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Geithner said he would remain in his Treasury post "for the foreseeable future" and sidestepped a direct question about his career plans after a flurry of media reports that he was mulling leaving the Obama administration.

"I've only worked in public service. I live for this work. It's the only thing I've ever done, I believe in it," Geithner said. "We have a lot of challenges as a country, and I'm going to be doing it for the foreseeable future."

Geithner is one of the last members of President Barack Obama's original economic team. He has faced intense criticism, including at times calls for his resignation, but has prevailed to win a reputation as a steady hand amid turbulent times.

"We hate to say it but this looks like the A-Team is resigning without anyone credible coming off the bench to win the game," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York.

"These will be very big shoes to fill."

Bloomberg News, which first reported Geithner's possible departure, cited unnamed sources as saying that family considerations were among the factors Geithner was weighing. ABC News reported that there "are far too many caveats" to say Geithner will definitely depart.

A Treasury official said that Geithner has not yet made a decision.

Geithner's family is expected to move to New York in a few months and he told former President Bill Clinton at an event in Chicago that his son will finish his final year of high school in New York, adding he might be commuting for a while.

Obama would face a tough choice in replacing him at Treasury, and any successor could face a grueling and long quest to win the Senate's needed confirmation.

Among those Obama could consider are General Electric chief Jeff Immelt, who already heads a council that advises the White House, New York Mayor Michael Bloomberg, or JPMorgan Chase & Co Chairman and CEO Jamie Dimon.

WINDOW OF OPPORTUNITY

Politics could weigh on Geithner's decision. If he stays past late summer or fall, he could feel an obligation to stick with President Barack Obama through what may be a difficult campaign for reelection in 2012.

A person familiar with Geithner's thinking said the Treasury chief realizes he might have a window to potentially depart after a deal to raise the debt limit and reduce U.S. deficits is reached.

"People are a little worried or interested because I have a family, my son's going back to New York to finish high school and I'm going to be commuting for awhile," Geithner said at the conference in Chicago.

Geithner, 49, led the New York Federal Reserve Bank before joining the Obama administration, where he played a lead role in combating the 2007-2009 financial crisis. He continued efforts to guide the economy back to health at Treasury.

Austan Goolsbee, chairman of the White House Council of Economic Advisers, who is leaving in August, told CNBC that news of Geithner's potential departure was "a bit of a surprise."

"I know his overwhelming focus is to get this debt ceiling and deficit reduction worked out," Goolsbee said.

MORE WORK TO DO

Geithner has been warning all year of catastrophic consequences if Congress fails to increase the nation's $14.3 trillion borrowing limit. He has said the Treasury will no longer be able to pay all the nation's bills -- including interest on the national debt -- after August 2.

Geithner has spent most of his career in public service and it is unclear what direction his career would take in the future.

At the New York Fed, he presided over collapses and bailouts of major Wall Street banks and insurer American International Group.

As Treasury secretary he has spent much of his tenure under fire. He took the helm during the depths of the recession in February 2009 by announcing a plan to cleanse bank balance sheets of toxic assets, but the proposal was criticized as inadequate and markets plunged.

A year later, some lawmakers called for his ouster over his handling of the AIG bailout. This year, he has taken heat over slowing job growth and an ineffective housing rescue program.

Clinton, whom Geithner served under at Treasury in the 1990s, offered fulsome praise on Thursday.

"Unlike most people who get this job, who made a lot of money in business or in finance, he has spent most of his life serving the rest of us and in the process has acquired an enormous amount of expertise and knowledge to go with a considerable amount of common sense," Clinton said. "I think he's done a great job in a back-breaking position."

(Additional reporting by Glenn Somerville, Rachelle Younglai and David Lawder in Washington, and Ann Saphir in Chicago; Writing by David Lawder; Editing by Carol Bishopric)

A U.S. Treasury official confirmed that Geithner had not yet made a decision on whether to leave the Obama administration.

Geithner is expected to address reports of his possible early departure at a forum in Chicago later on Thursday.

Bloomberg News, which first reported the story, cited unnamed sources as saying that family considerations were among factors that Geithner was weighing. ABC News reported that there "are far too many caveats" to say that Geithner will definitely depart.

A person familiar with Geithner's thinking said the Treasury chief realizes he might have a window to potentially depart after a deal to raise the debt limit and reduce U.S. deficits is reached.

Geithner is the last remaining top member of President Barack Obama's original economic team. Council of Economic Advisers Chairman Austan Goolsbee is planning to leave the administration in August to return to the University of Chicago.

Goolsbee told CNBC on Thursday that news of Geithner considering a departure was "a bit of a surprise."

"He's a good friend. I know his overwhelming focus is to get this debt ceiling and deficit reduction worked out," Goolsbee said.

Geithner, 49, has been warning all year of catastrophic consequences if Congress fails to increase the $14.3 trillion statutory borrowing limit and the United States defaults on its debt. He has said the Treasury will no longer be able to pay all the nation's bills -- including interest on the national debt -- after August 2.

Geithner, 49, has spent most of his career in the public sector and does not have a university position or banking job waiting for him. Prior to taking the top job at Treasury, he was president of the Federal Reserve Bank of New York and held key positions before that at the International Monetary Fund and the Treasury during the Clinton administration.

(Reporting by Tim Ahmann, Glenn Somerville, Rachelle Younglai and David Lawder; Editing by James Dalgleish and Jan Paschal)

When the Treasury Department revamped its rules for participating in government bond auctions two years ago, officials said they were simply modernizing outdated procedures.

The real reason for the change, a Reuters investigation has found, was more serious: The Treasury had concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open - all without ruffling feathers in Beijing.

Treasury officials then worked to keep the reason for the auction-rule change quiet, with the acting assistant Treasury secretary for financial markets instructing subordinates to not mention any specific creditor's role in the matter, according to an email seen by Reuters. Inquiries made at the time by the main trade organization for Treasury dealers elicited the explanation that the change was a "technical modernization," according to a document seen by Reuters. There was no mention of China.

The incident calls into question just how clear a handle the Treasury has had on who is buying U.S. debt. Chinese entities hold at least $1.115 trillion in U.S. government debt, and are thought to account for roughly 26 percent of the paper issued by Washington, according to U.S. government data released on June 15.

China's vast Treasury holdings are both a lifeline and a vulnerability for Washington - if the Chinese sold their Treasuries all at once, it could undermine U.S. markets and the economy by driving interest rates higher very quickly. Scenarios of this sort have been discussed in Washington defense-policy circles for at least a year now. Not knowing the full extent of these holdings would make it even more difficult to assess China's political leverage over U.S. finances.

The Treasury has long said that it has a diversified base of investors and isn't overly reliant on any single buyer to digest new U.S. Treasury issuance. Evidence that China was actually buying more than disclosed would cast doubt on those assurances.

