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The surprise move, which was the biggest antitrust challenge yet by the Obama administration, caught the carriers by surprise and if successful would end AT&T's move to unseat Verizon Wireless as the No. 1 U.S. mobile carrier.

If AT&T fails to defeat the Justice Department lawsuit, it will prove very costly -- the No. 2 carrier would have to pay T-Mobile parent Deutsche Telekom an estimated $6 billion in cash and other assets as part of the original deal.

The announcement is a slap in the face for AT&T Chief Executive Randall Stephenson, who was poised for a career-defining deal that would allow him to emerge from the shadow of predecessor and serial acquirer Ed Whitacre.

The court case could take months and cost millions of dollars. Wall Street immediately signaled the deal was likely now a longshot, with shares in the companies falling sharply.

Justice Department officials warned that allowing AT&T to gobble up the No. 4 carrier would be disastrous for consumers.

"Were the merger to proceed, there would only be three providers with 90 percent of the market, and competition among the remaining competitors on all dimensions, including price, quality and innovation, would be diminished," Deputy Attorney General James Cole told reporters.

The lawsuit came only five months after the deal was announced and despite the surprising timing, one source close to the case said it was a real attempt to halt a "fundamentally flawed" deal, not a tactic to wring big concessions from AT&T.

They would have to give up "so much" to win approval, the source said. Still, Justice Department officials said they were willing to consider proposals to ameliorate their concerns, but they expected to the fight to shift to federal court.

A source close to one of the carriers said they may have to offer to divest up to 25 percent of the combined company's assets, up from an earlier estimate of up to 10 percent, to try to save the deal.

James Ratcliffe, an analyst at Barclays Capital slashed his expectations that the deal would win approval to a range of 35 percent to 40 percent, down from 75 percent.

CAUGHT BY SURPRISE

The government's lawsuit overshadowed an announcement just hours earlier by AT&T that it would bring back 5,000 call center jobs to the United States if the deal closed.

Just a day ago, the two sides had met to continue discussions on the merger and the Justice Department dropped no hints that it was getting frustrated with the talks.

The two sides were "talking past each other," said one source familiar with the case, adding that the Justice Department side felt that nothing was really presented to address their competition concerns.

AT&T's Stephenson has argued that his company needs T-Mobile to get more wireless airwaves to meet exploding demand for high-speed mobile services from smartphones and tablets.

Stephenson put himself on the line with this deal so he has no choice but to double down, said a person close to AT&T. [ID:nN1E77U26Q]

Shares of AT&T closed down 3.8 percent at $28.48 on the New York Stock Exchange, while Deutsche Telekom shares fell 7.6 percent to 8.81 euros in Frankfurt trade.

"This one took everybody by surprise," said a person close to one of the carriers, adding that they thought the Justice Department would ask for concessions but not derail the deal.

Meanwhile shares of Sprint Nextel Corp -- the No. 3 U.S. wireless carrier, which has fiercely opposed the deal -- shot up almost 6 percent to close at $3.76. A scuppered acquisition could prompt Sprint to consider buying T-Mobile.

AT&T's high-powered lobbying team in Washington is led by Jim Cicconi, who previously worked in the Reagan and Bush administrations.

"We thought the weight of AT&T's lobbying was having some success; this very much undermines that. It's very uncertain where this leaves us at the moment," said Andrew Hogley, telecom analyst at Espirito Santo investment bank.

If the government succeeds in blocking the deal, it would also be a major setback for Deutsche Telekom, which for years has been looking for a way out of T-Mobile USA, a business that has ceased to be a source of growth.

Deutsche Telekom "will gain some short-term consolation from the penalties it can exact from AT&T," said John Delaney, an analyst at technology research firm IDC. "But in the end, DT would still be stuck with the problem of how to turn around a sub-scale national operator with a declining subscriber base."

The news also sent chills through the mergers and acquisitions market. Not only do the seven investment banks that advised on this deal stand to lose about $150 million in fees, but bankers elsewhere were also worried it could make companies think twice about antitrust risk when mulling takeovers.

COURT BATTLE

Antitrust experts saw this case as the signature antitrust event for the Obama administration, which includes former AT&T executive William Daley serving as White House chief of staff.

"This is an administration that came in saying it was going to have a more aggressive approach," said Michael Sohn, an antitrust attorney with Davis Polk Wardwell LLP.

The administration has cleared some big deals like Comcast Corp's purchase of NBC Universal, but Nasdaq OMX Group Inc and IntercontinentalExchange withdrew a hostile bid for NYSE Euronext after opposition from antitrust regulators.

"I think the court is going to block it," said Andy Gavil, who teaches law at Howard University in Washington and testified to Congress on the deal. "Having read the complaint, I don't see a basis for a negotiated settlement."

