Berkshire Hathaway Inc (BRKa.N) Chairman Warren Buffett, who said in his annual letter that Berkshire will engage in record capital spending in the coming year.

"They're certainly encouraging, especially for U.S. investing. I was struck by the level of capital investing he cited," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Whether or not his remarks result in a Monday (rally) remains to be seen. Buffett is a long-term investor, not a timer. He tends to be early."

Along with the direction of oil, potential market movers this week for traders will be the February payrolls report, which will be released on Friday, and Federal Reserve Chairman Ben Bernanke's speech on Tuesday.

The benchmark S&P index fell 1.7 percent last week, a relatively mild pullback for an index that has gained more than 25 percent since the start of September.

"We were looking for a pullback of at least 5 percent and we didn't get it, so I don't think we can expect a lot of new entrants at these levels," said Leo Grohowski, who oversees about $166 billion in assets as chief investment officer at BNY Mellon Wealth Management in New York.

"With the gains we've had, and since tensions remain high in the Middle East, I don't expect to see aggressive buying on the dip this time around," Grohowski said.

A lack of new entrants could mean lighter volume, which could leave the market more susceptible to increased volatility. Lately, volume has been stronger on down days in the market.

"RISKIER" ENVIRONMENT

An unexpected surge in crude prices, sparked by Libya's popular uprising, pressured equities for much of the holiday-shortened previous week on concern that higher energy costs could stifle economic activity.

U.S. crude futures spiked as much as 20 percent during the week to a high of $103.41 per barrel, although they later fell below $100. The CBOE Volatility Index VIX .VIX rose 17 percent last week and at one point was up 30 percent.

Though many say the market remains overstretched, its resilience in the face of geopolitical uncertainty and some disappointing data has some encouraged.

Judy Moses, portfolio manager at Evercore Wealth Management in San Francisco, said that the week's drop had quieted some of the calls for consolidation.

"Had we not seen this pullback, our enthusiasm would be a little tapered because valuations would be fuller," she said. "But it does seem that in general the investment environment is a bit riskier now."

Following the S&P 500's worst week in 15, investors are trying to determine whether the predictions of a correction have been fulfilled or if there's still downside ahead as oil prices remain at elevated levels.

Along with the direction of oil, potential market movers for traders will be the February payrolls report, which will be released on Friday, and Federal Reserve Chairman Ben Bernanke's speech on Tuesday.

The benchmark S&P index fell 1.7 percent in the week, a relatively mild pullback for an index that has gained more than 25 percent since the start of September.

"We were looking for a pullback of at least 5 percent and we didn't get it, so I don't think we can expect a lot of new entrants at these levels," said Leo Grohowski, who oversees about $166 billion in assets as chief investment officer at BNY Mellon Wealth Management in New York.

"With the gains we've had, and since tensions remain high in the Middle East, I don't expect to see aggressive buying on the dip this time around," Grohowski said.

A lack of new entrants could mean lighter volume, which could leave the market more susceptible to increased volatility. Lately, volume has been stronger on down days in the market.

"RISKIER" ENVIRONMENT

An unexpected surge in crude prices, sparked by Libya's popular uprising, pressured equities for much of the holiday-shortened week on concern that higher energy costs could stifle economic activity.

U.S. crude futures spiked as much as 20 percent during the week to a high of $103.41 per barrel, though they later fell below $100. The CBOE Volatility Index VIX .VIX rose 17 percent this week and at one point was up 30 percent.

Though many say the market remains overstretched, its resilience in the face of geopolitical uncertainty and some disappointing data has some encouraged.

Judy Moses, portfolio manager at Evercore Wealth Management in San Francisco, said that the week's drop had quieted some of the calls for consolidation.

"Had we not seen this pullback, our enthusiasm would be a little tapered because valuations would be fuller," she said. "But it does seem that in general the investment environment is a bit riskier now."

S&P MEETS KEY LEVEL

The S&P faces few technical hurdles before it reaches 1,360, and this week it seemed to find support at 1,300. Grohowski said it was "very important, psychologically, that we closed above that level on Wednesday and Thursday."

"I think the oil price rises we've seen so far don't pose a risk to the recovery," he told reporters after a speech on regulation.

"Oil price changes could have the potential, if they were very large, for slowing the recovery, but we have a lot of experience and a lot of data on past instances, and I think it's a manageable risk," he added.