THE 'GUARANTEED' BID

The United States sells its debt to investors through auctions that are held weekly - sometimes four times per week - by the Treasury's Bureau of the Public Debt, in batches ranging from $13 billion to $35 billion at a time. Investors can buy the bonds directly from the Treasury at auctions, or through any of the 20 elite "primary dealers," Wall Street firms authorized to bid on behalf of customers. The Treasury limits the amount any single bidder can purchase to 35 percent of a given auction. Anyone who bought more than 35 percent of a particular batch of Treasury securities at a single auction would have a controlling stake in that batch.

By the beginning of 2009, China, which uses multiple firms to buy U.S. Treasuries, was regularly doing deals that had the effect of hiding billions of dollars of purchases in each auction, according to interviews with traders at primary dealers and documents viewed by Reuters.

Using a method of purchases known as "guaranteed bidding," China was forging gentleman's agreements with primary dealers to purchase a certain amount of Treasury securities on offer at an auction without being reported as bidders in that auction, according to the people interviewed. After setting the amount of Treasuries the guaranteed bidder wanted to buy, the dealer would then buy that amount in the auction, technically on its own behalf.

To the government officials observing the auction, it would look like the dealer was buying the securities with the intent of adding them to its own balance sheet. This technicality does not preclude selling them later in the secondary market, but does influence the outcome of bidding in the auction, by obscuring the ultimate buyer. In fact, the dealer would simply pass the bonds on immediately to the anonymous, guaranteed bidder at the auction price, as soon as they were issued, according to the people interviewed.

The practice kept the true size of China's holdings hidden from U.S. view, according to Treasury dealers interviewed, and may have allowed China at times to buy controlling stakes - more than 35 percent - in some of the securities the Treasury issued.

The Treasury department, too, came to believe that China was breaching the 35 percent limit, according to internal documents viewed by Reuters, though the documents do not indicate whether the Treasury was able to verify definitively that this occurred.

Guaranteed bidding wasn't illegal, but breaking the 35 percent limit would be. The Uniform Offering Circular - a document governing Treasury auctions - says anyone who wins more than 35 percent of a single auction will have his purchase reduced to the 35 percent limit. Those caught breaking auction rules can be barred from future auctions, and may be referred to the Securities and Exchange Commission or the Justice Department.

The Treasury Department generally does not comment on specific investors but a source in the department said China was not the only Treasury buyer striking guaranteed bidding deals.

People familiar with the matter named Russia as being among the guaranteed bidders. But Russia's total Treasury holdings, while significant, represent 2.8 percent of outstanding U.S. debt, versus one-fourth for China's.

CHANGING THE RULE

Traders at primary dealers did not have the same diplomatic concerns about the level of Chinese buying. But they did have reasons to dislike guaranteed bidding, and they began clamoring for a change. One trader said in an interview he first brought the issue to the attention of Treasury officials in 2007.

Some primary dealers began expressing concern that the deals were opaque in a way akin to the Salomon Brothers Treasury trading scandal in the early 1990s. In that case, traders from the securities firm submitted false bids under other bidders' names in Treasury auctions in order to more closely control the results, and their bids altered the auction prices. The idea that unseen bidders were again influencing auction prices raised similar concerns among traders.

There were also commercial concerns: Dealers say that knowing that the practice was going on at other firms made them less confident they could see and understand overall patterns of buying in the Treasury market. Such visibility can be one of the greatest benefits of being a primary dealer, since the service itself often doesn't pull in big profits directly.

Some traders at primary dealers say they simply refused to do the deals and ended up turning away customers, including China. That irked sales colleagues who were promising clients guaranteed bidding deals.

At the beginning of 2009, Treasury officials began discussing the issue of guaranteed bidders, with a focus on China's behavior, internal documents seen by Reuters show. The culmination of their efforts was a change to the Uniform Offering Circular published on June 1, 2009 that eliminated the provision allowing guaranteed bidding.

Treasury Secretary Timothy Geithner was in Beijing that day meeting with Chinese government officials on his first formal visit to China since taking up his cabinet post. There is no evidence he discussed the rule change with Chinese officials there.

A spokeswoman for the Treasury Department said: "We regularly review and update our auction rules to ensure the continued integrity of the auction process. The auction change made in June 2009 eliminated some ambiguity in auction rules and increased transparency, which ultimately benefits taxpayers and investors."

The rule change had an immediate impact.

In the first auctions conducted after guaranteed bidding was banned, a key metric rose sharply: the percentage of so-called indirect bidders, those who placed their auction bids through primary dealers. Indirect bidders are seen as a proxy measure for foreign central bank buying, because foreign central banks most often bid through primary dealers. With the elimination of the guaranteed bidder provision, far more buyers were put in this class in reports to the Treasury Department.

The seven-year U.S. Treasury note, which was sold in sizes of between $22 billion and $28 billion once a month from February 2009 to September 2009, had an average indirect bid percentage of 33 percent from February through May. But from June to September the average indirect bid rose to 63 percent.

(Graphic: r.reuters.com/hyn42s)

BIDDERS REACT

Shortly after the Treasury revised the auction rules, U.S. officials learned from dealers that some bidders were seeking to continue using guaranteed bids. According to a Treasury document, a large client asked one primary dealer whether the Treasury might make an exception to the new rule for them. Neither the client nor the dealer were named.

Deutsche Bank, Goldman Sachs, JPMorgan, RBS Securities and UBS all received calls from clients asking for secret bid arrangements immediately after the rule change went into effect, according to the internal Treasury document, a summary of inquiries received seeking guidance from dealers after the rule change.

Deutsche Bank, according to the document, said their client canceled a bidding deal. Goldman told Treasury that a large client would be going to other dealers who in the past had done the deals after Goldman turned them away, the document said.

JPMorgan asked if there were any exceptions to the new prohibition on guaranteed bids. RBS said it actually struck a deal with a customer for a guaranteed bid after the rule change, but it used a different structure and wanted to know what was legal. UBS told the New York Fed that its former guaranteed-bidder client would now change its behavior and buy Treasuries in the secondary market directly after an auction, according to the document.

Spokespeople for Goldman Sachs and UBS declined to comment for this story. Deutsche Bank, RBS, and JPMorgan did not respond to requests for comment.

The change came at a delicate time in U.S.-Chinese financial relations. China, long a major buyer of American government securities, was at the time snapping up huge amounts of debt as Washington was suffering a sharp drop in tax revenue during a crushing recession.

Almost all of the business of buying Treasuries on behalf of the Chinese government is conducted by China's State Administration of Foreign Exchange (SAFE), an arm of the Chinese central bank which manages China's currency reserves, which include large amounts of U.S. Treasury bonds.

