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Robust corporate earnings and the Federal Reserve's promise to keep liquidity cheap have fueled the Nasdaq to a 10-year high and driven the Dow and the S&P to their highest levels since 2008.

"We are clearly seeing signs of overbought conditions but there is still a lot of optimism, especially after the S&P broke well above the 1,340 range. The next ceiling is really not until the 1,400 level," said Stephen Massocca, managing director of Wedbush Morgan in San Francisco.

Heading into May, a seasonally weak month for stocks, the Dow and the Nasdaq posted their best monthly performance since December. At Friday's closing bell, the S&P 500 was up 8.4 percent for the year.

With earnings season coming to an end, investors will shift their focus to economic data next week, especially the April employment report on Friday. Investors will scrutinize the jobs data for signs of improvement in the labor market.

After a mixed batch of data this week, investors would need to see a solid gain in jobs to believe in sustainable economic growth. Nasdaq's rebalancing of its index may also cause a bit of a stir in the market next week.

But despite the concerns, options investors were buying less protection against a market correction, according to James Dailey, portfolio manager of TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.

"It's surprising, but ironically, the put-to-call ratio on S&P 500 rose late last week and early this week, but fell in the last few days," he said.

"We might see some reaction to the overbought conditions depending on the jobs number, but still, that would be a minor pullback, maybe down to test the 1,340 levels."

Other economic data due next week include the ISM manufacturing data and domestic car sales on Monday, the ISM services-sector data on Wednesday, and weekly jobless claims on Thursday.

NASDAQ REBALANCING

Nasdaq will be rebalancing its benchmark Nasdaq 100 index on Monday that will slash Apple Inc's (AAPL.O) weighting. The rebalancing will affect the relative weights of all the securities in the index and cause popular index-tracking funds such as the PowerShares QQQ (QQQ.O) to buy and sell shares to match the new composition.

"Apple shares are likely to see some volatility, but unlike 10 years ago, hedge funds and traders start trading on this (the rebalancing) from weeks ahead, so it won't be a huge event on the overall market," said Jack DeGan, chief investment officer of Harbor Advisory Corp in Portsmouth, New Hampshire.

The CBOE Volatility Index or VIX .VIX, Wall Street's so-called fear gauge, was relatively low, ending Friday's session below 15, although it was up 0.9 percent for the day.

"While conditions of being overbought and oversold can stick around for a while, as a trader, I feel this market is just too complacent. That is why I advocate looking at insurance, but also at this stage in the wave, ride it and not try to swim against it," said Joe Cusick, senior market analyst at Chicago-based online brokerage firm optionsXpress.

The VIX usually moves inversely with the S&P 500, tracking options prices that investors are willing to pay as protection on the price moves of the underlying stocks.

So far, 324 of the S&P 500 companies have reported earnings, of which 73 percent were above analysts' expectations, according to Thomson Reuters data. In a typical quarter, 62 percent of companies beat estimates.

(Reporting by Angela Moon; Editing by Jan Paschal)

One of the focal points of Berkshire Hathaway's (BRKa.N) annual meeting weekend is the Friday night cocktail party at Borsheims, the country's largest independent jewelry store and one of the many businesses in Buffett's ice-cream-to-insurance conglomerate.

The young and the old mingled freely among display cases laden with diamonds at 20 percent off, and many took advantage of the discounts. One thing that was not discounted, though, was the loyalty of Nebraskan shareholders to Buffett, beloved as the hometown kid with the folksy manner.

"I think he's been handling it very well ... I think he's done a nice job of addressing the issue but also recognizing that it's a difficult one," said Amy Peck of Omaha, a shareholder who was visiting with her dog Bosley in tow.

Peck was hardly alone; most smaller shareholders in Omaha simply feel differently about the controversy surrounding David Sokol's behavior than some institutional holders do.

Even if they expect answers from Buffett about Sokol this weekend, they still fundamentally believe in the man some call the "Oracle of Omaha." One investor choked up when asked about Berkshire after Buffett is no longer in charge.

"In my opinion Warren Buffett is Superman," said Ernie Fierro of Omaha, who has been attending the annual meeting for the last five years.

This aura of invincibility is what keeps investors coming back year after year. In fact, Buffett has said he'll never retire, and suggested he'll work until he dies.

Others made no effort to hide their adulation for the 80-year-old and their eagerness to buy Berkshire's stock -- even four-legged investors.

"You know what, that's not a bad idea, maybe we'll have him buy some shares too," Peck said of her dog.

Not everyone shopping at Borsheims on Friday was a small investor, though. Baba Blumkin of Los Angeles, a descendant of the family that founded Buffett's retailer Nebraska Furniture Mart, was browsing some of the store's higher-end offerings.

Blumkin, who grew up attending Berkshire's annual meetings, agreed Buffett had handled the situation well. Yet, asked what he would ask Buffett if given the opportunity, Blumkin had a slight less pragmatic question than most.

"Is it fun hanging out with LeBron James?" he said.

(Reporting by Ben Berkowitz, editing by Bernard Orr)

The European Commission, the EU's executive body, said it is probing whether major investment banks, including Goldman Sachs and JP Morgan, colluded in their operations in a market that is already under scrutiny by U.S. authorities and being subjected to broad, new regulations.

Credit default swaps, or CDS, are derivatives that let a buyer transfer loan default risk to a seller, making them a kind of insurance against default. CDS can also be bought by speculators without direct interest in the debts involved.

CDS played a central role in the near collapse of AIG in 2008, which led to a massive U.S. taxpayer bailout of the former insurance giant. The contracts have also been at the heart of the debt crisis engulfing some weaker EU states.

The EU probe comes as the 27-nation bloc struggles, along with the United States, to complete a government crackdown under way for months now on the broad, $600 trillion off-exchange derivatives markets, including CDS.

"CDS play a useful role for financial markets and for the economy," said the EU's anti-trust commissioner, Joaquin Almunia, in a statement announcing the two-track inquiry.

"Recent developments have shown, however, that the trading of this asset class suffers a number of inefficiencies that cannot be solved through regulation alone," he said.

Almunia added that a lack of transparency could lead to abusive behavior and that he hoped the probe would improve financial markets and aid economic recovery.

The U.S. Justice Department in 2009 launched an inquiry into anti-competitive practices in the trading, clearing and pricing of CDS in the United States. A spokeswoman for the U.S. Justice Department declined to comment on the EU move.

Unlike other derivatives, such as grain or metal futures, credit derivatives are risk transfers. "It's a banking function that's been converted by this small group of banks into a trading instrument," said Karen Shaw-Petrou, managing director at consulting firm Federal Financial Analytics.