Lacker said that pass-through from higher food and energy prices into broader inflation is limited but that there is a danger that prices that consumers are keenly aware of -- such as what they pay for gasoline -- could spur fears of wider inflation, which ultimately could push prices up.

"There's a risk that the high visibility of gasoline and food price increases would pose a little more risk for inflation dynamics this time than in the past," he said.

A rise in inflation expectations can be self-fulfilling if it leads businesses to raise prices and workers to demand higher wages. However, with the U.S. unemployment rate at 9 percent, many Fed officials do not see much scope for wage increases.

Yellen said she did not intend to provide any new information about the outlook for the economy or monetary policy in her speech.

Lacker, who is not a voter on the Fed's interest-rate setting panel this year, is known as one of the staunchest skeptics of the Fed's easy-money policies. His comments illustrate a likely course of debate at the Fed's meeting in mid-March over whether the biggest risk to the economy is a setback to the recovery or a surge in inflation.

Some Fed policymakers have suggested it might be time to reduce or taper off their $600 billion bond buying program in light of a strengthening recovery, but others feel higher oil prices could create headwinds to the recovery.

Oil prices retreated from 2-1/2-year peaks of almost $120 a barrel hit in London on Thursday to hover below $112 on Friday on Saudi efforts to plug supply gaps. However, turmoil in the Middle East and Northern Africa has added to worries about higher fuel prices and inflation risks around the world.

Another senior Fed official, Vice Chair Janet Yellen, said the Fed's long-term commitment to loose financial conditions will shift when the time comes for the central bank to withdraw its support for the U.S. economy.

"Once the recovery is well established and the appropriate time for beginning to firm the stance of policy appears to be drawing near, the (Fed) will naturally need to adjust its 'extended period' guidance and develop an alternative communications strategy," she told the Booth School conference.

Yellen said she did not intend to provide any new information about the outlook for the economy or monetary policy in her speech.

Lacker also said stress tests for banks come at a cost but are valuable for preventing financial panics.

"Quantifying the risks at large financial institutions is a complex and costly process that is vulnerable to manipulation," he said at the event sponsored by the University of Chicago's Booth School of Business.

Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate, marking a downward revision from its initial 3.2 percent estimate.

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.

The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent.

Federal Reserve officials have been concerned the economy is expanding too slowly to bring down unemployment significantly. The report supported the view that the central bank will complete its $600 billion government bond-buying program to further stimulate demand by lowering interest rates.

"A bit disappointing, but largely old news at this point that will take a back seat to fears about growth beyond the first quarter in the wake of both oil price hikes and a budget impasse that could cut into government spending," said Avery Shenfeld, an economist at CIBC World Markets in Toronto.

U.S. government debt prices pared losses on the data, while the dollar extended losses against the yen.

The government revised fourth-quarter growth to reflect a steeper contraction in government spending than previously estimated. Government spending declined at a 1.5 percent rate rather than 0.6 percent, due to weak state and local government outlays, and subtracted 0.31 percentage points from GDP.

In addition, consumer spending -- which accounts for more than two-thirds of economic activity -- grew at a 4.1 percent rate in the final three months of 2010 instead of 4.4 percent.

It was still the fastest since the first three months of 2006 and was an acceleration from the third quarter's 2.4 percent rate. But there are concerns that surging crude oil prices could hurt consumer spending and slow the economy's recovery.

The government revised business investment up, though spending on equipment and software was lower. Business spending increased at a 5.3 percent rate instead of 4.4 percent.

Business investment grew at a 10.0 percent pace in the third quarter. Spending on software and equipment increased at a 5.5 percent rate instead of 5.8 percent.

Business inventories subtracted 3.70 percentage points from GDP growth, unrevised from last month. Business inventories increased $7.1 billion instead of the $7.2 billion estimated last month.

Excluding inventories, the economy expanded at a 6.7 percent pace rather than 7.1 percent. It still marked the biggest increase in domestic and foreign demand since 1998. In contrast, domestic purchases grew at a much more moderate 3.1 percent rate instead of 3.4 percent.

Exports were revised higher, but the upward revision to imports was even greater. Trade added 3.35 percentage points to GDP growth instead of 3.44 percentage points.

The report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures (PCE) index rose at an unrevised 1.8 percent rate in the fourth quarter. That was a sharp gain from 0.8 percent in the third quarter.

But a "core" price index closely watched by the Fed advanced at revised 0.5 percent rate instead of 0.4 percent. The increase, which matched the third quarter, was still the smallest rise on record.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

* Early losses on the S&P 500 .SPX, triggered by deepening concerns that higher oil could stifle economic activity, eased in late-day trading on Thursday as Brent crude prices came off 2-1/2 year highs of $120 a barrel.