SAFE, for its part, was facing heat in China over the extent of its U.S. holdings. SAFE was hit hard by the collapse of Lehman Brothers, the doomed investment bank that was SAFE's trading counterparty in the U.S. overnight-lending market. And the potential losses SAFE faced upon the collapse of the U.S.-backed mortgage titans Fannie Mae and Freddie Mac whipped up such a storm in China that Chinese officials publicly berated the Americans for lapses in financial stewardship. (For more, click on link.reuters.com/qec28r )

SAFE officials in Beijing did not respond to a request for comment.

After evidence mounted that China was disconcerted by the auction-rule change, U.S. officials moved to tweak the system, to offset some of the pinch of the stricter bidding rules. The move gave big buyers a way to maintain some anonymity, by increasing the amount of securities it was possible to buy at a single auction without having to declare the purchase in a letter to the New York Fed.

The old requirement stipulated that any purchase of $750 million in Treasury securities had to be declared by the buyer in a letter to the New York Fed. Officials increased the threshold to $2 billion.

'TECHNICAL MODERNIZATION'

The official explanation for eliminating guaranteed bidders did not mention foreign central banks at all. It focused instead on "technical modernization" of auction rules.

One government official warned others in a written message "not to include the words 'China' or 'SAFE' in email subjects." The Securities Industry and Financial Markets Association, the main trade organization for Treasury dealers, asked the Treasury in early June 2009 to explain the change. The Treasury's response: It had found that a detail in its auction rules no longer applied to the way auctions were conducted, and so the rule was changed, according to an internal Treasury memo.

Separately, the Treasury's acting assistant secretary for financial markets, Karthik Ramanathan, told subordinates in an email: "Please let's stick to the 'Modernization of Auction Rules' when outside requests come in on the (rule) change. Please DO NOT emphasize the guaranteed bid portion, or mention any specific investors."

Ramanathan, who left the Treasury in March of 2010 and is now senior vice president and director of bonds at Fidelity Investments in Merrimack, New Hampshire, declined to comment.

The Federal Reserve Bank of New York, which interacts directly with primary dealers on Treasury auctions, issued a strongly worded letter on June 23, 2009, dealers say, urging them to "comply with the spirit as well as the letter of this recent auction rule clarification."

"That was how we knew they wanted us to tell them who was buying what," said a trader at one primary dealer.

(Additional reporting by Kristina Cooke and Benjamin Kang Lim; Editing by Michael Williams and Claudia Parsons)

* News Corp (NWSA.O) secured UK government backing for its controversial buyout of BSkyB (BSY.L) on Thursday after the minister responsible rejected complaints the move would give Rupert Murdoch too much power and influence.

* The Labor Department releases at 1230 GMT first-time claims for jobless benefits for the week ended June 25. Economists forecast a total of 420,000 new filings compared with 429,000 in the prior week.

* AMR Corp's (AMR.N) American Airlines is negotiating with aircraft makers Airbus (EAD.PA) and Boeing Co (BA.N) to replace its entire domestic fleet by purchasing at least 250 airplanes in a deal valued at about $15 billion, the Wall Street Journal reported.

* The Institute for Supply Management-New York releases at 1230 GMT June index of regional business activity. In May, the

index read 534.0.

* At 1345 GMT, the Institute of Supply Management Chicago releases June index of manufacturing activity. Economists in a

Reuters survey forecast a June reading of 54.0 compared with 56.6 in May.

* Greece's government expects to pass a second austerity bill on Thursday to pull the country back from default by securing more EU and IMF funds.

* The Federal Reserve ends its $600 billion bond-buying program, known as QE2, on Thursday and has yet to offer any hints of more monetary easing to come.

* Eli Lilly and Co (LLY.N) is committed to spending what it takes to come up with innovative drugs over the long term, its chief executive said, even though the company's earnings are expected to tumble over the next three years.

* Companies reporting results include Apollo Group (APOL.O), Darden Restaurants Inc (DRI.N) and McCormick & Co Inc (MKC.N).

* The Dow Jones industrial average .DJI gained 72.73 points, or 0.60 percent, to 12,261.42 on Wednesday. The Standard & Poor's 500 Index .SPX rose 10.74 points, or 0.83 percent, to 1,307.41. The Nasdaq Composite Index .IXIC added 11.18 points, or 0.41 percent, to 2,740.49.

* The pan-European FTSEurofirst 300 .FTEU3 index of top shares was up 0.2 percent on Thursday, while Japan's Nikkei average .N225 closed 0.2 percent higher.

(Reporting by Atul Prakash; Editing by Hans-Juergen Peters)

The government of Prime Minister George Papandreou, which won a first vote on Wednesday by 155 votes to 138, expects to pass the second and final bill covering detailed measures to implement the 28 billion euros in tax hikes, spending targets and privatizations agreed as a condition of an EU/IMF bailout.

Parliament resumed debate at 9:30 a.m. (0630 GMT) and the decisive vote is not expected before 2 p.m. (1100 GMT).

After two days of violent protests in central Athens, which ground to a halt during a 48-hour strike by powerful public and private sector unions, teams of street cleaners swept up broken masonry and shattered glass overnight.

Only one member of the ruling Socialist party voted against Wednesday's bill and he was immediately expelled, leaving the government with 154 deputies in the 300-seat chamber.

Before the vote, it had not yet been decided whether deputies would be allowed to vote on individual clauses as well as for the overall law, as is common in Greece.

While Socialist lawmakers are expected to approve the legislation as a whole, some would vote against individual clauses, such as increases in a levy on heating oil and a rise in the minimum income tax threshold. In a bid to win over waverers, new Finance Minister Evangelos Venizelos offered some concessions on tax measures on Wednesday.

The conservative New Democracy opposition, which voted against the first bill but is broadly in favor of privatizations and some other reforms, said it was willing to support some measures in the second bill to have it passed.

"We will do what we can to support the government. Today we will vote for two chapters in the implementation law," said New Democracy lawmaker Nikos Dendias, a former justice minister.

Parliament must approve both bills for the European Union and International Monetary Fund to release a 12 billion euro loan -- essential for Greece to meet debt payments in July -- under a 110-billion-euro bailout agreed in May 2010.

World stocks rallied on Thursday for the third day running and the euro rose to its highest dollar level in 20 days on relief that Greece looked set to avoid the euro zone's first debt default.

Tents and protest banners remained in Syntagma Square outside parliament where demonstrators have camped for more than a month to show their anger at austerity measures driving many Greeks to desperation during the worst recession since the 1970s.

"The implementation law will pass, without problems," said Costas Panagopoulos, head of ALCO pollsters. "The problem for Papandreou is not in parliament, it is what is happening outside parliament: not in Syntagma Square which is just a few hundred protesters, but with the whole of Greece's 11 million people."

Implementing the measures will be hard for the government, which has fallen behind the opposition in opinion polls and has faced heated criticism from its own deputies.

Unions have vowed to oppose privatizations and other austerity steps. The Socialists, who halted Greece's privatization process when they came to power, must sell off 5 billion euros in assets this year or risk missing the targets under its EU/IMF program, which would cut off funding again.