One thing most experts agree on is that it would take a long time for the case to wind its way through the courts. The question remains whether the companies are willing to pursue that route and for how long, or go their separate ways.

Another complicating factor is that the deal also needs approve by the Federal Communications Commission, which regulates wireless communications.

"Although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition," said FCC Chairman Julius Genachowski.

The case is USA v. AT&T Inc et al, No. 11-cv-1560 in U.S. District Court for the District of Columbia.

(Additional reporting by Diane Bartz and Jasmin Melvin in Washington, Nadia Damouni in New York, Georgina Prodhan and Victoria Howley in London, Nicola Leske in Berlin, and Edwin Chan in San Francisco. Editing by Robert MacMillan, Gary Hill)

Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 100,000 jobs. July's private payrolls were revised down to an increase of 109,000 from the previously reported 114,000.

August's gain was the smallest number of private jobs added since May's disappointingly small reading of 35,000.

The ADP figures come ahead of the U.S. government's much more comprehensive labor market report on Friday, which includes both public and private sector employment.

Economists often refer to the ADP report to fine-tune their expectations for the payrolls numbers, though it can be erratic in predicting the outcome.

"I don't think this was a bad number, and I don't think it changes people's forecasts for Friday's employment number. A small miss is not the end of the world, and we all know ADP can be unreliable, though it's been better lately," said Steven Butler, director of FX trading at Scotia Capital in Toronto.

The jobs report at the end of the week is expected to show a rise in overall nonfarm payrolls of 75,000 in August, based on a Reuters poll of analysts, and a rise in private payrolls of 105,000.

Government payrolls are expected to shrink for the ninth month in a row, but the decline may not be as steep as in the past three months since 23,000 state workers in Minnesota returned to the job after a partial government shutdown.

A strike by about 45,000 Verizon Communications Inc employees is also expected to put a dent in Friday's numbers. Neither factor affects the ADP report and Macroeconomic Advisers LLC Chairman Joel Prakken said that could cause nonfarm payrolls to be a good deal weaker than indicated by Wednesday's data.

While fears the economy is falling back into recession have increased this month, some of the recent data has been consistent with a slow-growth scenario rather than a contraction.

Slower than expected economic growth has fueled speculation the Federal Reserve could launch another round of bond buying -- known as quantitative easing -- but such a move would likely face political opposition both domestically and abroad.

Markets saw little impact from the data. Wall Street opened higher open as comments from Fed officials boosted hopes of more monetary stimulus.

A separate report earlier on Wednesday showed the number of planned layoffs at U.S. firms declined in August after rising for three months in a row, but the cuts were still up sharply from a year ago amid government job losses.

Employers announced 51,114 planned job cuts, down 23 percent from 66,414 in July, according to the report from consultants Challenger, Gray & Christmas, Inc. July's figure had been a 16-month high.

But August's job cuts jumped compared to a year ago, rising 47 percent from 34,768. Cuts at the federal government level led the way and more are expected to come with the United States under pressure to cut federal budgets, the report said.

The Mortgage Bankers Association said on Wednesday applications for U.S. home mortgages tumbled last week as demand for refinancing sagged for the second week in a row.

The industry group said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, dropped 9.6 percent in the week ended Aug 26.

But other data on the housing market was somewhat more cheery as U.S. home prices edged up for the fourth month in a row in July, while the yearly rate of decline moderated.

CoreLogic Inc's July home price index rose 0.8 percent from the month before. Prices declined 5.2 percent compared to last year, an improvement from June's year-over-year decline of 6.0 percent. June's yearly figure was revised from a decline of 6.8 percent.

(Additional reporting by Steven C. Johnson; Editing by Padraic Cassidy)

The deal also underscores a trend by technology companies to snap up patents in a bid to stave off competitive threats and patent-infringement lawsuits. Google's patent portfolio is seen as one of the weakest in the industry.

By agreeing on August 15 to pay $12.5 billion in cash for struggling Motorola Mobility's vast portfolio of 17,000 patents and 7,500 pending patent applications on top of its handset business and television set-top boxes, Google is building a defensive bulwark for its Android phone software, already available on Motorola phones among others.

The acquisition, Google's largest ever, has legal tax and accounting benefits, many associated with the money Motorola Mobility has lost over the years, according to experts who have studied its details.

"The tax benefits of the deal make what was a good deal into a great deal," said Robert Willens, a New York accounting and tax expert. He estimated that through the acquisition, Google can expect to reap $700 million a year in tax deductions from future profits each year through 2019. Google also will be able to immediately reduce its taxes by $1 billion due to Motorola Mobility's U.S. net operating loss, and by a further $700 million due to its foreign operating loss, he said.

These are deductions which Motorola Mobility has been unable to use because of a faltering business that has failed to generate the revenue against which to offset them. The deductions include those for research and development, tax losses in the United States and abroad, and credits carried over.