* The index is down 2.7 percent for this week, partly on worries that political unrest in oil-rich Libya could spread to major oil-producing countries and result in persistently higher energy prices at the expense of fragile global economic growth.

* Brent crude hovered at around $112 on Friday, with the crisis in Libya continuing to underpin prices.

* The U.N. Security Council was to meet on Friday to discuss a draft proposal for sanctions against Libyan leaders, locked in a bloody battle for survival against a popular uprising.

* In company news, Boeing Co (BA.N) rose 3.4 percent after the bell on Thursday as the firm said it won a $30 billion contract for 179 new U.S. Air Force refueling planes.

* Bailed-out insurer American International Group Inc (AIG.N) rose 1.4 percent in extended trade after the firm said it earned $11.2 billion in the fourth quarter on asset sales, though charges to expand its reserves for old asbestos claims pushed its underlying operations into another loss.

* News Corp (NWSA.O) has kicked off the process to explore the sale or spin-off of its troubled social entertainment site, Myspace, a person familiar with the talks said on Thursday.

* Almost a third of Apple (AAPL.O) shareholder votes cast were in favor of a proposal to disclose a succession plan for Chief Executive Steve Jobs, underscoring investors' worries over who will replace the visionary leader at the helm.

* Macroeconomic data due on Friday include U.S. fourth-quarter preliminary gross domestic product (GDP) figures at 8.30 a.m., and February's final Reuters/University of Michigan consumer sentiment survey at 9.55 a.m.

* Among the companies scheduled to release earnings results include retailer JC Penny (JCP.N)

* In Europe, the pan-European FTSEurofirst 300 .FTEU3 was up 0.5 percent in early trade, taking a breather after a week-long retreat, though trading in British shares was halted due to technical issues on the London Stock Exchange (LSE.L).

(Reporting by Harpreet Bhal)

After a surge in Brent oil prices to 2- year highs near $120 a barrel, South Korea, the world's fifth-biggest crude importer, warned that its inflation situation was getting tougher.

Business executives fretted about rising prices and investment banks said oil was reaching an inflection point that could endanger the world's recovery from the global financial crisis.

"We actually think that we'll be able to ride out the Libya situation and it will stabilize," Obama, referring to fuel prices, told a group of corporate chief executives.

His Treasury Secretary said the world had plenty of oil reserves.

"We have substantial capacity across the major economies in the strategic reserves," Timothy Geithner said.

"Hopefully, by reminding people of that and calling attention to the fact that there's a fair amount of excess capacity in parts of OPEC ... hopefully that will make it less likely the market ... starts to build in higher prices over time."

The key risk for the world economy is a sustained rise in the price of oil. But after shooting up to close to $120 a barrel in intraday trade on Thursday, Brent crude futures ended the day at less than $112, showing just how fraught investors nerves are.

The sharp fall came after market rumors that Libyan leader Muammar Gaddafi had been shot dead and on news that top producer Saudi Arabia could cover any supply disruptions.

On Friday, Brent crude was trading around $112. U.S. crude futures eased to $97.60 from a Thursday high of $103.41.

In Libya, forces loyal to Gaddafi hit back in fierce gun battles with rebels holding towns near the capital but there were no signs they had broken the opposition momentum.

The Organization of the Petroleum Exporting Countries (OPEC) has an estimated 4-6 million barrels per day of spare crude production capacity, more than enough on paper to cover Libya's output of 1.6 million barrels a day.

But markets are worried that the unrest might spread to bigger producers in the region that would have a much bigger impact on the world economy.

After public uprisings have already toppled leaders in Egypt and Tunisia, governments in the region are taking notice.

Saudi Arabia this week unveiled a $37 billion package to try to insulate the kingdom from the wave of protests across the Arab world, while Algeria lifted a 19-year-old state of emergency as it tried to appease opposition groups.

Brent oil prices vaulted more than 7 percent to almost $120 before pulling back on rumors that Libyan leader Muammar Gaddafi had been shot and on Saudi Arabia's reassurances that it could counter Libyan supply disruption.

The pullback in oil, underpinned late gains in U.S. stocks and caused shares in Asia's key markets to find their feet after a steady decline earlier this week.

Japan's Nikkei average .N225 rose for the first time in four days while Seoul .KS11 shuffled up, drawing support from Wall Street's overnight bounce.