"If Papandreou and Venizelos miss this last chance and do not proceed with the needed reforms and a real shrinking in the wasteful state, they and the country will face an explosive situation in the autumn with no way out," wrote center-right daily Kathimerini in an editorial.

The anger among the Greek population was underlined by violence on Syntagma Square as votes on the first bill were being counted.

Hooded youths and police fought battles into the night. The protesters set fire to the post office in the building where the Finance Ministry is located, and tried to set a bank ablaze. Across the square, the luxury King George Hotel was evacuated.

Doctors working with the demonstrators said they had treated at least 25 people for minor injuries and hundreds with respiratory problems at the adjacent Syntagma metro station. At least 40 police officers were hurt, the police union said.

The laws are also needed for talks on a planned second and longer-term bailout of about the same size, which will include some 30 billion euros in private sector participation.

Locked out of bond markets, Greece needs the extra cash to avert default and keep the debt crisis from spilling over to the rest of the euro zone.

(Additional reporting by Harry Papachristou and George Georgiopoulos; Editing by Robert Woodward)

Lagarde said all the right things during her recent campaign-trail tour of Asia. She acknowledged that countries like China and India deserve increased IMF voting power to reflect their growing economic clout, and a fair shot at the emergency lending institution's top decision-making posts.

"Lagarde is a friend of India," a senior Indian government source said on Wednesday.

"We can't get the IMF managing director's chair for now but at least India can get some high-level appointments in the IMF during her tenure and we will work toward that."

Lagarde begins her five-year term as managing director of the International Monetary Fund on July 5, and will find herself immediately immersed in efforts to head off a Greek debt default that could spark an international crisis.

High on her to-do list within the Fund will be appointing a top leadership which fairly reflects global economic influence, and shepherding through an already agreed process to reallocate IMF voting rights to give emerging markets greater say.

China's central bank said in a brief statement that it hoped Lagarde would push for reform, and wanted to see the IMF play a positive role in promoting global financial stability "and to increase the representation of emerging economies in the IMF governance structure."

Lagarde received support from many major Asian economies even though she perpetuates a pattern they despise of Europeans holding the top IMF job. No Asian candidate stepped forward to challenge Lagarde and Mexico's Agustin Carstens.

"Lagarde has been more successful in consensus building to bridge relationships between advanced countries and emerging markets," Indonesia's central bank deputy governor Hartadi A. Sarwono told Reuters.

Carstens, Mexico's central bank governor, hit out at international bodies on Wednesday, saying they failed to live up to the standards they set for others.

"The reality is that these institutions have always asked for transparency from us, they have asked us to adopt democratic principles that they do not enforce themselves," Carstens told Mexican radio.

Lagarde will need to be diplomatic for the tough personnel decisions. The United States is already considering putting forward a Treasury Department official for the No. 2 role, which has traditionally been filled by an American.

Breaking with that tradition might help convince Asian countries that Lagarde is serious about reforming the IMF, although there was no indication that she had made any promises to award the second-in-command role to someone from Asia.

Singapore Finance Minister Tharman Shanmugaratnam, who also chairs the IMF's steering committee, said he had spoken to Lagarde about the importance of IMF reforms that "reflect the evolving balance in the global economy and financial system."

Even countries that had backed Lagarde's challenger, Carstens, pledged their support.

Australian Treasurer Wayne Swan said he had worked with Lagarde through the Group of 20 club of rich and emerging countries, and welcomed her appointment.

"We're very happy to see the process concluded so this important institution can continue its work," Swan said through a spokesman.

(Reporting by Aditya Suharmoko in Jakarta, Abhijit Neogy in New Delhi, Kevin Lim in Singapore, Luis Rojas in Mexico City, James Grubel in Canberra and Zhou Xin and Kevin Yao in Beijing; Writing by Emily Kaiser; Editing by Jonathan Thatcher and Neil Fullick, Gary Hill)

The failed bid from the London Stock Exchange, opens the door to a hostile C$3.8 billion offer for TMX Group from Canada's Maple Group consortium, a made-in-Canada alternative to a takeover that would have put a big domestic asset in foreign hands.

It also turns the spotlight on the LSE as a target as exchanges consolidate to grow and broaden geographic reach, and to fight off rivals and new market entrants.

Nasdaq OMX Group, smarting from its own failure in the United States to buy the New York Stock Exchange parent NYSE Euronext, could be a contender for an alternative transatlantic combination with the LSE.

"While the failed deal probably puts an end to TMX's M&A ambitions, other exchange operators will likely continue to look for partners. This reinforces my belief that we should expect more mergers, not less," said Ed Ditmire, New York based analyst for Macquarie Securities.

The failure of the TMX bid, a high-profile deal that was months in the making, follows Singapore Exchange Ltd.'s scuttled bid for Australia's ASX Ltd in the latest sign that nationalism and pride are frustrating cross-border deals for highly symbolic capital markets.

And it's a black eye for LSE Chief Executive Xavier Rolet, who banked his reputation on sealing the deal.

Rolet was to have led a LSE-TMX exchange group, which would have been a heavyweight global player and No. 1 in listing energy and mining companies.

But the support he got from TMX management and board wasn't enough to overcome opposition from within Canada's tight-knit banking sector.

Four of Canada's biggest banks were the lead players in the bid from Maple, a consortium that also included pension funds and financial services firms. Canada's other two big banks were advisers to the LSE proposal.

NOT ENOUGH VOTES

In brief statements issued one day before a shareholder vote, the two exchanges said they realized from an early tally of proxy votes that TMX shareholders would not give them the two-thirds majority needed to approve their friendly deal.

TMX Group, operator of the Toronto Stock Exchange, said it would now review opportunities, including the Maple offer.

"LSE and TMX were both in positions where they weren't quite big enough or diverse and fast-growing enough to control their own destiny," said Justin Schack, managing director of market structure analysis at New York-based agency brokerage Rosenblatt Securities.

"They did the best deal that they probably could. Now that that's not going to happen TMX has Maple to deal with, while LSE is out on its own again, and there aren't many partners out there where they could be the acquirer rather than the target."

Maple has offered C$3.8 billion for TMX, mostly in cash.

LSE's mostly-stock offer was worth about C$49 a share.

It would have needed a green light from a government that last year vetoed a big international takeover as not being in Canada's best interests.

TMX shares touched a high of C$44.80 after the deal was scrapped before easing back to C$44.60 by mid afternoon. That's still below the Maple offer price of C$50 a share.

Maple also wants to wrap in Alpha, Canada's biggest alternative trading venue, and the CDS stock trading clearing system. That would give it a market share of more than 80 percent and leave it facing anti-trust concerns.

"Now we need to see what the Competition Bureau thinks of Maple. We also need to see if shareholders support Maple. I think they will, I don't see how they won't," said Alison Crosthwait, director of global trading strategy at Instinet.