While Motorola Mobility has lost $3.9 billion on its U.S. business pre-tax over the past three years and generated a $630 million pre-tax profit on its operations abroad, Google made $11 billion in global pre-tax profit last year.

In 2009, the Internal Revenue Service changed rules that previously said the tax benefits associated with a loss-making company could only be used by that company to offset its own income. The change, according to Willens, "makes Motorola Mobility that much more valuable to Google, which will clearly utilize the losses."

The IRS kept a separate rule saying that a company could not acquire another company primarily for its tax benefits -- something Willens said Google was not doing, even as it benefited from the tax component of the acquisition.

VALUING PATENTS TRICKY

The acquisition further highlights the lack of transparency in accounting rules on how intangibles such as patents, brand names and the like are valued and their worth to investors.

Google has yet to announce the value it will give Motorola's intangibles, but experts agree it will be far more than what is currently on the cell phone maker's books. In a recent filing, Motorola Mobility reported an amortized value of $176 million for its intangible assets as of July 2, 2011.

Valuing patents may be more an art than a science.

Kevin Smithen, an analyst at Macquarie Capital, an investment firm in New York, estimated the $12.5 billion purchase price represented a $4.5 billion value for Motorola Mobility's patent portfolio, $3.2 billion in cash the company holds, a $3 billion handset and TV set-top business, and $1.7 billion in net operating loss tax benefits it has been unable to use.

Willens estimated the $12.5 billion deal will include $3 billion in goodwill, or the value Google expects to generate from Motorola Mobility's brand, know-how and other intangibles, not including the patents. He added that Google would be able to immediately use the $1 billion in U.S. operating losses absorbed from Motorola Mobility, thanks in part to how goodwill is amortized.

GOOGLE TAX BILL

Even before the acquisition, Google was an adept manager of its corporate tax bill.

According to its Securities and Exchange Commission filings over the past five years, its foreign earnings soared to 54 percent of its total profits in 2010, from 33 percent in 2006. Meanwhile, its foreign revenue nudged up more slowly, to 52 percent from 43 percent. Experts say the difference can be explained by Google's increasing use of its subsidiary operations in the low-tax jurisdiction of Ireland.

Since 2006, Google has never paid more than 2.9 percent in foreign taxes on its foreign earnings, well below Ireland's statutory 12.5 percent corporate rate and a fraction of the 35 percent U.S. rate. In the United States, the company pays a far larger slice of its earnings in taxes -- 33 percent in 2010. But with more and more profit being recorded overseas, Google's combined global tax rate is dropping. Last year the company's worldwide tax bill came to 21 percent of profits. The search giant now holds $17.5 billion in profits outside the United States. In its filings, Google says it intends to leave that money overseas permanently, but the company is part of a group of firms lobbying Congress for a one-time chance to repatriate their foreign cash at a reduced tax rate.

Motorola Mobility, spun off from Motorola Inc in early 2011, appears to have used foreign tax jurisdictions less extensively, though financial filings do not detail its offshore subsidiaries and other entities. Before the merger announcement, Peter Look, the company's corporate vice president for tax, was leading development of a global tax function to manage over 100 legal entities spread out across 40 countries. It is not clear if those entities refer to operating subsidiaries or offshore entities.

Aaron Zamost, a Google spokesman, declined to answer questions about the tax and accounting benefits of the deal. Motorola Mobility also declined to provide further information on the deal.

PATENTS MAKE ACCOUNTING TOUGH

Under accounting rules, assets developed in-house are not recorded as an asset on a company's balance sheet. Even when such assets are acquired, through a merger or acquisition, their value is recorded as a short-lived asset or as goodwill.

"This Motorola deal highlights this anomaly in the accounting today," said Esther Mills, president of Accounting Policy Plus, an advisory firm in New York specializing in complex accounting matters.

The Obama administration has proposed tightening up definitions of intangibles and foreign goodwill to make them taxable and making foreign entities with a single, U.S. owner subject to U.S. income tax, even if they are in a low-tax jurisdiction. Separately, the IRS is increasingly concerned about abuses in which companies low-ball the prices they charge subsidiaries for goods and services and thus pay correspondingly less tax.

Where Google books revenues from the Motorola patents could play a big role in further lowering its corporate tax bill.

"I assume that's what they have in mind -- to convert the Motorola business to lower-tax jurisdictions," said James Hines, a corporate taxation professor at the University of Michigan.

Under IRS rules on transfer pricing, a legal and controversial financial maneuver governing the prices companies charge their divisions and subsidiaries for goods and services sold between them, Google could shift Motorola's patents to a low-tax jurisdiction. They would have to pay a fair price for their use, but tax experts argue that upfront cost is often well worth the future tax savings. Google could also use a cost-sharing agreement, a form of transfer pricing that governs the development of new patents and technologies.