"The problem is no one knows what anything is worth unless or until the entity against which the CDS is placed defaults ... That's what makes it very opaque," she said.

GREEK CRISIS

In Europe, CDS moved to center stage last year as Greece grappled with higher borrowing costs, blaming the move on speculators raising default insurance costs.

The European Commission, which regulates competition in the EU, said it would investigate whether 16 investment banks had colluded or abused a dominant market position.

The opaque CDS market, where industry players say the only record of some multimillion-euro deals is just a fax, has frustrated politicians who have struggled to understand it because there are few central records of trading.

"It is not a transparent market," said Shaw-Petrou. "It's a liquid market ... but there's no real proof of value other than moment-to-moment exchanges that are then impossible to verify because it's not a public exchange."

The probe could hit banks' bottom lines as the EU can fine companies up to 10 percent of revenues and has handed out penalties as big as 1 billion euros ($1.5 billion).

Analysts said CDS trading was too concentrated. "Eighty percent of derivatives transactions on both sides of the Atlantic are done by about eight banks," said Karel Lannoo of the Center for European Policy Studies, a think tank.

EU countries and the region's parliament are trying to agree how to revamp derivatives market rules, with some lawmakers calling for outright bans on speculative CDS trading. Such calls were heard two years ago in the United States, but major CDS dealers were able to silence them.

Instead, the 2010 Dodd-Frank reforms of financial regulation mandated the first comprehensive U.S. regulation of off-exchange derivatives, including CDS. The legislation is now being implemented by regulatory agencies.

The reforms mandate standardization and increased trading on exchanges or electronic platforms of derivatives. For instruments ill-suited to this, more use of central clearinghouses and disclosure of transactions is required.

A comparable level of detail has yet to emerge from EU debates about derivatives oversight, leading to some concern among regulators that momentum behind global reforms could slow amid divergent regional regulatory approaches and stiff resistance from banks defending their business models.

MARKIT EYED

The European Commission said it will also investigate any collusion by Markit, which provides prices and whose shareholders are the 16 banks. Markit denied any inappropriate conduct.

"Markit has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants," it said in a statement.

The EU said it would investigate nine of the 16 banks and ICE Clear Europe, a CDS clearinghouse owned by exchange operator InterContinental Exchange, to see if preferential tariffs given to the banks hurt competitors.

The 16 banks being examined are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Credit Agricole and Societe Generale.

The banks named either declined to comment or were not immediately available.

(Additional reporting by Arno Schuetze in Frankfurt, Emma Thomasson in Zurich, Kevin Drawbaugh, Sarah Lynch and Diane Bartz in Washington and William James in London; editing by Rex Merrifield and Alexander Smith, Gary Hill)

The world's biggest maker of earth-moving equipment said on Friday it now looks for full-year earnings of $6.25 to $6.75 per share, up from its prior forecast of "near $6" and above analysts' expectations.

It also reported first-quarter profit of $1.84 per share, well above the $1.31 Wall Street expected.

(For a related graphic click: r.reuters.com/bak39r)

"It's a huge number on huge volume, that's the simplest way of describing it," said Eli Lustgarten, an analyst at Longbow Research. He noted that revenue came in more than $1 billion above forecasts.

The report comes a day after government figures showed that economic growth in the United States slowed sharply in the first quarter, with higher food and gasoline prices starting to weigh on consumer spending and sparking concern about inflation.

Commodity inflation is not necessarily bad news for companies including Caterpillar and General Electric Co that make equipment used in energy production and commodity extraction. Rising demand for and prices of metals, coal and oil are driving demand for Caterpillar's heavy equipment -- its sales to miners and other resource companies nearly doubled in the quarter, outpacing its construction equipment business.

"We expect that the pace of world economic growth will support continued recovery in the key industries we serve," said Doug Oberhelman, who took the reins as chief executive of the Peoria, Illinois-based company last June.

Caterpillar joins a string of strong earnings reports from industrials ranging from 3M Co to Komatsu Ltd.

Its shares rose 2.8 percent to $115.85 in premarket trading, above their lifetime high on the New York Stock Exchange. As of Thursday's close, they were up 63 percent over the past year, more than four times the pace of the rise in the Dow Jones industrial average, of which Caterpillar is a component.

QUAKE EFFECT

The company reported first-quarter profit of $1.23 billion, compared with $233 million, or 36 cents per share, a year earlier.

Revenue rose 57.2 percent to $12.95 billion, above expectations of $11.69 billion, according to Thomson Reuters I/B/E/S.

Earlier this week Komatsu reported operating profit had doubled, citing demand in China and a recovery in the United States and Europe. The Japanese company said it was unclear what effect Japan's March 11 earthquake, tsunami and nuclear crisis would have on its results this year.

Caterpillar said the aftermath of the Japan quake, which has shaken supply chains around the world, would weigh on its full-year results, pulling down revenue by about $300 million and operating profit by $100 million.

The company is expected to close its $7.6 billion acquisition of mining equipment maker Bucyrus International later this year. Caterpillar officials in March said they might complete the purchase without issuing new shares because of its expected strong profit growth this year.

The company noted that it added 20,813 workers over the past year, about a third of whom work in the United States. That represented a 19.3 percent increase in headcount.

(Reporting by Scott Malone; editing by Robert MacMillan, John Wallace, Dave Zimmerman)

Futures for the S&P 500, the Dow Jones and the Nasdaq were flat to down 0.1 percent by 0825 GMT.

Shares on Wall Street rose on Thursday, with the Dow Jones Transportation Average .DJT closing at an all-time high.

Corporate results on tap include quarterly earnings from Caterpillar (CAT.N), the world's largest maker of heavy equipment, which is expected to show a more-than-tripling of profit from a year ago. Analysts predict earnings per share (EPS) of $1.31 against 36 cents a year ago.

Chevron is also scheduled to report earnings, with analysts expecting the second-largest U.S. oil company to show EPS of $3, against $2.36 a year ago.

Major macroeconomic data due later in the session is likely to provide further direction for equities, with the New York ISM figures for April due at 1230 GMT, the Chicago PMI numbers at 1345 GMT and the University of Michigan consumer sentiment for April scheduled for release at 1355 GMT.

In company news, Nasdaq OMX and IntercontinentalExchange are poised to go hostile in their bid for NYSE Euronext after shareholders ratcheted up pressure on the Big Board parent to get a better deal.

Samsung Electronics (005930.KS) filed its own U.S. lawsuit against Apple (AAPL.O), accusing the iPad maker of infringing 10 patents in an escalation of the dispute over tablet and mobile technology.

French energy company Total SA (TOTF.PA) offered to pay up to $1.37 billion for a majority stake in U.S. solar company SunPower Corp (SPWRA.O), one of the biggest moves ever by an oil and gas giant into the market for renewable energy.