"We're going back to more of a closely held, interested parties controlling the exchange."

Canada's independent Competition Bureau has bared its teeth lately on several fronts, getting a C$10 million payment from BCE Inc's Bell Canada unit for misleading advertising, and seeking to block a joint venture between Air Canada and United Continental.

(Additional reporting by Andrea Hopkins, Euan Rocha, Solarina Ho, Jonathan Spicer, Allison Martell and Trish Nixon; editing by Janet Guttsman)

The National Association of Realtors said on Wednesday its Pending Home Sales Index increased 8.2 percent to 88.8. Pending homes sales lead actual sales of homes by a month or two.

The rise in contracts was merely a correction after an 11.3 percent fall in April and the market will continue to bounce along the bottom, economists said.

That subdued outlook for a sector, which is helping to constrain economic growth, was illustrated by a Mortgage Bankers Association report showing applications for loans to buy homes dropped 3 percent last week to a four-month low.

"Although today's number could bring some cheer to investors who are on the prowl for good news, the fact of the matter is that the housing sector is still a long way from a meaningful recovery," said Peter Buchanan, a senior economist at CIBC World Markets in Toronto.

While the rise in contracts suggested a bounce back in home sales in June, economists cautioned against expecting a strong increase as many planned deals get canceled.

Demand for loans to buy a home has been modest so far this month. Existing home sales fell 3.8 percent in May.

WEAK HOUSING HURTING ECONOMY

Investors on Wall Street cheered the rise in pending home sales, which beat economists' expectations for a 3.8 percent gain, and bought stocks for a third straight day.

Sentiment was also buoyed by the Greek parliament's approval of austerity measures, an important step in the country's bid to gain access to international funding to avoid default. Prices for U.S. government debt fell and the dollar was down against a basket of currencies.

The housing market is grappling with an oversupply of homes, which is keeping prices subdued, and economists do not see a recovery any time soon.

According to the NAR, there were 3.72 million used homes on the market in May, excluding the so-called shadow inventory of homes which are at risk of being foreclosed upon or have been seized by lenders.

The housing market collapse helped to push the U.S. economy into its worst recession since the 1930s. The sluggish economic recovery has been marked by a 9.1 percent unemployment rate and on Wednesday, President Barack Obama called for new job creation measures.

"It makes perfect sense for us to take a look at, can we extend the payroll tax, for example, an additional year, and other tax breaks for business investment that could make a big difference in terms of creating more jobs right now," Obama told a White House news conference.

Economists are cautiously optimistic that home sales will gradually improve later this year and chip away at the huge inventory. Data on Tuesday showed a moderation in the pace of decline in single-family home prices in April.

"What is emerging is that we have hit some bottom level of activity and that's a good thing," said Steve Blitz, a senior economist at ITG Investment Research in New York.

"When you take that and marry it to the fact that you are not getting much new home construction, it means you are selling out of inventory of existing homes ... and you start to get new home construction. The industry is slowly moving in the right direction."

A slightly hopeful note was also sounded by KB Home, the fifth-biggest U.S. homebuilder, which said net orders for new homes fell 11 percent in the second quarter, compared with the same period of 2010 but jumped 53 percent from the first three months of the year.

"Although a broad-based housing recovery remains stalled, it appears that the worst of the crisis is behind the homebuilding industry as select markets for new homes are showing signs of stability," said chief executive officer Jeffrey Mezger.

(Editing by Andrea Ricci)

The sum, which includes an $8.5 billion settlement, removes a question mark that had been hovering over the bank since October, and Bank of America's shares rallied.

"Investors can now start attaching a number to these unknowns and what they will cost the bank. With the swipe of a pen, they've dealt with a large chunk of these issues," said Paul Miller, a banking analyst with FBR Capital Markets.

Excluding items such as the settlement, the bank forecast second-quarter earnings that could top analysts' average estimate.

The deal, combined with other settlement-related charges, was within the range that Bank of America disclosed in a filing in May.

The settlement, which still requires court approval, could pressure other big banks, including JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N), to resolve similar allegations, and could result in new lawsuits as well.

"This settlement is likely to embolden the other plaintiff's lawyers to go after other banks and look for similarities in their securitizations," said Nancy Bush, a veteran bank analyst.

Bank of America settled with a group of investors, including BlackRock Financial Management (BLK.N), who alleged that bonds they bought from Countrywide Financial were packed with mortgages that should never have been sold. Bank of America bought Countrywide, once the largest U.S. mortgage lender, in 2008.

The investors also said Bank of America, which is collecting payments on the mortgages, was not doing enough to maximize the collections. Part of the settlement includes improvements in gathering payments, known as servicing.

Bank of America said it expected to post a loss of 88 cents to 93 cents per share for the second quarter.

Excluding special items, it expects earnings of 28 cents to 33 cents a share. Analysts' average forecast was 28 cents, according to Thomson Reuters I/B/E/S.

The bank said charges would include the $8.5 billion settlement with bond investors, $5.5 billion to cover expected payments to other mortgage bond investors, and $6.4 billion in other charges linked to mortgages.

The $8.5 billion settlement covers a lawsuit filed by 22 institutional investors, including BlackRock, Pacific Investment Management Co and Western Asset Management.

All investors in the securities will share in the settlement, and the 22 institutional investors will not receive any special benefits, according to a statement from law firm Gibbs & Bruns, which represented the institutional investors.

Shares of Bank of America were up 3 percent to $11.16 in early trading.

(Reporting by David Henry, additional reporting by Brenton Cordeiro in Bangalore and Lauren Tara LaCapra and Dan Wilchins in New York; Editing by Lisa Von Ahn and John Wallace)

Buyers snapped up shares after the S&P 500's 7 percent swoon since April, mostly in commodities and technology shares, as investors raised their exposure heading into quarter-end and before earnings season in July.

Volatility has remained elevated. The CBOE VIX Index .VIX, Wall Street's "fear gauge, has only fallen modestly in recent days even as stocks have risen, suggesting investors are cautious. That has kept volume low as well, with 5.91 billion shares traded on the NYSE, AMEX and Nasdaq exchanges, below average.

"It shows a level of skittishness. The conviction level is not at screaming highs buying these rallies," said Ciaran O'Kelly, head of equities at Nomura in New York. "That would absolutely be a cause for concern."

The Dow Jones industrial average .DJI gained 145.13 points, or 1.21 percent, to 12,188.69. The Standard & Poor's 500 Index .SPX rose 16.57 points, or 1.29 percent, to 1,296.67. The Nasdaq Composite Index .IXIC added 41.03 points, or 1.53 percent, to 2,729.31.

The S&P 500 has now rallied more than 2 percent in the last two days.

The first of two key votes to approve budget-cutting measures in Greece, crucial for receiving international aid, is set for Wednesday.