In a 2008 analysis, Professor Ronald Dye of the Kellogg School of Management at Northwestern University said cost-sharing agreements could cut a company's tax bill by 80 percent compared with pure transfer pricing agreements. But he said it was "impossible" to tell what that would look like from Google's and Motorola Mobility's recent filings.

Paul Flignor, an economist at DLA Piper in Chicago, said that "pen strokes move IP," adding that Google's acquisition provides it with a golden opportunity to further shrink its taxes. "Google will be very aggressive about that."

(Reporting by Lynnley Browning in Fairfield, Conn., Nanette Byrnes in Chapel Hill, N.C., and Dena Aubin in New York; Editing by Howard Goller and Tim Dobbyn)

The Mortgage Bankers Association was set to release its Weekly Mortgage Market Index for the week ended August 26 at 1100 GMT (7 a.m. ET). The index read 699.1 and the refinancing index was 3,850.1 in the previous week.

At 1215 GMT (8:15 a.m. ET), Automatic Data Processing (ADP) will release its August employment report. Economists expected 100,000 jobs were created in August, versus 114,000 created in July.

U.S. authorities have been investigating whether business software maker Oracle's (ORCL.O) deals in Africa violated federal anti-bribery laws, the Wall Street Journal reported, citing sources familiar with the matter.

Challenger, Gray & Christmas Inc will release at 1130 GMT its report on job cuts for August. Challenger reported 66,414 layoffs in the prior month.

The Institute for Supply Management-New York will release at 1230 GMT its August index of regional business activity. In the previous month, the index read 538.8.

Bank of America (BAC.N) is looking to sell its correspondent mortgage business and the unit's employees could be notified as soon as Wednesday, the Wall Street Journal reported, citing people familiar with the matter.

At 1345 GMT, the Institute of Supply Management Chicago releases August index of manufacturing activity. Economists forecast a reading of 53.5 in the month compared with 58.8 in July.

The Commerce Department releases July factory orders at 1400 GMT. Economists forecast a rise of 1.9 percent, compared with a 0.8 percent drop in the prior month.

Exxon Mobil (XOM.N) and Rosneft (ROSN.MM) signed an agreement to extract oil and gas from the Russian Arctic, in the most significant U.S.-Russian corporate deal since U.S. President Barack Obama began a push to improve ties.

The FTSEurofirst 300 .FTEU3 index of top European shares rose 1.1 percent, extending the previous session's steep gains, on hopes the U.S. Federal Reserve will act soon with stimulus measures to boost the struggling economy, and ahead of a raft of data.

U.S. stocks rose for a third straight day on Tuesday in a volatile session after the Fed minutes. The Dow Jones industrial average .DJI was up 20.39 points, or 0.2 percent, at 11,559.64. The Standard & Poor's 500 Index .SPX was up 2.80 points, or 0.2 percent, at 1,212.88. The Nasdaq Composite Index .IXIC was up 14.00 points, or 0.55 percent, at 2,576.11.

(Reporting by Atul Prakash; Editing by Dan Lalor)

Crude and copper prices also rose while the dollar slipped against the yen and the euro.

Gold, bolstered during August by safe-haven buying, was poised to post its biggest monthly rise since November 2009 and held steady after a 2.6 percent rise in the previous session.

Tuesday's slump in U.S. consumer confidence to its lowest in two years, along with Fed minutes showing policymakers discussed a range of unusual tools they could use to help the economy, further bolstered expectations that the U.S. central bank is ready to act.

The Fed's decision to hold a two-day meeting in September instead of a one-day session has already helped stabilize financial markets after steep sell-off earlier in August on concerns over slowing global growth and the euro zone debt crisis.

"Although the release of the FOMC meeting minutes offered little in the way of consensus as to precisely what the central bank will do next, it does still leave the door open for further action so this may well help keep the general sentiment upbeat," said Cameron Peacock, market analyst at IG Markets.

World equities measured by the MSCI All-Country World Index .MIWD00000PUS advanced 0.3 percent. The benchmark is down 8.5 percent this month, on track for its worst monthly percentage drop since May last year.

Europe's FTSEurofirst 300 .FTEU3 put on 0.4 percent, though it was still down 12.8 percent in August and set for its biggest monthly fall since September 2002.

In Asia, Japan's Nikkei average .N225 ended flat and was down 8.9 percent in August, its biggest monthly decline since May 2010.

Expectations of further stimulus from the U.S. weighed on the dollar, which was down 0.1 percent at 76.61 yen on Wednesday. The U.S. currency was down 1.2 percent in August versus the yen, despite Tokyo's efforts to weaken its currency through intervention.

The greenback is down 5.6 percent this year against the yen, which has held its safe-haven appeal.