"The Nikkei may bounce back today after oil stopped its advance, but the dollar/yen rate will hold the key to gains," said Kazuhiro Takahashi, general manager at Daiwa Securities Capital Markets.

"But with many economic indicators out next week from the U.S. and ahead of the weekend, which will probably bring more clues about the Libyan situation, investors won't take too many risks," Takahashi said.

The S&P 500 .SPX recovered from early lows following the retreat in oil but was down 2.7 percent for the week after sharp gains in crude prices this week cast doubt on the strength of the U.S. economic recovery.

The broader Asia-ex Japan stocks .MIAPJ0000PUS stabilized near 1-1/2 month lows.

In the currency markets, the dollar stayed above a record low against the Swiss franc after suffering heavy losses overnight as investors sought safety in other currencies, fearing the unrest in Libya could spread to other oil producers.

It has fallen nearly 4.8 percent against the franc in the last two weeks, its worst showing since June.

Meanwhile, the euro held near three-week highs, helped by more hawkish comments from European Central Bank officials with ECB policymaker Axel Weber saying the only direction for interest rates to go is up.

Other ECB officials recently talked tough about fighting inflation, reinforcing market view that the ECB will raise interest rates before the U.S. Federal Reserve.

Gold, another safe-haven, consolidated around $1,400 an ounce as safe-haven buying dried up after the rally in oil fizzled.

U.S. Treasuries consolidated overnight gains in Asian time, with ten-year yields falling to 3.45 percent. (Additional reporting by Antoni Slodkowski in Tokyo and Ian Chua in Sydney; Editing by Tomasz Janowski)

U.S. Air Force Secretary Michael Donley told reporters the contract was worth over $30 billion and Boeing's shares rose 3.5 percent in after-hours trading.

Boeing, which could still face a contract protest from Airbus parent EADS, was awarded an initial $3.5 billion to design and deliver 18 planes.

It is the third effort in nearly decade to start replacing the Air Force's Boeing-built KC-135 Stratotankers, built before man first landed on the moon.

The contest has sparked transatlantic tensions and clashes in Congress among lawmakers eager to bring high-paying aerospace jobs to their states.

"Boeing was the clear winner," Deputy Defense Secretary William Lynn told reporters at the Pentagon.

He said EADS could protest the decision, but the Pentagon was convinced the decision was fair and transparent and there would be no grounds for a protest.

"We think we've established a clear, a transparent and an open process and we think we've executed on that and it will not yield grounds for protest," Lynn told the briefing.

EADS last week said it would only protest if it saw egregious errors. On Thursday, it expressed disappointment and concern about the decision, but said the contract was just "one business opportunity among many" in the United States.

EADS did not say if it planned a protest. Company officials say they will wait until after a formal briefing by the Air Force, which is likely to occur on Wednesday.

EADS has 10 days to file a formal protest after a contract award and its congressional backers can also try to block the award legislatively. Several Alabama lawmakers said they would examine the decision carefully to ensure it was fair.

Teal Group analyst Richard Aboulafia called the decision "a major surprise" and said if it holds, Boeing will have succeeded in blocking EADS's biggest defense initiative.

Aerial refueling tankers supply fuel to fighter planes and other aircraft in mid-flight, extending the range of military operations.

Air Force Chief of Staff General Norton Schwartz said he was pleased that troops would finally get a new refueling plane. "Let me just say that I'm pleased that this has produced an outcome ... that we'll get about delivering a capability that's long overdue -- and we'll stop talking about it."

EADS and Boeing, arch rivals in the market for passenger jets, have fought bitterly in public over the contest with expensive advertisements while their respective supporters have battled it out at dueling news conferences.

U.S. crude oil futures were up more than $2 a barrel at above $100 on mounting fears that the chaos in Libya that has cut more than a quarter of OPEC-member Libya's crude output could spread to other major producers in the region, including top exporter Saudi Arabia.

European stocks were down around 0.5 percent in morning trade while Tokyo's Nikkei average lost 1.2 percent, adding to this week's global sell-off triggered by escalating violence in Libya.

The spotlight will be on General Motors Co (GM.N) on Thursday, as the company is expected to report full-year earnings of more than $5 billion, its first annual profit in six years, although rising commodity prices and its European operations are seen as putting a drag on the fourth-quarter performance.

Limited Brands Inc (LTD.N) said on Wednesday fourth-quarter net income rose 27 percent, in-line with its recently raised forecast, as fewer markdowns and more full-priced selling boosted results.