"All eyes will continue to be on the situation in Europe as we go into the second half of the week," said O'Kelly. "The world is watching events in Greece unfold over the next 48 hours."

Cyclical areas of the market such as energy, retail and materials, which are more sensitive to shifts in the economy and have underperformed this year, strengthened.

The S&P energy index .GSPE surged nearly 2.7 percent, the biggest gainer among S&P sectors. Halliburton Co (HAL.N) gained 5.3 percent to $48.69, while Chevron Corp (CVX.N) was up 1.5 percent at $100.35.

In an advance indication of earnings season, Nike Inc (NKE.N) surged 10.1 percent to $89.90 a day after reporting fourth-quarter earnings that beat expectations, while orders suggested robust strength for the future.

"The greater risk to the market is that the news is not negative and we rally on good earnings," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

"The more the market pushes higher, the more it makes the people who are under-exposed nervous," he said.

Greek lawmakers will vote Wednesday and Thursday on measures which must be passed to receive the next payment. If Greece doesn't get the funds, investors fear a Europe-wide crisis and credit market freeze could follow.

Also helping sentiment, progress was reported in talks to persuade European banks and insurers to voluntarily roll over maturing Greek debt.

Although investors were generally optimistic about Greece, the CBOE's Volatility Index suggested some caution. The index stood at 19.23, a number considered relatively high.

"While the equity markets have rallied this week, the VIX has held in, losing only about one point so far this week, reflecting the nervousness that persists in the market with the upcoming vote," said derivatives strategists in Nomura in New York.

(Reporting by Edward Krudy; Editing by Kenneth Barry)

The deal could embolden investors holding mortgage-backed securities filled with now-toxic home loans to pursue claims against other large mortgage lenders such as Wells Fargo & Co and JPMorgan Chase & Co, analysts said.

A settlement, first reported by The Wall Street Journal, would be the largest in the banking industry to date. It would also require approval by Bank of America's board, which met on Tuesday to discuss it, according to the source.

"If you're an investor, you now know this is a potential lottery ticket, and the only way you lose is by not playing," said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Investment Counsel. "You have to think this is the first settlement we'll be seeing in a long line."

After news of a possible settlement, shares rose as much as 3.5 percent from their $10.82 close but later eased to trade around $10.95 after-hours, up about 1 percent.

The largest U.S. bank by assets has been fighting claims by a group of 22 investors over the housing-related securities it packaged and sold before the financial crisis.

This investor group includes BlackRock Inc, MetLife Inc and the Federal Reserve Bank of New York, in a dispute dating back to the fall. It had threatened to take the matter to court, but both sides delayed a trial early this year to continue settlement negotiations.

Bank of America was not immediately available for comment. BlackRock declined to comment.

Bank of America's possible settlement extends beyond the case brought by the initial group of investors, and could resolve "significant parts" of its exposure to repurchase claims from private investors, the person familiar said.

The settlement would exceed the bank's earnings for the last three years, according to the company's 2010 annual report. It could also more than triple the $2.5 billion that Bank of America paid in 2008 for Countrywide Financial Corp, once the nation's largest mortgage lender.

"HAND-TO-HAND COMBAT"

Last Fall, Bank of America Chief Executive Brian Moynihan has said the bank would contest any repurchase claims, and described the process as "hand-to-hand combat."

But as the bank entered into settlement agreements with bond insurers and the two government-backed mortgage investment companies, Moynihan softened that stance, and said the bank would settle when fighting would offer little for shareholders.

In January, Bank of America announced $2.8 billion settlements with mortgage financiers Fannie Mae and Freddie Mac covering essentially all of their outstanding mortgage repurchase claims.

Three months later, the bank announced a $1.6 billion settlement with bond insurer Assured Guaranty Ltd, which had sought to hold the bank responsible for poor underwriting by Countrywide.

(Reporting by Maria Aspan in New York and Joe Rauch in Charlotte; Editing by Carol Bishopric, Tim Dobbyn and Lisa Shumaker)

Lagarde, who starts her five-year term as managing director on July 5, will find herself immediately immersed in efforts by the IMF and European Union to head off a Greek default that could touch off an international crisis.

Minutes after her appointment, Lagarde pressed Greece to move quickly to push through unpopular austerity measures that the IMF and EU say are a prerequisite for further aid.

"If I have one message tonight about Greece, it is to call on the Greek political opposition to support the party that is currently in power in a spirit of national unity," she told TF1 television.

Lagarde, 55, the first woman to head the IMF, succeeds Dominique Strauss-Kahn, who resigned from the IMF in May to defend himself against charges of sexual assault against a New York hotel maid. He denies the charges.

Her skills as a tough negotiator with a reputation for sealing deals under pressure will carry weight as she moves from defending France's economic interests to overseeing a global institution that must be seen as a neutral player around the world.

The succession race was one of the most hotly contested in IMF history as emerging market nations expressed displeasure with the 64-year tradition of having a European head the IMF and an American lead its sister institution, the World Bank.

The IMF board moved ahead despite lingering concerns about an unresolved legal case in France looking at Lagarde's role in a 2008 arbitration payout to a French businessman.

Lagarde said on Tuesday she was "completely unconcerned" by the case. A top French court has put off a decision on the matter until July 8.

The IMF may decide not to offer Lagarde a contract until the court makes a final decision, one board source said.

In a Financial Times blog post, Mohamed El-Erian, chief executive of Pimco, the world's largest bond investor, said Lagarde would need to show the IMF's efforts to help distressed European countries were not politically motivated.

He said she would need to prepare for the possibility the IMF could face losses from the large bailout loans it made in recent years, including 30 billion euros for Greece.

Lagarde must also show a commitment to meritocracy by eliminating some nationality-based appointments, El-Erian added, citing the No.2 position at the fund which traditionally goes to an American.

Washington is already considering naming White House advisor David Lipton to succeed John Lipsky as IMF second in command at the end of August, according to sources close to the discussions.

FINDING CONSENSUS

Lagarde's selection over Mexico's Central Bank Governor Agustin Carstens was assured after the United States made its support clear, and emerging market economies China, Brazil, India and Russia did the same.

The United States, worried about the possibility of contagion from the Greek crisis, had cautioned that the appointment of the next IMF chief should not be delayed.

French President Nicolas Sarkozy called the news of Lagarde's appointment "a victory for France."

Carstens said he hoped Lagarde would pursue "meaningful progress in strengthening the governance of the institution, so as to assure its legitimacy, cohesiveness, and ultimately, its effectiveness."

Developing countries, resentful over a process that favored a European from the start, said they would hold Lagarde to her promise of giving them more voting power in the fund.

Emerging markets have long called for greater say in the IMF to reflect their growing weight in the global economy. They have threatened to leave the IMF's fold unless imbalances in the fund's voting power are corrected.

Strauss-Kahn pushed through changes in voting power that benefited mainly larger emerging economies like China, India and Brazil, but not as much as they had wanted.