The euro was down 0.2 percent at $1.4421, though the single currency is up 7.8 percent against the dollar this year, largely helped by Asian investors' moves to diversify their assets.

Gold steadied at more than $1,830 an ounce, while copper added 0.2 percent and was up for the sixth day in a row.

Brent crude put on 0.2 percent to trade above $114 a barrel.

(Editing by John Stonestreet)

The pact, which includes an option for Rosneft to invest in Gulf of Mexico and Texan properties, ended any hope of Britain's BP reviving its deal with state-owned Rosneft to develop the same Arctic territory. That deal was blocked in May by the billionaire partners in another BP Russian venture.

The pact gives Exxon, the biggest U.S. oil company, access to substantial reserves in Russia, the world's top oil producer. For Rosneft, it's about bringing in one of the few companies capable of drilling in the harsh, deep waters of the Arctic.

Russia has shown greater willingness in the past year to secure foreign partners, even if some deals later fell apart. The Exxon announcement comes only months after the demise of a Rosneft deal with Chevron Corp for a $1 billion investment in an estimated $32 billion Black Sea project.

Analysts cited differences between Chevron and Rosneft over the choice of contractor, the joint venture's domicile and the jurisdiction of arbitration for any business disputes.

Yet Chevron, like Royal Dutch Shell Plc, was also considered a potential partner for Rosneft's Arctic venture.

Russian Prime Minister Vladimir Putin attended the Tuesday signing -- in the Black Sea resort of Sochi -- by Exxon Chief Executive Rex Tillerson and Russia's top energy official, Deputy Prime Minister Igor Sechin.

"New horizons are opening up. One of the world's leading companies, Exxon Mobil, is starting to work on Russia's strategic shelf and deepwater continental shelf," Putin said.

Exxon and Rosneft agreed to invest $3.2 billion to develop East Prinovozemelsky Blocks 1, 2, and 3 in the Arctic Kara Sea and the Tuapse licensing block in the Black Sea.

Rosneft will own 66.7 percent and Exxon the rest of the joint venture to develop the blocks, which Exxon said were "among the most promising and least explored offshore areas globally, with high potential for liquids and gas."

"The fact that someone with the stature of Exxon Mobil is willing to give it a stab is very significant," said Amy Myers Jaffe, of the Baker Institute at Houston's Rice University.

While Rosneft will tap Exxon's expertise to open up one of the last unconquered drilling frontiers, it will also diversify further by getting a piece of some of Exxon's U.S. developments.

"To get into Russia offshore you give up some of your domestic offshore. I think it's a fair trade," said Brian Youngberg, senior energy analyst at brokerage Edward Jones in St. Louis, who has a "hold" rating on Exxon shares.

It marks a big move for Exxon after it spent a year swallowing XTO -- a much-criticized purchase that shifted its profile toward the depressed U.S. natural gas market. "Now Exxon Mobil is starting to look elsewhere for deals," Youngberg said.

Analysts also said the Rosneft-Exxon agreement indicates that the reset in relations Obama sought was working to reduce the political risk for U.S. businesses operating in Russia.

"Three years ago, American companies were being excluded. Here, an American company is at the center of a flagship announcement. This deal demonstrates that reset has had a positive effect on U.S.-Russia energy relations," said Cliff Kupchan, director of Eurasian Practice at Eurasia Group.

An Obama administration official said the deal was a result of the new cooperation between the United States and Russia.

"Today's announcement of a deal between Exxon-Mobil and Rosneft valued at $3.2 billion is another example of the expanding economic relationship and the potential for mutually beneficial collaboration between Russian and American businesses," the official said.

In explaining the deal's significance, Myers Jaffe pointed to previous failed efforts in the past decade to foster joint energy interests. "There was a lot of disappointment on both sides," she said. "The U.S. industry just gave up on Russia."

PLAN B FOR ROSNEFT

Rosneft said the Kara Sea blocks contain an estimated 36 billion barrels of recoverable oil resources. Total resources are estimated at 110 billion barrels of oil equivalent -- more than four times Exxon's proven worldwide reserves.

The Black Sea block is estimated to hold 9 billion barrels of oil reserves. First drilling is planned to start in 2015, with Exxon shouldering most of the costs.

"The Russians very quickly had a Plan B, and Plan B was Exxon," said Fadel Gheit, energy analyst at Oppenheimer & Co, referring to the quick switch to Exxon from BP.

The deal marks a turnaround in Russia for Exxon, which was widely thought to be on the verge of taking over Yukos, then Russia's largest oil company, before Yukos's boss, Mikhail Khodorkovsky, was arrested in 2003.

Khodorkovsky was subsequently jailed for fraud and tax evasion and Yukos's prime assets were bought at bankruptcy auctions by Rosneft, now Russia's industry leader and with enough reserves to cover 27 years of production.