The United States looked set on Thursday to announce the winner of a $35 billion battle between Boeing and Airbus to supply in-flight refueling aircraft to the U.S. Air Force after two failed attempts to renew its aging fleet.

Citigroup Inc (C.N) will restructure its North American retail bank and credit card units, according to internal memos obtained by Reuters on Wednesday.

On the earnings front, companies due to report on Thursday include AIG (AIG.N), Applied Materials (AMAT.O), Gap (GPS.N), Mylan (MYL.O), Safeway (SWY.N) and Target.

Economic data due includes durable goods orders, new home sales and jobless claims.

U.S. stocks dropped for a second straight session on Wednesday as Libya's violence sent oil prices up and tech shares sank.

The Dow Jones industrial average .DJI fell 107.01 points, or 0.88 percent, to 12,105.78. The Standard & Poor's 500 Index .SPX lost 8.04 points, or 0.61 percent, to 1,307.40. The Nasdaq Composite Index .IXIC declined 33.43 points, or 1.21 percent, to 2,722.99.

(Reporting by Blaise Robinson; Editing by Greg Mahlich)

Disruption stemming from the revolt in the world's No. 12 exporter Libya has cut at least 400,000 barrels per day (bpd) of the country's 1.6 million bpd output, according to Reuters calculations.

Brent crude on Thursday spiked nearly $7 in the 90 minutes to 0800 GMT. It rallied as much as $8.54 or 7.7 percent a barrel to a peak of $119.79, trimming gains to trade up $6.00 at $117.25 by 0902 GMT. The contract has risen nearly 14 percent in four days.

Reuters market analyst Wang Tao says technical charts show Brent could be on course for a rise to $158 per barrel in 2011, well above its 2008 high of $147.50, while he expects U.S. crude to touch $159 per barrel.

U.S. crude for April delivery rose as high as $103.41, the highest September 2009. It traded up $4.31 at $102.41 at 0903 GMT.

The cuts from Libya represent the first disruption to supply as a direct result of protests that have swept through the oil producing regions of North Africa and the Middle East.

The concern for oil markets is how unrest might affect Saudi Arabia, which not only pumps around 10 percent of the world's oil but is also the only holder of significant spare crude production capacity that could be used to plug supply outages such as those being suffered by Libya.

"The situation in the Middle East is causing a lot of uncertainty in the market now, the risk of disruption to major producers in the region is what every investor is watching now,"

said Ken Hasegawa, a commodity derivatives manager at Newedge brokerage in Tokyo.

Without Saudi Arabia's 4 million bpd of spare capacity, there is little margin in the global oil supply system to deal with output disruption.

To date, the kingdom has escaped the popular protests against poverty, corruption and oppression that have raged across the Arab world, toppling the long-time leaders of Egypt and Tunisia and spreading as far as Saudi neighbor Bahrain.

Goldman Sachs said on Thursday oil markets were driven by fear of contagion to other producing nations and that another disruption could create severe oil shortages and require demand rationing.

"The market cannot accommodate another disruption, in our view, with the problems in Libya potentially absorbing half of OPEC's spare capacity," Jeffrey Currie said in a research note.

Saudi King Abdullah returned home on Wednesday from a three-month medical absence and unveiled benefits for Saudis worth some $37 billion in an apparent bid to insulate the world's top oil exporter from the protests across the Arab world.

Hundreds of people on Wednesday backed a Facebook page campaigning for a "day of rage" across the kingdom on March 11 to demand an elected ruler, greater freedom for women and the release of political prisoners.

Copper also bounced off one-month lows, although the dollar stayed on the back foot as some investors worry that the U.S. economy would be vulnerable to high oil prices, given its reliance on consumer spending to drive growth.

London Brent crude rose as high as $113 a barrel for the first time since September 2008, having gained nearly 10 percent in the past four sessions. U.S. crude last traded at around $99.38 a barrel, a whisker away from Wednesday's high of $100.

Worries that higher energy prices will crimp corporate profits had sparked a steep selloff in Asian stocks in the past two sessions, but that looked to be losing its punch.

Japan's Nikkei 225 index .N225, while still 0.4 percent lower on the day, was off its lows and stocks elsewhere in Asia .MIAPJ0000PUS erased early losses to be up 0.4 percent.