After the closing bell, shares of both Research in Motion Shares (RIMM.O) and Microsoft (MSFT.O) after posting quarterly earnings

In Europe, the FTSEurofirst 300 .FTEU3 index of top shares ticked lower in early trade to snap a six-session rally. Volumes, however, were thin as Britain's markets were closed for a royal wedding holiday.

(Reporting by Harpreet Bhal; Editing by Mike Nesbit)

A fresh batch of U.S. economic data in the form of rising claims for jobless benefits failed to rescue the dollar, which had dropped to its weakest level since July 2008 against other currencies before recovering slightly.

Silver barely moved, standing at 48.32 an ounce by 0234 GMT (10:34 p.m. ET on Thursday), having rallied to a record at $49.51 an ounce on Thursday. Gold lost $1.10 to $1,533.85 an ounce after hitting a lifetime high around $1,538 an ounce in the previous session.

"If the dollar continues to weaken, then it's only likely to boost gold as well as silver as the inverse relationship between the two assets persists. I would say that for gold I am still looking for it to hit $1,600 this year," said Ong Yi Ling, investment analyst at Phillip Futures in Singapore.

"In the long term, I think if we see silver prices at such a high level, then it could hurt the industrial demand."

But dealers said strong investment demand for silver would keep the metal at record levels, while a lack of scrap sales in the physical market suggested that investors expected more gains. Year to date, silver was up almost 60 percent, sharply above gold's 8 percent gain.

A bullish target at $1,549 per ounce is still intact for spot gold, based on its wave pattern and a Fibonacci projection analysis, according to Wan Tao, who is a Reuters market analyst for commodities and energy technicals.

"There's some selling but I would say it's very light," said a dealer in Singapore, who trades gold and silver. "It had been a very busy week, and I am glad today is Friday. It's all quiet, finally."

The CME Group Inc, parent of the Chicago Board of Trade, said on Thursday it would raise maintenance margins for COMEX 5000 Silver futures by 13.2 percent, making it more expensive for silver speculators to trade in.

Soaring prices hurt the bottom line of certain manufacturers, including photography company Eastman Kodak, which said on Thursday a hike in raw material costs, particularly silver, led to a decrease in its film business revenue.

Trading was subdued in Asia, with Japanese financial markets shut for a public holiday. UK markets will be closed for the royal wedding. Premiums for gold bars were steady in Hong Kong and Singapore.

The dollar index, which tracks the currency's performance against a basket of major currencies, stood at 73.065 on Friday, having plumbed a three-year low of 72.871 on Thursday.

Sentiment for the dollar took a hit this week after the Federal Reserve said it was in no hurry to tighten its ultra-loose monetary policy, a move that gave investors the green light to keep using the dollar as a funding currency to buy higher-yielding assets.

"It all depends on the U.S. dollar, but I would say we only see a small amount of selling in the physical market," said a dealer in Hong Kong.

In the energy market, U.S. crude futures were steady in early trade on Friday, after rising to a 31-month high settlement in the previous session, as a weak dollar helped stem a slide in prices from slower economic growth in the United States in the first quarter.

(Reporting by Lewa Pardomuan; Editing by Clarence Fernandez)

Nasdaq OMX Group Inc and IntercontinentalExchange Inc are expected to soon take their $11.1 billion bid directly to NYSE's shareholders through a tender offer, two sources familiar with the situation said.

The move is seen as the next logical step for Nasdaq and ICE after being rebuffed twice by NYSE, which has refused to open talks on their offer. NYSE favors its existing $10.1 billion deal with Germany's Deutsche Boerse AG.

A direct appeal to shareholders through a tender offer would ramp up the pressure that NYSE is already under, although they also have defenses to keep Nasdaq and ICE at bay.

NYSE, for instance, can institute a poison pill, which would thwart the hostile bid by making it more difficult and expensive for the rivals to buy its shares.

In signs the Big Board is facing growing dissent over its strategy of just saying "no," shareholders at its annual meeting on Thursday approved two proposals that the board had advised against, and directors who were up for election got fewer votes than before.

Investors at the packed meeting in New York urged NYSE management and board to start talks with Nasdaq and ICE, while also asking them to press Deutsche Boerse to sweeten its deal.

"This merger is grossly unfair to the shareholders," said Kenneth Steiner, who owns about 1,000 NYSE Euronext shares. "I voted against the directors. I believe they should be removed and replaced with those who can get us the appropriate value for our shares."

The NYSE board and managers who launched a charm offensive to woo shareholders stuck to their belief that the Deutsche Boerse deal was the better way to go.

Earlier on Thursday, NYSE CEO Duncan Niederauer said he would close the "perceived value gap" between the deals. The Nasdaq/ICE offer is about 10 percent higher than the Deutsche Boerse deal.

Niederauer, a fierce rival of Nasdaq's Robert Greifeld, promised that a combined NYSE-Deutsche Boerse would have much higher earnings, diverse revenues and would cut costs.

With shareholders pushing for a sweeter deal from the German exchange, Niederauer said, "We would hate to miss out on an accelerating opportunity because we just got a touch too greedy on the ratio."

DISRUPTIVE TACTICS

NYSE Chairman Jan-Michiel Hessels called the unsolicited offer from Nasdaq and ICE "illusory" and "fraught with unacceptable execution risk.

"We believe their request for a meeting is a tactic principally designed to be disruptive to our combination and therefore we see no basis for which to meet with them," Hessels said.

NYSE's board took just 10 days to snub Nasdaq this month, dismissing its bid as "strategically unattractive" and warning of heavy U.S. job losses from such a deal.

Eight of nine institutional investors polled by Reuters this week said NYSE Euronext should at least sit down with Nasdaq and ICE.

On Thursday, shareholders approved a proposal that gives investors with just 10 percent of the company's shares the power to call special meetings -- a move that could make it easier for Nasdaq and ICE to pursue their counter-bid if it drags on after a July shareholder vote.

NYSE said it would likely take 12 months to adopt the proposal.

The shareholders reelected the directors with an average of 80 percent support, according to preliminary results. Last year, the directors got more than 90 percent support.

STRONG RESULTS

Separately, Deutsche Boerse said it has no plans to sweeten its offer, but highlighted possible cost savings of at least 500 million euros ($742 million) from the deal.

The target is 100 million euros higher than the initial estimates. Half of the additional savings would come from the technology unit.

Deutsche Boerse and NYSE Euronext also reported strong first-quarter results, topping analyst expectations.

NYSE earned 68 cents a share, excluding items, topping the 60 cents Wall Street expected.

Separately, CME Group Inc said its first-quarter profit rose 22 percent, beating expectations, as the biggest U.S. futures exchange operator handled record trading in energy and grains.