Uncertainty persists over whether Putin or President Dmitry Medvedev will seek the presidency next March. Putin can now show off the deal as a success if he decides to run.

The transaction also marks a comeback for Sechin, who was ousted as Rosneft chairman earlier this year in a purge of state company boards ordered by Medvedev. Sechin estimated total investment in the project at $200 billion-$300 billion.

In anticipation of all the money flowing there, oilfield services companies including Schlumberger Ltd, Baker Hughes Inc and Weatherford International Ltd WFT.N> have been picking up assets in Russia.

Environmental concerns are unlikely to create barriers to oil extraction in Russia's remote Arctic regions, if moves this year by the country's Natural Resources Ministry to shift nature reserve boundaries are any guide.

U.S. UPSTREAM

Rosneft will be offered an equity interest in Exxon exploration projects in North America, including deepwater Gulf of Mexico and fields in Texas, as well as in other countries.

The deal thus fulfills a demand for reciprocity often made by Putin, helping Rosneft, which already works with Exxon offshore Russia's Sakhalin island, toward its long-term goal of being a global energy major.

It was not clear whether any such investments by Rosneft would need approval from the Committee on Foreign Investment in the United States. An Exxon spokesman declined to comment.

There is no exchange of equity in the agreement, while the BP deal called for a $16 billion share swap in which BP would have exchanged a 5 percent stake for 9.4 percent in Rosneft.

"Exxon is double or triple the size and market value of BP," said Gheit at Oppenheimer. "So, obviously, this would be much more important for a BP than it is for Exxon."

While Rosneft shares rose 1.4 percent in Moscow, Exxon fell slightly on the New York Stock Exchange on Tuesday. (Additional reporting by Vladimir Soldatkin, Katya Golubkova, Michael Erman and Ernest Scheyder; Writing by Douglas Busvine and Braden Reddall; Editing by Dan Lalor, Tiffany Wu, John Wallace, Steve Orlofsky and Phil Berlowitz)

Tuesday's data kept alive concerns the United States could slide back into recession, spurring investors to buy government bonds on bets the Federal Reserve would try harder to push down borrowing costs.

The private-sector Conference Board said its index of consumer attitudes sank to 44.5, from a downwardly revised 59.2 in July. The August reading was the weakest since April 2009, when the country still languished in recession, while the drop was the largest since October 2008.

"What we are effectively going through is a crisis of confidence," said Tom Porcelli, an economist at RBC Capital Markets in New York.

Economists had expected a much-less-pronounced decline.

Consumers' flagging confidence might lead them to shut their wallets, although retail sales data has not pointed in that direction yet.

So far, data from industrial production to employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output. But economists are watching closely for signs of a fresh downturn and will focus sharply on a reading on employment in August on Friday.

"There is basically nothing for consumers to be confident about," said Gennadiy Goldberg, a fixed income analyst at 4CAST in New York.

Stock markets slid sharply in early August as investors were shaken by the politically contentious fight over cutting the U.S. budget and raising the nation's debt limit. Discouraged by the political process, Standard & Poor's stripped the nation of its top-notch AAA credit rating.

The consumer sentiment data weighed on stocks for most of Tuesday's session, although the Standard & Poor's 500 Index closed higher.

FED EYES STEPS TO SUPPORT RECOVERY

Worries over the economy led the Fed in early August to consider new steps to support growth, like tying the path of interest rates to a specific unemployment level, minutes of the central bank's August 9 meeting released on Tuesday showed.

At that meeting, the central bank decided to announce that it expected to hold rates near zero until at least mid-2013.

While that decision drew three dissents, the most in nearly 20 years, the minutes showed some officials wanted even bolder action. Chicago Federal Reserve Bank President Charles Evans made clear in an interview with CNBC that he would have preferred a stronger course of action.

The high level of joblessness is weighing on sentiment and holding the economy back. Friday's jobs report is expected to show the unemployment rate held at 9.1 percent in August.

The Conference Board data suggested things may be getting worse, not better, with an index gauging how difficult it is to find a job hitting its highest level since November 2009.

HOME PRICES WEAK

A separate report showed U.S. single-family home prices fell slightly in June, the latest sign the economy's recovery will not be able to count on help from the housing sector.

The S&P/Case-Shiller composite index of 20 metropolitan areas slipped 0.1 percent from the previous month on a seasonally adjusted basis. A Reuters poll of economists had expected prices to be unchanged.

Prices in the 20 cities fell 4.5 percent from a year ago, better than expectations of a 4.6 percent decline.

An excess supply of homes, ongoing foreclosures, tight credit and weak demand have kept the housing market on the ropes and helped to mute the broader economic recovery.

"Basically this is just more confirmation that housing is moving sideways," said Brian Jones, an economist at Societe Generale in New York.