"As Japanese stocks have tumbled for the past two sessions (losing 2.6 percent), today's losses may not be sharp," said Masumi Yamamoto, a market analyst at Daiwa Securities Capital Markets.

Hong Kong's Hang Seng .HSI put on 0.2 percent and China's Shanghai Composite Index .SSEC edged up 0.2 percent. Gains in U.S. stock futures suggest a steadier start on Wall Street after two sessions of declines.

Gold, a traditional safe haven in times of trouble, traded at around $1,412 an ounce, not far from a record high around $1,430 set in December.

Copper gained 1.1 percent to $9,526 a metric ton, climbing off a one-month low of $9,365.

The dollar index .DXY, which tracks its performance against a basket of major currencies, shed 0.3 percent to 77.173.

Against the Swiss franc, the dollar fell to a record low at around 0.9277 franc, surpassing the previous trough of 0.9301 set at the end of the year.

The euro held firm at $1.3776, coming within easy reach of its February 2 peak of $1.3862, helped also by recent hawkish comments on inflation by European Central Bank officials, which raised expectations the ECB will hike interest rates before the Federal Reserve.

"There may be a realization that if oil prices rise sharply, that would hit all the developed countries and in that sense it effects every major currency the same," said Tsutomu Soma, manager of foreign bonds at Okasan Securities.

"And if the impact from the Middle East crisis is roughly equal on each currency, you could argue that currencies with a yield advantage will benefit at the end of the day," Soma said.

The New Zealand dollar continued to struggle at two-month lows below $0.7500, with markets now pricing in an 88 percent chance that the next rate move will be a 25 basis point cut.

The move followed the deadly earthquake that hit the country's second biggest city of Christchurch Tuesday.

(Additional reporting by Ayai Tomisawa and Hideyuki Sano in Tokyo; Editing by Tomasz Janowski and Yoko Nishikawa)

GM's results, due on Thursday, come at a pivotal time for investor sentiment in the U.S. auto industry, still widely seen as being in the early stage of recovery from its near-collapse in 2008 and 2009.

Analysts have been encouraged by GM's strength in China and its progress in slashing costs and debt in a bankruptcy funded by the Obama administration in 2009.

But since GM's record-setting $23 billion initial public offering in November, investors have also become concerned about the pressure on profit margins from rising commodity prices, higher costs for launching new vehicles and the risk of a sustained spike in oil prices.

GM's closest rival Ford Motor Co reported a fourth-quarter profit last month that fell far short of expectations after a $1 billion surge in costs from the third quarter.

The results sent both Ford and GM shares lower as investors worried about the risk that higher costs for everything from steel to plastic to the engineering teams behind new vehicles would erode profitability in future quarters.

GM shares have fallen 11 percent in the four weeks since Ford's results. Ford is down 21 percent in the same period.

GM management led by Chief Executive Dan Akerson had cautioned in a January meeting with analysts that fourth-quarter earnings would be below the rate for the first three quarters of the year.

"Ford has obviously taken a lot of wind out of the upside speculation of GM," said Josef Schuster, founder of IPOX Schuster LLC and a fund manager specializing in IPOs.

"If Ford is not meeting the earnings (expectations), it's hard to imagine that GM would strongly outperform," said Schuster, whose funds hold GM shares.

Analysts polled by Thomson Reuters I/B/E/S on average forecast fourth-quarter profit for GM of about $966 million and a full-year 2010 profit of about $5.3 billion.

Fourth-quarter revenue is expected to be nearly $33 billion with earnings of 46 cents per share, according to the average forecasts.

From 2005 to 2009, GM had lost about $88 billion in its slide to bankruptcy.

In the decade prior to then, annual U.S. auto sales averaged almost 17 million vehicles. The total plunged to a low of 10.4 million in 2009, the year that GM was overtaken by Toyota Motor Corp as the global top seller.

FOCUS ON EUROPE, ASIA

U.S. crude futures continued to climb, reaching a 2-1/2-year peak above $96 a barrel on concern that unrest in oil-rich Libya could spread to other top oil producers in the region and cut more output.

A senior aide to Muammar Gaddafi's influential son Saif resigned on Wednesday, the latest top official to walk out after the Libyan leader vowed to crush a revolt that threatens his four-decade rule.

European stocks fell for a third consecutive session on Wednesday, down 0.3 percent in morning trade, with tech shares featuring among the top losers.