($1=.6817 Euro)

(Additional reporting by Ann Saphir in Chicago and Edward Taylor in Frankfurt; editing by Sophie Walker, Jon Loades-Carter, Robert MacMillan and Andre Grenon)

Another report on Thursday showed a surprise rise in the number of Americans claiming unemployment benefits last week, which could cast a shadow on expectations for a significant pick-up in output in the second quarter.

Growth in gross domestic product -- a measure of all goods and services produced within U.S. borders -- slowed to a 1.8 percent annual rate after a 3.1 percent fourth-quarter pace, the Commerce Department said. Economists had expected a 2 percent growth pace.

Output was also restrained by harsh winter weather, rising imports as well as the weakest government spending in more than 27 years.

"The biggest factor was weather. It hurt consumption and construction. Energy also hurt consumption as well. Higher gasoline prices took a bigger bite out of people's budget," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

Initial claims for state unemployment benefits jumped 25,000 to a seasonally adjusted 429,000, the Labor Department said. Economists had expected claims to slip to 392,000.

U.S. government debt prices rose after the data, while stock index futures added to losses. The dollar extended losses against the yen and the euro.

The Federal Reserve on Wednesday acknowledged the slowdown in first-quarter growth, describing the recovery as proceeding at a "moderate pace" -- a slight step back from a statement in March when it said the economy was on a "firmer footing."

It trimmed its growth estimate for 2011 to between 3.1 and 3.3 percent from a 3.4 to 3.9 percent January projection.

The U.S. central bank signaled it was in no rush to start withdrawing the massive monetary stimulus it has lent the economy. It confirmed plans to complete its $600 billion bond buying program in June.

ROBUST GROWTH NEEDED

"Coming in at 1.8, to get to where Fed's forecast is, you're going to need some robust growth," said Bob Andres, chief investment strategist and economist at Merion Wealth Partners in Berwyn, Pennsylvania. "In my mind, the Fed's forecast and the Street's forecast are more than likely a little too optimistic."

Growth in the first quarter was curtailed by a sharp pull back in consumer spending, which expanded at a rate of 2.7 percent after a strong 4 percent gain in the final three months of 2010.

Rising commodity prices meant the consumers, which drive about 70 percent of U.S. economic activity, had less money to spend on other items. The report also underscored the pain that strong food and gasoline prices are inflicting on households.

A broader measure of inflation, the personal consumption expenditures price index, rose at a 3.8 percent rate -- its fastest pace since the third quarter of 2008 -- after increasing 1.7 percent in the fourth quarter.

The core index, which excludes food and energy costs, accelerated to a 1.5 percent rate - the fastest since the fourth quarter of 2009 -- from 0.4 percent in the fourth quarter. The core gauge is closely watched by Fed officials, who would like it around 2 percent.

Still, economists expect consumer spending to trend higher in the second quarter, mostly on the belief gasoline prices will not rise much above $4 a gallon on average.

In the first quarter, growth was also curbed by the trade deficit as a need for businesses to rebuild inventories sucked in imports. Export growth slowed.

A widening trade deficit weighs on GDP growth because it shows more U.S. demand being sated by overseas production. Nevertheless, strong import growth has been seen as a sign of underlying strength in domestic demand.

Restocking by businesses picked up pace, with inventories increasing $43.8 billion after a $16.2 billion rise in the fourth quarter. Inventories added 0.93 percentage point to GDP growth. Excluding inventories, the economy grew at a pedestrian 0.8 percent pace, reflecting important pockets of weakness, after a brisk 6.7 percent rate in the fourth quarter.

Business spending on equipment and software gained pace from the prior quarter, but government spending contracted at its fastest pace since the fourth quarter of 1983.

Home building made no contribution, while investment in nonresidential structures dropped at its quickest pace the fourth quarter of 2009. However, motor vehicle output added 1.4 percentage point to economic growth last quarter.

(Additional reporting by Mark Felsenthal; Editing by Neil Stempleman)

Investors awaited a flurry of corporate results on Thursday from companies such as Coca-Cola, Microsoft and Procter & Gamble, as well as the first estimate of the U.S. first-quarter GDP growth. Economists in a Reuters survey forecast a 2.0 percent annualized pace of growth compared with a 3.1 percent rate in the final fourth quarter estimate.

U.S. crude futures rose to their highest in 2-1/2 years and metal prices rallied as the Federal Reserve appeared in no rush to tighten its monetary policy.

The dollar sank to a three-year low against a basket of currencies on Thursday and was at risk of a drop to $1.50 versus the euro, with momentum-driven investors piling in anticipation U.S. interest rates will be low for a long time.

Japan's Nikkei added 1.6 percent while European stocks were up 0.2 percent in morning trade, gaining ground for the sixth straight session, boosted by a raft of strong earnings from firms such as Deutsche Bank and Royal Dutch Shell.

Consumer goods maker Unilever, however, warned of higher commodity costs for 2011 as vegetable oil and chemical prices rose sharply, and said it would cut its own costs deeper to compensate.

Starbucks Corp warned that rising fuel and dairy costs will take a bigger chunk out of earnings than previously anticipated, and offered a full-year forecast that disappointed Wall Street.

Bid target NYSE Euronext, the transatlantic exchange operator, stepped up calls on shareholders to back a $10.2 billion bid from Deutsche Boerse as it unveiled robust first-quarter results.

Japanese consumer electronics giant Panasonic Corp said it was planning 35,000 job cuts over three years to March 2013, nearly 10 percent of its workforce, in a bid to pare costs and keep up with Asian rivals.

The Nasdaq jumped to a 10-year high as U.S. stocks rallied on Wednesday after Fed Chairman Ben Bernanke's dovish comments.

The Dow Jones industrial average gained 95.59 points, or 0.76 percent, to 12,690.96. The Standard & Poor's 500 Index rose 8.42 points, or 0.62 percent, to 1,355.66. The Nasdaq Composite Index climbed 22.34 points, or 0.78 percent, to 2,869.88.

(Reporting by Blaise Robinson; Editing by Hans Peters)

The Bank of Japan (BOJ) is also expected to maintain its ultra-loose monetary policy later in the day and indicate its readiness to ease further if damage from last month's earthquake proves bigger than expected.

Putting pressure on the BOJ to do more, latest data showed Japanese factory output fell at a record pace in March.

With the two major central banks keeping interest rates near zero, investors are set to continue using the dollar and yen as funding currencies to buy higher-yielding assets, commodities and equities.

"The reason for the dollar's broad weakness is that market players think it makes sense to use the dollar to fund investment in various assets, since U.S. interest rates are likely to stay low for a while," said Daisuke Karakama, market economist at Mizuho Corporate Bank in Tokyo.