(Additional reporting by Emily Flitter in New York and Pedro Nicolaci da Costa in Washington; Writing by Jason Lange in Washington; Editing by Neil Stempleman and James Dalgleish)

Financial stocks were among the top decliners, with the S&P financial index .GSPF down 1.4 percent.

Bank of America Corp (BAC.N) dropped 2.4 percent to $8.19 and JPMorgan Chase & Co (JPM.N) was off 1.4 percent to $37.10, weighing on the Dow average as the biggest decliners.

Consumer confidence crumbled in August to its lowest level in more than two years as the fallout from political wrangling over a budget deal took a toll.

"This isn't unexpected, given the last month, what with the lack of movement in Washington and the decline in stocks ... If we see positive action there, it will be a blip. Otherwise, I think this could be a trend," said Ron Kiddoo, chief investment officer at Cozad Asset Management in Champaign, Illinois.

The Dow Jones industrial average .DJI was down 72.47 points, or 0.63 percent, at 11,466.78. The Standard & Poor's 500 Index .SPX took off 9.03 points, or 0.75 percent, at 1,201.05. The Nasdaq Composite Index .IXIC slipped 15.86 points, or 0.62 percent, at 2,546.25.

In other data, U.S. single-family home prices fell slightly in June as the market continued to crawl along at depressed levels.

The Federal Open Market Committee releases minutes of its August 9 at 2 p.m. EDT. (1800 GMT) Investors are seeking clues on the policy-setting panel's economic outlook.

Amid concerns about the debt crisis in Europe, Italy's bond sale drew relatively weak demand despite the European Central Bank buying Italian debt in recent weeks.

(Reporting by Angela Moon; editing by Jeffrey Benkoe)

The Conference Board, an industry group, said on Tuesday its index of consumer attitudes sank to 44.5 from a downwardly revised 59.2 the month before. Economists had expected a much less pronounced decline.

Concerns have grown that the United States might be heading toward a new recession. Consumers' flagging confidence might lead them to shut their wallets, although retail sales data hasn't pointed in that direction yet.

"What we are effectively going through is a crisis of confidence," said Tom Porcelli, an economist at RBC Capital Markets in New York.

The United States lost its AAA credit rating earlier this month following a drawn out battle in Washington over spending that nearly led the country to default on its obligations.

U.S. Treasuries prices extended gains on Tuesday on fears a pullback in consumer spending could trigger recession, while U.S. stocks fell. The dollar hit a session low against the yen.

So far this year, data from industrial production to employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output.

"There is basically nothing for consumers to be confident about," said Gennadiy Goldberg, a fixed income analyst at 4CAST in New York.

Concern over the outlook led the U.S. Federal Reserve earlier this month to say it would hold interest rates at rock-bottom level for at least the next two years, a decision that drew three dissents.

Some Fed officials favor doing more to bring down the unemployment rate. A report on Friday is expected to show the jobless rate held at 9.1 percent in August.

The Fed releases the minutes of its August 9 meeting later on Tuesday and investors will scour them for clues on whether the Fed is likely to do more for the economy.

Chicago Federal Reserve Bank President Charles Evans, who is considered to be less focused on inflation risks than some of his colleagues, said on Tuesday he favored strong central bank accommodation for a substantial period of time.

"It's difficult to characterize the labor market as anything other than consistent with being in a recession," he told CNBC television.

"I'm in favor of some of the most aggressive policy actions of anyone on the committee," added Evans, who votes on the Fed's policy-setting Federal Open Market Committee this year.

HOME PRICES WEAK

A separate report showed U.S. single-family home prices fell slightly during June in the latest sign the country's struggling economic recovery will not be able to count on any help from a moribund housing sector.

The S&P/Case-Shiller composite index of 20 metropolitan areas slipped 0.1 percent from the previous month on a seasonally adjusted basis. A Reuters poll of economists had expected prices to be unchanged.

An excess supply of homes, ongoing foreclosures, tight credit and weak demand have kept the housing market on the ropes and helped to mute the broader economic recovery.

"Basically this is just more confirmation that housing is moving sideways," said Brian Jones, an economist as Societe Generale in New York.

Prices in the 20 cities fell 4.5 percent from a year ago, better than expectations for a decline of 4.6 percent.

Friday's jobs will give an idea of how much damage the stock market turmoil inflicted on the already wounded economy.

U.S. nonfarm payrolls likely increased 75,000 in August after rising 117,000 in July, according to a Reuters survey.

(Additional reporting by Emily Flitter; writing by Jason Lange in Washington; Editing by Neil Stempleman)

A group of investors is buying 13.1 billion CCB shares from Bank of America, with the deal expected to close in the third quarter. The U.S. bank declined to name the investors but two sources said Singapore state fund Temasek was among the buyers.