U.S. tech shares will be in the spotlight after Hewlett-Packard Co (HPQ.N) trimmed its 2011 revenue projections on weak consumer PC demand and a lackluster showing from its IT services arm, sending its shares plummeting 12 percent in after-hour trading. Shares of the company traded in Frankfurt (HPQ.N) were down 11 percent.

Nasdaq OMX Group Inc (NDAQ.O), left out of a global merger frenzy among exchanges, is exploring options that include teaming up with a partner on a rival bid for NYSE Euronext (NYX.PA) (NYX.N), a person familiar with the situation said on Tuesday.

The U.S. Air Force may announce as early as Thursday whether Boeing Co (BA.N) or Europe's EADS (EAD.PA) has won a projected $35 billion contract for 179 new refueling planes, a senior defense official said.

Car rental company Hertz Global Holdings Inc (HTZ.N) posted a better-than-expected fourth-quarter adjusted profit, helped by strong growth at its U.S. off-airport business.

The Federal Reserve's monetary policy should remain accommodative for some time yet, Chicago Federal Reserve President Charles Evans was quoted on Wednesday as saying.

Wall Street suffered its worst day since August on Tuesday as investors dumped stocks on turmoil in oil exporter Libya, in what could be the start of a long-anticipated pullback after a lengthy rally.

The Dow Jones industrial average .DJI lost 178.46 points, or 1.44 percent, to end at 12,212.79. The Standard & Poor's 500 Index .SPX fell 27.57 points, or 2.05 percent, to 1,315.44. The Nasdaq Composite Index .IXIC dropped 77.53 points, or 2.74 percent, to 2,756.42.

(Reporting by Blaise Robinson; Editing by Jon Loades-Carter)

This is one option Nasdaq, valued at $5.7 billion, is considering as a spate of deals shakes up a global industry under intense cost pressure from upstart electronic rivals.

Looking to press home a merger between Toronto market operator TMX Group Inc and the London Stock Exchange, the head of TMX warned Canadian lawmakers opposed to the tie up that the country risked damaging its free-trade credentials if it blocked the agreed deal.

TMX Chief Executive Thomas Kloet told Reuters in an interview he was taking political opposition to a deal "very seriously."

Even so, he said Canada was putting its reputation on free trade and competition on the line as it considers a proposal to create a transatlantic operator worth $7 billion in market value and the world's fifth-largest exchange ranked by trading volume.

"One of the things Canada has to make sure to consider as it goes through this is what if it says no," Kloet said.

While the agreed merger of LSE and TMX has piqued the interest of industry experts, the merger talks between Deutsche Boerse and NYSE Euronext is drawing comparisons with the Chicago Mercantile Exchange (CME), the world's biggest derivatives marketplace.

Nasdaq focuses on intensely competitive, low-margin equities trading, so may feel vulnerable to more price-competitive exchanges that could result from the wave of merger plans.

A source familiar with the matter told Reuters that Nasdaq's alternatives include the possibility of tying up with IntercontinentalExchange Inc or CME to wrest NYSE Euronext out of its planned $10.2 billion takeover by Deutsche Boerse.

The source asked to remain anonymous because the talks are private.

The Wall Street Journal said Nasdaq may also consider selling itself or buying another competitor if it is unable to compete with Deutsche Boerse on the NYSE deal. A Nasdaq spokesman was not available to comment.

NYSE Euronext and Deutsche Boerse dominate futures and options on European bonds, shares and rates, with Deutsche Boerse's Eurex unit focused on the long end of the interest rate curve and NYSE Euronext's Liffe unit on the short end.

The Deutsche Boerse-NYSE Euronext merger would give the combination annual trading volume exceeding $20 trillion but to succeed it needs approval from a host of regulators.

A $7.9 billion bid by Singapore Exchange for the Australia stock exchange operator ASX Ltd late last year kicked off a wave of industry consolidation last seen just before the global financial crisis.

NO BIG ASIAN M&A

Popular protests in Egypt and Tunisia have toppled entrenched leaders, but a defiant Gaddafi, the world's second-longest-serving leader after the Sultan of Brunei, said he would not be forced out by the deadly unrest sweeping his nation.

The turmoil in Libya, which pumps nearly 2 percent of world oil output, sent London Brent crude prices above $108 a barrel to a 2-1/2 year high but they settled below $106 on Tuesday as the Organization of the Petroleum Exporting Countries (OPEC) said it would act should there be a supply shortage.

On Wednesday, Brent was trading up around 70 cents at around $106.47. NYMEX crude for April delivery was up 50 cents at $95.92 a barrel. The contract earlier rose as high as $96.08, the highest for any nearby month since October 2008.