"RIGGED SYSTEM"

Brazil's Finance Minister Guido Mantega said Brazil backed Lagarde because she vowed to continue raising the profile of emerging markets.

"Our support is for her to be a manager not of Europe's problems but of the world's. We will be watching out for this from the first day," Mantega said at a regional trade meeting in Paraguay.

In justifying why India had gone with Lagarde in the end, Indian Finance Minister Pranab Mukherjee told Reuters it was in part because it wanted to be part of the consensus that had formed around her.

Speaking while on a visit to Washington, Mukherjee said the IMF's selection process should have been more transparent but he believed Lagarde was a worthy candidate.

Arvind Subramanian, a senior fellow at the Peterson Institute in Washington, said emerging economies had missed a golden opportunity to force change at the IMF helm by failing to rally around Carstens or by putting up their own consensus candidate.

"It is a rigged system that needs to change but ... the only reason the outcome didn't match what (developing nations) wanted was because emerging market countries did not grab the opportunity," Subramanian said.

Global development group Oxfam said Lagarde's appointment was "farcical" and had damaged the credibility of the IMF.

"There were noises made about openness, but the decision was made before the candidates were interviewed," said Sarah Wynn-Williams, Oxfam's head of relations with the IMF and World Bank.

(Additional reporting by Glenn Somerville and David Lawder in Washington, Luciana Lopez in Brasilia, Alexandria Sage and Catherine Bremer in Paris and Mariel Cristaldo and Guido Nejamkis in Paraguay)

(Editing by Paul Simao, Jan Paschal and Andrew Hay)

She begins her five-year term July 5 amid an escalating debt crisis in Europe and growing fears that Greece will default.

"The executive board, after considering all relevant information on the candidacies, proceeded to select Ms. Lagarde by consensus," the IMF said in a statement.

Lagarde, 55, is the first woman to lead the IMF, succeeding Dominique Strauss-Kahn, who resigned in May to defend himself against charges of sexual assault against a hotel maid in New York.

Lagarde's victory over Mexico's Central Bank Governor Agustin Carstens was assured after the United States made its support clear and emerging market economies China, Brazil and Russia did the same.

She will have to immediately deal with an IMF-European Union effort to keep debt-stricken Greece afloat and focus on potentially thorny IMF "spillover reports" that analyze the economic and policy actions of the world's major economies.

"Minister Lagarde's exceptional talent and broad experience will provide invaluable leadership for this indispensable institution at a critical time for the global economy," Treasury Secretary Timothy Geithner said in a statement.

(Reporting by Lesley Wroughton; Editing by Paul Simao, Jan Paschal and Andrew Hay)

Even so, economists cautioned house prices will likely continue to crawl along at low levels, and could have further to fall, as the battered housing market works through an excess amount of houses for sale, ongoing foreclosures, tight credit and weak demand.

The S&P/Case-Shiller composite index of single-family homes in 20 metropolitan areas dipped 0.1 percent on a seasonally adjusted basis. A Reuters poll of economists had forecast a decline of 0.2 percent.

On a non-seasonally adjusted basis, however, the index rose 0.7 percent, its first advance in eight months, the report said.

"The seasonally adjusted numbers show that much of the improvement reflects the beginning of the spring-summer home buying season," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement.

"It is much too early to tell if this is a turning point or simply due to some warmer weather."

There was little reaction in financial markets to the data.

"It suggests that the housing market is stabilizing. It suggests that things are bottoming out, and it is only a matter of months before you hit the bottom," said Rudy Narvas, senior economist at Societe Generale in New York.

"Things aren't great but at least they are not completely falling apart."

The 20-city composite index edged up at 138.84 from 138.16 in March, which had marked a new crisis-era low.

Prices in the 20-city index fell 4 percent year over year, slightly worse than expectations for a drop of 3.9 percent.

U.S. home prices were supported last spring by a tax credit, but the housing market has struggled since the credit expired. While housing makes up a fraction of gross domestic product, most economists say the economy will be hard pressed to make a sustainable recovery without an improvement in housing.

(Reporting by Leah Schnurr, additional reporting by Chris Reese; Editing by Padraic Cassidy)

* Greece still needed a vote of approval by lawmakers on Wednesday and Thursday for the austerity measures being debated through parliament in order to receive the next tranche of the bailout program.

If it does not get the next tranche, analysts said Greece could default, sparking a Europe-wide crisis and potential credit market freeze similar to the Lehman collapse.

* Nike Inc (NKE.N) quarterly earnings beat expectations on Monday, helping its shares gain 4.3 percent in after-hours trading.

* Swiss drugmaker Roche (ROG.VX) will try and persuade a U.S. health panel that it should retain approval for Avastin, the world's best-selling cancer medicine.

* Google (GOOG.O) said French search engine company 1plusV had been notified the company of its intention to file a 295-million-euro damage claim but declined to comment further on the matter.

* Steve Balmer, chief executive of Microsoft (MSFT.O) is set to launch its Office 365 software on Tuesday - a revamped online version of its hugely profitable Office software suite.

* French Finance Minister Christine Lagarde looked set to get the majority support of the International Monetary Fund board to become the new chief.

* Investors will watch the U.S. S&P/Case-Shiller April Home Price index at 1300 GMT and both the U.S. Richmond Fed Manufacturing Services index for June and the U.S. Consumer Confidence for June at 14 GMT, for signs that the economic recovery is back on track.

* Wall Street rose on Monday after three days of losses on optimism over Greece's austerity plan and France's proposal that French banks would roll over Greek debt.

The Dow Jones industrial average .DJI gained 0.9 percent, the Standard & Poor's 500 Index .SPX rose 0.9 percent and Nasdaq Composite Index .IXIC added 1.3 percent.

* European shares were flat on Tuesday ahead of a Greek parliamentary vote on austerity measures.

With depositors fleeing Greek banks in growing numbers and financial markets watching anxiously, President Nicolas Sarkozy told a news conference in Paris that French banks had reached a draft agreement with the authorities on a voluntary rollover of maturing bonds.

"We concluded that by stretching out the loans over 30 years, putting (interest rates) at the level of European loans, plus a premium indexed to future Greek growth, that would be a system that each country could find attractive," he said.

The plan was put to a meeting of international bankers and European Union officials with the International Institute of Finance (IIF) in Rome Monday but no decision was taken, an Italian Treasury official said.

In a sign of ebbing confidence that Greece can avoid default on its 340 billion euro ($486 billion) debt mountain, Moody's said Greek banks had lost about 8 percent of private sector deposits so far this year as customers burned their savings due to unemployment, transferred funds abroad or bought gold.

French government sources said under an outline deal, banks would reinvest 70 percent of the proceeds when Greek bonds fall due in 2011-14 and cash out the rest. Of the amount reinvested, 50 percent would go into the new 30-year bonds and 20 percent would go into zero-coupon AAA bonds with deferred interest.