Japan's Nikkei average .N225 rose 1.3 percent, while stocks elsewhere in Asia .MIAPJ0000PUS put on more than 1 percent to hit a new three-year peak.

Trading volume in Japan's stock markets, however, is expected to be thin as the Golden Week holidays loom and as investors awaited earnings from the likes of Panasonic Corp (6752.T) and Honda Motor 7267.t due after the market close.

"If earnings continue to impress the market, the Nikkei may rise further," said Makoto Kikuchi, chief executive officer at Myojo Asset Management.

Japanese markets will be shut on Friday and will reopen on Monday, ahead of more holidays next week.

Also highlighting hefty demand for higher-yielding assets and exposure to fast-growing emerging Asian markets, Indonesia's $2.5 billion medium-term note offering this week was nearly 3 times oversubscribed, with half the issue snapped up by U.S. investors.

The dollar index .DXY, which tracks its performance against a basket of major currencies, fell to as low as 72.878 -- a level not seen since July 2008.

Dealers also said several central banks in Asia were spotted buying the greenback to check sharp gains in their currencies.

The euro rose to a 16-month high of $1.4878, further spurred by stop-loss buying after a breach of option barriers around $1.4800, while the Australian dollar touched a post-float high of $1.0948.

In the commodities market, U.S. crude scaled a 2-1/2 year peak of $113.70 a barrel, and gold futures raced to a record high above $1,530 an ounce. Copper gained nearly 2 percent to around $9,490 a tonne.

U.S. Treasury yields were a touch lower, after having risen on Wednesday as the market made room for an upcoming seven-year supply. The two-year yield slipped 1.2 basis points to 0.6368 percent.

The committee said it may sue Sokol to recover the $3 million of trading profit he made when Berkshire bought chemicals company Lubrizol Corp and could seek damages from him for harm to the company's reputation. The company will cooperate with any government probe in the matter as well.

The U.S. Securities and Exchange Commission is probing Sokol, a person familiar with the matter said on Wednesday.

Sokol's high-profile attorney disputed the board's report and said his client is "a man of uncommon rectitude and probity."

"I have known Mr. Sokol and have represented his companies in business litigation since the mid 1980s," said Barry Levine of the Washington firm Dickstein Shapiro. "He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies."

Levine, who has done work for Sokol's former company MidAmerican Energy, co-heads Dickstein's white collar criminal defense practice and has also represented attempted Ronald Reagan assassin John Hinckley.

The report is an unusual statement from a board that has historically been very close to Buffett, who is CEO and chairman. It may begin to answer the demands of shareholders who expected Buffett to address the controversy at the company's annual meeting in Omaha, Nebraska this weekend.

Buffett previously said he would have nothing further to say about Sokol's actions, a stance that became untenable over time given the intense pressure on the conglomerate.

The report paints a picture of Buffett as having been duped by Sokol. However, one shareholder said it was also crafted to exonerate Buffett from wrongdoing.

"This report makes it clearly look like this was not Warren Buffett's fault, this was Sokol's fault," said Michael Yoshikami, chief executive of wealth manager YCMNET Advisors and a Berkshire shareholder. "There really is an effort here to make clear that this was not Warren Buffett's behavior in any way, this was Sokol's behavior."

GAIN AT RISK

Buffett announced Sokol's resignation in March, noting that Sokol bought shares in Lubrizol before suggesting to Buffett that Berkshire buy the company. While Sokol mentioned to Buffett in "passing" that he held some Lubrizol stock, Buffett said he only later found out that Sokol held nearly 100,000 Lubrizol shares worth about $10 million.

Sokol made a profit of about $3 million -- a gain that could be at risk. The Berkshire board said it was still considering legal action against Sokol to, among other things, recover any trading profits he made.

"It hardly sounds like Berkshire is trying to circle the wagons to protect Sokol," said Francis Pileggi, a partner at Fox Rothschild LP in Wilmington, Delaware. "If I had my druthers, I would rather be representing Berkshire in this matter than Sokol in a Delaware court."

Besides the potential civil recovery, Berkshire's board also said it would cooperate with any government investigation. A spokesman for the Securities and Exchange Commission declined to comment.

Legal experts said Sokol appears to be in more trouble now than was first thought.

"I think Mr. Sokol has a real problem here," said Duke University Law Professor James Cox. "This is not a close call at all."

FALLEN HEIR

Sokol, who used to run Berkshire subsidiaries MidAmerican and NetJets, was widely seen as Buffett's heir apparent, an image Buffett biographers say the "Oracle of Omaha" cultivated.

Yet Sokol, in his one public appearance since the scandal broke, told CNBC he had no aspiration to the job. In Wednesday's statement, Berkshire said Sokol reiterated as much to Buffett before Buffett announced Sokol's resignation.

When Buffett made that announcement, he said he believed Sokol had not done anything unlawful. The statement Wednesday seemed to suggest otherwise.

"His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed to the company," the board said -- noting that an executive's duty of candor was part of the duty of loyalty under Delaware law where Berkshire is incorporated.

Berkshire's board also said certain answers Sokol gave to Buffett in response to questions about the nature of his holdings appeared "intended to deceive."

In total, the 18-page statement uses variations on the word "violation" some 11 times.

The board's audit committee held three meetings this month to consider the report.

Berkshire attorney Ron Olson said Sokol was interviewed at least three times regarding his Lubrizol trading and contacts with Citigroup Inc bankers. "In connection with the preparation of the audit committee report, a request for a further interview with Mr. Sokol was made to his attorney. Mr. Sokol was not made available," Olson said in the statement.

The audit committee members are chairman Thomas Murphy, 85, and a decades-long Buffett friend; Donald Keough, 84, a former president of key Buffett holding Coca Cola Co; and former Microsoft executive Charlotte Guyman, 54.

Their report is likely to take some pressure off Buffett this weekend when tens of thousands of shareholders descend on Omaha for Berkshire's annual festival-cum-general-meeting.

"One way or another, Mr. Buffett will have to address this. It's conceivable that this release relieves Mr. Buffett from the chore of addressing what is an unpleasant issue," said Jerry Bruni, CEO and portfolio manager at J.V. Bruni and Co, which owns Berkshire shares and has $450 million of assets under management.

Berkshire's actively traded class B shares were flat at $82.99 in after-hours trading.

(Additional reporting by Jonathan Stempel, Moira Herbst, Matthew Goldstein, Dan Wilchins, Alina Selyukh and Jonathan Spicer in New York and Sarah N. Lynch in Washington. Editing by Robert MacMillan)

The Fed trimmed its forecast for 2011 economic growth in a nod to a weak start to the year and bumped up its projections for inflation, which caused some jitters in financial markets.