Japan's Nikkei 225 index .N225 was down 0.2 percent and the MSCI's index of Asia Pacific shares outside Japan .MIAPJ0000PUS was off 0.3 percent.

Transporter companies, whose fuel bills are headed up, extended sharp losses from Tuesday, with Korean Air Line (003490.KS) shedding 1.5 percent.

"The only observation an outsider sitting in Asia can make about events in the Middle East and North Africa is that the unpredictability of events and the difficulty in ascertaining the 'end game' mean that equity markets settling back into equilibrium is still some way off," said Nomura analyst Sean Darby.

"The ongoing risk is if food prices were to continue to rise due to unseasonal weather and indeed if fuel prices were to climb further. Non-linear responses such as bans on exports of food by producers or curtailment of shipments of fuel due to non-payment would only exacerbate the situation on the ground and make it more difficult to return to normalcy."

Gold, a traditional safe haven in times of trouble, were little changed around $1,400 an ounce on Tuesday, after a six-session rally, but the trend is still expected to be upwards.

Currencies viewed as safe havens, such as the yen and Swiss franc, have also been boosted by events in Libya.

The dollar traded around 0.9371 Swiss francs, not far off a three-week low around 0.9362 plumbed overnight. The euro fell to a 3-1/2 week low at 1.2782 francs and last stood around 1.2834.

The euro was at $1.3697, after having briefly risen as high as $1.3704 on EBS after European Central Bank officials said they were ready to fight inflation.

Wall Street stocks on Tuesday suffered their worst day since August in what could be the start of a long-anticipated pullback after gaining more than 20 percent in the past six months.

The Dow Jones industrial average .DJI closed down 1.44 percent. The Standard & Poor's 500 Index .SPX fell 2.05 percent. The Nasdaq Composite Index .IXIC dropped 2.74 percent.

U.S. stock futures were slightly higher, suggesting Wall Street will rise again when it reopens on Wednesday.

(Editing by Ramya Venugopal)

Violent clashes in Libya have resulted in at last three oil companies halting output in Africa's third-largest producer. Libya pumps 1.6 million barrels per day (bpd), or nearly 2 percent of global supply.

The disruptions mark the first reduction in oil supply stemming from a wave of protests that have swept through the oil-producing Middle East and North Africa. Investors fear for the potential impact on the flow of oil from top exporter Saudi Arabia if it suffers similar unrest.

U.S. crude rose as high as $96.08 a barrel, the highest level since October 2008. By 0355 GMT, the contract had trimmed gains to trade at $95.70, up 28 cents on the day.

Brent crude rose 78 cents to $106.56 a barrel. On Monday, Brent hit a 2-1/2-year high of $108.70.

"Even if Libya completely shuts down, there isn't a supply issue. But the (U.S. crude) could go to $100, given the potential for this contagion to spread to Saudi Arabia," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.

To date, protests in Saudi have been low key. But majority Shi'ites in neighboring Bahrain are protesting against the Sunni government and there is concern this could spill over to the Shi'ite minority living in Saudi Arabia's oil-producing eastern province.

A pipeline pumping Libyan gas to Italy was also closed, and operations at Libya's export terminal operations disrupted. Libyan leader Muammar Gaddafi has refused to step aside despite the growing revolt and threatened tougher action against protesters in a defiant speech on Tuesday.{ID:nLDE71L2LE]

International Energy Agency (IEA) chief economist Fatih Birol said on Tuesday that oil prices were in the danger zone and could rise further if turmoil continues in the Middle East.

"The global economy is more fragile now than it was in 2008. Growth has been driven by stimulus packages and austerity measures. I don't see it being able to absorb a rise to $140 like it did two years ago," Barratt said.

Brent crude has risen more than 13 percent so far this year. U.S. crude is up over 2 percent on the year, but is over $50 below its 2008 high of $147.27.

"(Brent) prices have broken through the $105 resistance, and if it breaks $110, it could easily move to $120," said Ken Hasegawa, a commodity derivatives manager at Newedge brokerage in Tokyo.

NO MORE CRUDE FROM SAUDI

Top exporter Saudi Arabia on Tuesday stopped short of pouring more oil on to markets, telling visiting consumer nations prices were driven by fear.

The kingdom could ramp up its oil production enough within one month to replace all of Libya's crude exports if growing strife in the African nation cuts off its oil shipments, a senior U.S. government energy official said on Tuesday.