The new bonds would be placed in a Special Purpose Vehicle, effectively removing Greek debt from the balance sheets of participating banks, the source said. Banks would hold equity in the SPV instead.

Private banking sources said the new bonds could be guaranteed by the euro zone's rescue fund (EFSF) or the European Investment Bank.

A French government source described the solution, proposed by French bankers, as "a sort of private Brady bond without a public guarantee," referring to a 1989 swap of Latin American debt for tradable securities, some of them guaranteed, proposed by then Treasury Secretary Nicholas Brady.

German banks voiced interest in the "French model" although Deutsche Bank chief Josef Ackermann said it was only one of several solutions being considered and it was unclear whether any satisfactory proposal could be found.

"Political leaders expect a solution by the end of the week but we should not rush it," Ackermann told Reuters Television in an interview. "It is important to have a good solution. The issues are complex and need to be discussed."

REBELS PRESSED

Any new financial rescue for Athens, including official lending and private sector participation, depends on the Greek parliament approving this week a five-year austerity plan and legislation to implement structural reforms and privatization. .

"Our vote is the only chance for the country to get back on its feet," Greek Prime Minister George Papandreou told legislators at the beginning of a parliamentary debate.

Greek Finance Minister Evangelos Venizelos met ruling socialist party (PASOK) rebels in Athens to push them to toe the line in parliamentary votes Wednesday and Thursday, where a defeat could plunge the country into default.

Greece's conservative opposition has rejected calls for national unity, forcing Papandreou to rely on his slim parliamentary majority to push through a painful mix of spending cuts, tax hikes and state sell-offs. .

However with Greece stuck in deep recession, at least three PASOK deputies have expressed serious reservations or outright opposition to a plan they say will crush any hope of growth for years to come and it is unclear how the numbers will play out.

Venizelos acknowledged the plan was painful but said it would win time to negotiate more favorable terms later, an attitude which risks irritating some euro zone partners.

"The strategy is to vote on the two pieces of legislation, to be able to face the euro zone and the IMF to obtain the fifth tranche, and until the end of the summer we seriously negotiate a new loan program," he said. "That's your renegotiation."

Without parliamentary approval for the measures, which have caused a wave of strikes and demonstrations, the European Union and International Monetary Fund say they will not release the fifth tranche of the 110 billion-euro bailout agreed last year.

If the loans are not forthcoming, the Greek government, which has been shut out of financial markets because of the ruined state of its public finances, will run out of money within weeks, probably triggering a Europe-wide crisis.

"If it is Greece alone, that's already big," Deutsche Bank's Ackermann said. "But if other countries are drawn in through contagion, it could be bigger than Lehman," he said, referring to the disastrous 2008 collapse of Wall Street investment bank Lehman Bros.

PLAN B

Three euro zone sources in Brussels said EU officials were working on a contingency plan for Greece if its parliament rejects an austerity program and the country cannot receive the next installment of EU/IMF emergency loans.

The fallback plan, distinct from the French rollover ideas, involves ways to ensure Greece gets the liquidity needed to avoid default if the next aid tranche cannot be paid out by mid-July, the sources said.

An initial Greek vote on the framework austerity package is due on Wednesday, and lawmakers then vote Thursday on a separate bill containing specific steps to implement it.

Defections over the past 13 months have cut Papandreou's support in the 300-member parliament to 155 seats, meaning a handful of votes could decide the issue, which may be further complicated if one bill passes and the other does not.

In an interview with Spanish daily El Mundo Sunday, Deputy Prime Minister Theodore Pangalos said he believed the first vote would pass but he was less confident about the second implementation bill.

"That's where we may have problems," he said. "I don't know whether some of our legislators will vote against it."

Progress in the rollover talks cooled demand for safe-haven bonds Monday but the premium investors demand to hold Greek debt rather than benchmark German Bunds widened by a further 20 basis points to 1,432 basis points.

(Additional reporting by Stephen Slater in London, Luke Baker and Julien Toyer in Brussels, Nick Vinocur in Paris, Harry Papachristou and Renee Maltezou in Athens, Stefano Bernabei and Gavin Jones in Rome; Writing by James Mackenzie and Paul Taylor, editing by Paul Taylor/Janet McBride)

Japan's No.3 automaker this month forecast a worse-than-expected 65 percent fall in annual operating profit to 200 billion yen ($2.5 billion) for the year to March 2012. Many analysts consider its guidance overly conservative, with consensus forecasts putting the profit at 412 billion yen, according to Thomson Reuters I/B/E/S.

"I don't think assuming 80 yen to the dollar is conservative at all," Fumihiko Ike told a small group of reporters in an interview, explaining the expected sharp drop in earnings.

"The same goes for raw material prices."

Ike said potential shortages of electricity in Japan following the nuclear disaster caused by the March 11 earthquake and tsunami likely meant resources-poor Japan would need to step up its imports of natural gas and other energy sources.

"And for that, a stronger yen is better," Ike said. "We in the manufacturing sector may cry out for relief but...I suspect such forces may be at work."

Honda's assumption that a rise in raw material prices would have a negative impact of 80 billion yen on profits this year was also not excessive, he said.

"Before, it used to be about rising precious metals prices. Now, on top of that, we're dealing with an incredible surge in rare earth prices as hybrid cars become more popular," he said.

Precious metals such as platinum are used in catalytic converters needed to reduce tailpipe emissions, while rare earth elements such as dysprosium and neodium are needed for electric motors fitted in fuel-efficient hybrid cars.

Rare earth prices have been soaring since China, which controls more than 95 percent of global supply, restricted exports late last year. The China offer price of dysprosium now hovers around $3,600-$3,800 a kg, up from $300 a year ago, and neodium is traded above $450, up from $45.

Honda's cost and sales assumptions translate into a cost increase of around 24,000 yen per car this year. Honda is expecting a 6 percent drop in its global car sales to 3.3 million vehicles.

ACURA DRIVE

Honda's 200 billion yen profit forecast would yield an operating margin of 2.4 percent, less than half of rival Nissan Motor Co's (7201.T) projection of 4.9 percent for 2011/12.

Nissan on Monday mapped out a business plan to boost that margin to a sustainable 8 percent within six years, partly fueled by a global expansion of the Infiniti luxury brand.

Ike said Honda was also preparing a big model offensive for its premium Acura brand, which sells about the same number of cars as Infiniti, or around 160,000 a year.

"We've got quite a number of new models in the pipeline," Ike said, declining to provide details. He added, however, that unlike Nissan, Honda had no plans to spread the brand into more markets. Honda sells Acura cars in North America and China.

Honda's shares rose 1.2 percent to 3,055 yen in morning trade in Tokyo, roughly in line with the benchmark Nikkei average .N225.

(Additional reporting by Yuko Inoue)