The central bank's policy-setting committee said after a two-day meeting it will complete the purchase of $600 billion in bonds in June to support the economy's recovery, and said it would keep its balance sheet, currently at $2.67 trillion, steady for a time to ensure its support does not fade.

It also repeated it plans to keep overnight interest rates, which it has held near zero since December 2008, extraordinarily low for "an extended period."

"It is a relatively slow recovery," Bernanke said at a news conference, the first after a policy meeting by a Fed chief in the central bank's 97-year history. "The combination of high unemployment, high gas prices and high foreclosure rates is a terrible combination. A lot of people are having a tough time."

Bernanke appeared nervous at the start of the briefing, held at the central bank's headquarters, but he relaxed as the widely watched, nearly hour-long session progressed.

A hush fell over the normally bustling floor of the New York Stock Exchange with orders drying up as investors tuned into the central bank chief. "It's kind of a novelty," said Kenneth Polcari, managing director at ICAP Equities.

The news conference served multiple purposes for the Fed.

It allowed Bernanke an opportunity to push back against stiff criticism from some lawmakers, economists and foreign officials that the Fed's efforts to prop up the U.S. economy with more than $2 trillion in stimulus would spark inflation.

It was also an opportunity for Bernanke to seize control of an often very public debate among Fed officials over whether the stimulus course could backfire, providing a new tool to deliver a consensus central bank view directly to markets.

"In no way did Bernanke begin laying the groundwork for a near-term reversal in monetary policy," said Michelle Girard, an economist with RBS in Stamford, Connecticut. "The chairman appears watchful but comfortable with the Fed's current stance."

GROWTH LOSING A STEP

In a fresh quarterly forecast, the Fed revised down its growth estimate for 2011 to between 3.1 percent and 3.3 percent from the 3.4 percent to 3.9 percent it saw in January. It said the recovery was proceeding at a "moderate pace," a shift from March when it said it was on "firmer footing."

Bernanke said growth may have slowed to less than a 2 percent annual rate in the first three months of this year after a 3.1 percent advance in the fourth quarter of 2010.

But he added: "I would say that roughly most of the slowdown in the first quarter is viewed by the committee as being transitory." The government releases its first estimate of first quarter GDP on Thursday.

The Fed lowered its projection for unemployment but said it would stay elevated over the central bank's three-year forecast period. The jobless rate stood at 8.8 percent in March.

"The pace of improvement is still quite slow and we are digging ourselves out of a very, very deep hole," Bernanke said.

The central bank sharply raised its estimate for 2011 inflation to account for a surge in oil prices. However, it bumped up its core inflation forecasts only marginally and expressed confidence the jump in the cost of oil would not spark broader inflation.

Financial markets showed some nervousness. Prices for 30-year U.S. government debt hit session lows on the inflation forecasts, while the price of gold -- a traditional inflation hedge -- hit a record high of almost $1,530 an ounce.

The U.S. dollar reached a three-year low against six major currencies as Bernanke spoke. Stock markets, which have been pumped up by the Fed's monetary easing, rose on the expectation that the central bank's support will continue.

Interest rate futures showed traders continued to bet that the Fed would hold off on raising rates until early 2012.

CALLED OUT ON DOLLAR

Bernanke faced broad questioning, including on the falling value of the dollar, which has been undercut by the Fed's easing as other major central banks raised interest rates.

While deferring to currency policy as an issue for the Treasury Department, Bernanke said a strong, stable dollar was in the interests of the United States and the world economy.

To keep its balance sheet from shrinking, the Fed said it will continue to reinvest proceeds from maturing securities it holds, ensuring it would remain a big buyer in debt markets.

Bernanke said a decision to stop that strategy would likely be the first step of a policy tightening, although he offered no timeframe on when that might occur.

As for an increase in interest rates, he suggested that was still some months off. "Extended period suggests that there would be a couple of meetings before action but unfortunately ... we don't know how quickly a response will be required."

Bernanke told a questioner that the trade-off between the benefits of extending the bond-buying program and the potential for wider inflation had become less attractive.

"Inflation has been getting higher, inflation expectations are a bit higher," he said. "It's not clear we can get substantial improvements in payrolls without some additional inflation risks."

(Additional reporting by Kristina Cooke and Caroline Valetkevitch; Writing by Mark Felsenthal and Glenn Somerville; Editing by Tim Ahmann and William Schomberg)

The Fed's policy-setting Federal Open Market Committee said in a statement after a two-day meeting it intends to complete its $600 billion bond buying program in June as scheduled.

Despite some headwinds, the U.S. central bank indicated that it believed the economic recovery was proceeding at a moderate pace, with little risk an inflationary psychology would take hold.

"Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," it said.

The statement is expected to be overshadowed within hours by a question and answer session Fed Chairman Ben Bernanke will hold with journalists. The briefing, which is set for 2:15 p.m. (1815 GMT), marks the first regularly scheduled news conference by a Fed chairman in the central bank's 97-year history.

The Fed cut interest rates to near zero in December 2008 and bought close to $1.4 trillion in longer-term securities to help spur a recovery from the economy's deep recession.

When the recovery stumbled last year, it launched a new program to buy an additional $600 billion in government bonds.

The bond-buying plan met withering criticism domestically and internationally. Even some Fed officials have worried it would stoke inflation.

The Fed's unprecedented easy money policies have been accused of pushing up the cost of oil and other commodities. Top Fed officials have defended their actions by saying surging commodity costs primarily reflect rapid growth in emerging markets and that a healthy U.S. economy has global benefits.

The Fed lags other major central banks, including the European Central Bank, that have already moved to raise interest rates or are poised to do so.

This out-of-step U.S. monetary policy has undercut the dollar, which slid to a three-year low against major currencies on Wednesday. Analysts expect the greenback to remain under pressure.

Several Fed officials have expressed concern the central bank risks falling behind the curve in responding to price pressures if it does not reverse its ultra-loose stance soon.

Although headline inflation has shot higher since the start of the year, core price indexes closely monitored by the Fed are still well below levels that would normally cause alarm.

At the same time, higher commodity costs have weighed on consumer spending and the unemployment rate is still at a lofty 8.8 percent.

Analysts polled by Reuters expect a report on Thursday to show the economy advanced at a subdued 2 percent annual rate in the first quarter, if not slower. It expanded at a solid 3.1 percent pace in the final three months of last year.

The world's largest aerospace and defense company said on Wednesday its first-quarter profit came to $586 million, or 78 cents per share, compared with $519 million, or 70 cents per share, a year earlier when the company took a 20 cents-per-share charge related to health care legislation.

Analysts on average expected Boeing to report a first-quarter profit of 70 cents per share, according to Thomson Reuters I/B/E/S.

Revenue slipped 2 percent to $14.9 billion.

Boeing, which competes with EADS unit Airbus, splits its business almost evenly between commercial airplanes and defense products.

Boeing Commercial Airplanes first-quarter revenue decreased by 5 percent to $7.1 billion on planned lower 777 deliveries.

Boeing repeated that first delivery for the long-delayed 787 Dreamliner was on track for the third quarter.

Boeing Defense, Space & Security's first-quarter revenue was $7.6 billion, in line with the year-ago quarter.

Its shares were up 55 cents at $76.10 in premarket trading.

(Reporting by Kyle Peterson; Editing by Derek Caney)

At 12:30 p.m. ET, the Federal Open Market Committee will release a statement on the interest rate policy. In a Reuters poll, dealers expect the fed funds rate will remain in the 0.0 percent to 0.25 percent range. Federal Reserve Chairman Ben Bernanke will hold media briefing at 1815 GMT.

Bernanke will likely use his first-ever news conference on monetary policy to hammer home the case for a patient approach to withdrawing the central bank's extensive support for the U.S. economy. He will face the press in the first regularly scheduled news conference by a Fed chairman in the central bank's 97-year history.

The dollar fell broadly, marking a fresh nadir against the Swiss franc and a 29-year trough against the Australian dollar. Crude oil prices also declined as investors awaited details of the Fed's assessment of the economy.

Major companies reporting results include Boeing (BA.N), Whirlpool (WHR.N), eBay (EBAY.O), Corning (GLW.N) and WellPoint (WLP.N).

At 1230 GMT, Commerce Department releases March durable goods orders. Economists expect a 2.0 percent increase in orders versus a 0.6 percent drop in February.

Johnson & Johnson (JNJ.N) is to buy Swiss medical devices maker Synthes Inc (SYST.VX) for 19 billion Swiss francs ($21.59 billion) in its largest ever buy, boosting its surgical business and reshaping the wider industry.

Mortgage Bankers Association releases at 1100 GMT Weekly Mortgage Market Index for the week ended April 22, versus the prior week. The mortgage market index read 467.5 and the refinancing index was 1,975.2 in the previous week.

Nasdaq OMX Group (NDAQ.O) and IntercontinentalExchange Inc (ICE.N) appealed directly to NYSE Euronext (NYX.N) stockholders on Tuesday, asking them to press the Big Board's directors to sit down to talk about their joint bid.

Federal Reserve Bank of Chicago releases at 1230 GMT its Chicago Fed Midwest Manufacturing Index for March. The index read 83.3 in the prior month.

News Corp (NWSA.O) is expected to receive bids for Myspace by the end of this week, according to a person familiar with the matter.

At 1500 GMT, Labor Department issues annual revisions to Employment Cost Index.

Shares in Amazon (AMZN.O) briefly turned higher in after-hours trade on Tuesday after it posted results. Costco (COST.O) was up 0.8 percent after the company announced late on Tuesday the expansion of its stock repurchase program and an increase in its quarterly cash dividend.

Tokyo stocks .N225 gained 1.4 percent after a batch of Japanese and U.S. corporate earnings came in better than expected, but the FTSEurofirst 300 .FTEU3 index of top European shares fell 0.2 percent.

On Tuesday, the Dow Jones industrial average .DJI, the Standard & Poor's 500 Index .SPX and the Nasdaq Composite Index .IXIC rose 0.8 to 0.9 percent. (Reporting by Atul Prakash; Editing by Louise Heavens)

While Fed chairman Ben Bernanke is expected to paint a cautious picture on the world's largest economy, Asian and Latin American central banks by contrast are still tightening monetary policy and some are using currency appreciation to check price pressures.

The European Central Bank raised its policy rate this month for the first time since mid-2008 and is expected to raise rates at least once more this year.

That has given new legs to the "carry trade", in which investors borrow in a low-yielding currency to invest in higher-yielding assets or currencies.

Investors have been snapping up the high-yielding Australian dollar and South Korean shares .KS11, while showing heavy interest in Indonesia's upcoming dollar bond.

Market players also added to bearish dollar bets, especially against the euro and the Swiss Franc, on expectations the Fed will cling to a near-zero interest rate policy even as it lets a $600 billion bond purchase program wind down in June.

"Focus will be on the inaugural press conference and whether Bernanke is shifting along the dove-hawk scale," said Michael Sneyd, analyst at Societe Generale.

"Attention will also be on comments for how the Fed may respond to U.S. fiscal tightening. All-in-all, the meeting is likely to give the green light for risk appetite and for dollar bears to continue to be bearish."

The dollar index .DXY, which tracks its performance against a basket of major currencies, hit the lowest since August 2008 at 73.483, before cutting some losses.

FLOWS PICK UP

Asian shares rose after robust gains posted by U.S. indices overnight, driven by better-than-expected performances from U.S. corporate heavyweights. U.S. stock futures rose 0.1 percent, suggesting a higher open on Wall Street.

South Korea's benchmark KOSPI index .KSII rose to a record high for the third consecutive session before giving back some gains as investors took profits on automaker shares. It ended flat. Hong Kong shares .HSI rose, boosted by a broad rally in financials ahead of results from Chinese banks.

MSCI's index of Asia Pacific shares outside Japan .MIAPJ0000PUS rose to its highest level since January 2008, and was up 0.5 percent on the day.

Japan's Nikkei .N225 closed up 1.4 percent, supported by rebounding shares of large exporters. But it could face downward pressure after ratings agency Standard & Poor's revised its outlook on Japan's sovereign debt to negative.

Offshore flows into non-developed Asian markets have picked up after a January slump, with both emerging markets equity and bond fund groups extending their longest inflow streaks since mid-January, according to fund tracker EPFR Global.

The order book for Indonesia's eagerly awaited 10-year dollar-denominated bond has grown to around $5 billion for an issue expected to be between $1 billion to $1.5 billion in size, IFR said. Indonesia's markets have been a favorite among global investors because of the country's relatively high yields, decent economic growth and demographics.

China let the yuan rise to a post-2005 revaluation high, triggering gains in emerging Asian currencies.

Helping the case of carry trades, the Australian dollar shot to a new 29-year peak above the $1.0800 per U.S. dollar after higher-than-expected first quarter inflation suggested the central bank will eventually have to resume tightening.

SILVER PULLBACK

The dollar's woes have been further compounded by a recent drop in U.S. Treasury yields as rate traders bet that any Fed tightening would be a slow and gradual process.

In Asian time, the U.S. 10-year note yield was at 3.32 percent, just above a one-month low of 3.31 percent before the Fed decision. Ten-year yields are down by about 30 basis points since this month's highs.

In commodity markets, spot silver bounced 0.9 percent to around $46 per ounce level after falling by nearly 5 percent overnight. High volatility and the expiry of U.S. silver options added to the intensity of the decline of the precious metal.

Despite the sharp pullback in silver which rippled over into other commodities, Brent held above the $124 per barrel line, as Libya's civil war and violence-tinged unrest Syria and Yemen helped limit bearish sentiment on a price slide.

The rating agency said costs related to the March 11 earthquake, tsunami, and nuclear power plant disaster will increase Japan's fiscal deficit above prior estimates by a cumulative 3.7 percent of GDP through 2013.

"We revised the outlook on the long-term rating on Japan to negative to reflect the potential for a downgrade if fiscal deterioration materially exceeds these estimates in the absence of greater fiscal consolidation," S&P said in a statement.

"In light of the evolving developments at the TEPCO nuclear power plant, in particular, we regard these projections as uncertain. Much will depend on Japan's political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future," it said.

The yen dipped shortly after the announcement with the dollar climbing to an intraday high of 81.781 yen.

"Given the huge damage from the earthquake, everyone knows that government spending will be massive," said Junko Nishioka, chief economist at RBS Securities Tokyo.

"We are not expecting big new government bond issuance for the coming second supplementary budget but political deadlock is likely to heighten the negative risk for sovereign debt."

S&P affirmed its long-term rating on Japan at AA minus.

The government's top spokesman, Yukio Edano, said that while fiscal steps are needed for quake relief, Tokyo will strive to maintain trust in Japanese government bonds.

(Reporting by Leika Kihara; Editing by Joseph Radford)

Shares were down 1.2 percent after Amazon reported a 32.8 percent decline in first-quarter profits. But that was a far cry from the big sell-off when the company last reported quarterly results and shares lost 9 percent.

"The concern that people had, that they were going to spend more than the Street was expecting, happened," said Ken Sena, analyst at Evercore Partners. "But when you look at the kind of growth acceleration they are showing on the top line and surpassing pretty much all Street expectations, I think that clearly shows what they are doing makes sense."

In recent years, Amazon has fought to win market share through its Prime program of low-cost delivery of its retail goods and by offering inexpensive electronic books for its Kindle e-reader.

More recently, it has invested heavily in areas such as "cloud computing" and "music lockers" where fans store their music on Amazon's servers, to take on its rivals Google Inc and Apple Inc.

Amazon expects that its investing to win market share will work. It forecast current-quarter revenue of $8.85 billion to $9.65 billion, above Wall Street expectations of $8.7 billion, according to Thomson Reuters I/B/E/S.

Chief Financial Officer Tom Szkutak told analysts on a conference call that Amazon has to spend money to develop the technology infrastructure and distribution centers and support its growth. Revenues nearly doubled between 2008 and 2010.

For the company's first quarter, which ended March 31, revenue was $9.857 billion, above the average analyst estimate of $9.57 billion and 38.2 percent above a year earlier.

In contrast, data firm eMarketer estimated that U.S. retail e-commerce sales rose 13 percent in the quarter compared with a year earlier.

Amazon's sales increase was led by a 45 percent rise in North America. Growth elsewhere was 27 percent excluding the effect of currency exchange. Szkutak said that would have been 32 percent if not for Japan's massive earthquake last month.

But net income in the first quarter was $201 million, or 44 cents per share -- down from $299 million, or 66 cents per share, a year earlier. That was far below the 61 cents expected by Wall Street, according to Thomson Reuters I/B/E/S.

The company posted an 18.2 percent dip in operating profit for the quarter, reflecting the costs of competing in the highly promotional retail environment, with beefed-up investment in its cloud computing services.

SHRINKING OPERATING MARGINS

Operating margin, which Amazon has said is the best gauge of its profitability given the variety of items it sells, came to 3.3 percent, in the middle of the range it had forecast.

Still, that was a significant drop from the 5.5 percent margin in the year ago quarter.

"It's not a revenue problem, it's a profit problem," said BGC Partners analyst Colin Gillis. "But at the end of the day, you've got to remember that these guys are a discount retailer."

Amazon said it expects operating profit in the current quarter of $95 million to $245 million, after costs of $180 million for stock-based compensation and amortization of assets. Amazon had operating profit of $207 million in the second quarter last year.

Amazon shares were off 1.2 percent at $180.17 in trading following the earnings report, after slipping 1.7 percent, or $3.12, to end at $182.30 in regular-session Nasdaq trading.

(Graphic: Amazon.com: income and sales growth r.reuters.com/pet29r)

(Additional reporting by Nichola Groom and Lisa Baertlein in Los Angeles and Jessica Wohl and Brad Dorfman in Chicago; Editing by Gary Hill)

The company also forecast revenue for the current quarter that would beat Wall Street estimates and profit margins were in line with the company's expectations, helping lift its shares in after-hours trading.

"The concern that people had, that they were going to spend more than the Street was expecting, happened," said Ken Sena, analyst at Evercore Partners. "But when you look at the kind of growth acceleration they are showing on the top line and surpassing pretty much all Street expectations, I think that clearly what they are doing makes sense."

The company has been willing to sacrifice some profitability to win customers and build its new businesses. It has invested heavily in areas such as "cloud computing" -- which allows companies to store data on its servers -- to take on its rivals Google Inc and Apple Inc.

Amazon is also laying out money to open new distribution centers and cement its lead as the world's largest online retailer.

For the company's first quarter, which ended March 31, revenue was $9.857 billion, above the average estimate of $9.57 billion and 38.2 percent above a year earlier.

Net income in the fourth quarter was $201 million, or 44 cents per share -- down from $299 million, or 66 cents per share, a year earlier. That was far below the 61 cents expected by Wall Street, according to Thomson Reuters I/B/E/S.

The company posted an 18.2 percent dip in operating profit for the quarter, reflecting the costs of competing in the highly promotional retail environment, with beefed-up investment in its cloud computing services.

Operating margin, which Amazon has said is the best gauge of its profitability given the variety of items it sells, came to 3.3 percent, in the middle of the range it had forecast.

But Amazon expects that its investing to win market share will pay off. It forecast current-quarter revenue of $8.85 billion to $9.65 billion, above Wall Street expectations of $8.7 billion, according to Thomson Reuters I/B/E/S.

Amazon said it expects operating profit in the current quarter of $95 million to $245 million. In the same quarter last year, Amazon had operating profit of $207 million.

Amazon shares were nearly flat following the earnings report, after slipping 1.7 percent, or $3.12, to end at $182.30 in regular-session Nasdaq trading.

(Reporting by Phil Wahba; Editing by Gary Hill)