Bank of America needs to boost capital by some $50 billion in the coming years to meet new global rules, according to multiple analyst estimates.

CCB is the second-largest bank by market value in the world, and Bank of America's ties with the Chinese bank are seen as an important source of future growth, particularly as economic growth in the United States is likely to be tepid for now.

Bank of America's willingness to sell part of its CCB investment as soon as it was contractually able to shows how far it must go to meet new capital requirements, analysts said.

"Bank of America's decision to sell that stake is wrong strategically in the long run, but they need money," said Josef Schuster, founder of Chicago-based IPO research and investment house IPOX Schuster.

The bank has said it can raise the capital it needs through earnings and selling off assets, but a number of investors have expressed concern that the bank will need to issue more common shares.

Those dilution concerns helped push the bank's shares this month to their lowest level in two-and-a-half years. Investors are also concerned about the bank's potential losses from mortgages and related litigation. Bank of America's 2008 purchase of Countrywide has brought it billions of dollars of losses and legal payouts.

Bank of America shares gained 8.1 percent to close at $8.39 on Monday.

A $5 billion investment from Warren Buffett's Berkshire Hathaway last week stopped the fall in Bank of America's shares.

For CCB, analysts said the sale helps soothe investor worries about when a sale might take place.

"This removes an uncertainty that's been hanging on China Construction Bank for a while now," said Ivan Li, deputy head of Hong Kong research at Kim Eng Securities.

In the CCB deal, Bank of America sold each share for HK$4.93, an 11 percent discount to the Chinese bank's most recent closing price of HK$5.55.

As lock-up provisions expire on a number of Chinese financial stocks, big investors will have the contractual right to start selling shares. Fears of those transactions have weighed on the sector, along with concerns about the Chinese economy's growth trajectory.

A START

Bank of America will record a $3.3 billion gain in the third quarter as a result of the sale, and a $3.5 billion increase to its core capital under current rules, a spokesman said.

Under proposed Basel III rules, the sale will generate an $8.3 billion gain for Bank of America.

The deal could add 0.3 percent to the bank's core capital until current industry rules and 0.2 percent under proposed Basel III rules, wrote David George, Robert W. Baird & Co bank analyst, in a research note to clients.

For Basel III, the bank's tier one capital levels after the deal are about 5.7 percent, while the bank is targeting somewhere around 6.75 percent or 7 percent by 2013, George said.

In recent weeks, Bank of America has also agreed to sell an $8.6 billion Canadian credit card portfolio to TD Bank Group and is in talks to sell $1 billion of real estate assets to Blackstone Group.

In the last six quarters, Bank of America has generated some $30 billion of proceeds from asset sales.

Fears about the bank's ability to meet its capital requirement have cut the bank's stock price by a third since the beginning of August, including a 20 pct plunge on August 8.

TAPPING INTO GROWTH IN 2005

Temasek has a history of buying CCB shares. In November, it bought Bank of America's entitlement to buy 1.79 billion CCB shares in the Chinese bank's rights offering.

The Singapore fund has another link to Bank of America -- Greg Curl, the U.S. bank's former chief risk officer, is now president, overseeing the financial services sector for the fund.

A Temasek spokesman declined to comment.

Before CCB's IPO in 2005, Bank of America paid $3 billion for a 9.9 percent stake in the Chinese bank.

At the time, then Bank of America Chief Executive Kenneth Lewis said the partnership was designed to give the bank increased access to roughly 1.3 billion Chinese consumers, while CCB would benefit from Bank of America's U.S. retail banking experience.

The U.S. bank increased its holdings in following years to 25.6 billion shares, including 23.6 billion that came out of lock-up on August 29. After the share sale, Bank of America will still have about 12.1 billion CCB shares, worth nearly $9 billion.

Last week, CCB President Zhang Jianguo told Reuters the two companies were in talks to extend their current cooperation agreement for another five years.

(Reporting by Joe Rauch in Charlotte and Elzio Barreto in Hong Kong, additional reporting by Saeed Azhar in Singapore; Lauren Tara LaCapra amd Clare Baldwin in New York; Editing by Derek Caney and Matthew Lewis)

With big-ticket data like U.S. job numbers due later this week, many investors remain uncertain about a recovery in the world's largest economy, leaving risk for a correction in markets still trading at low holiday volumes.

But European shares .FTEU3 rose 1.6 percent, tracking gains on Wall Street and in Asia, while London shares advanced 2 percent in early trade, catching up with the broader market after a holiday on Monday. .EU

World stock markets, as measured by MSCI .MIWD00000PUS, rose 0.5 percent to their highest since August 18. The index is still down nearly 15 percent from a May high, however, after taking a hammering at the start of August due to growing pessimism about the U.S. economy as well as worries over Europe's sovereign debt crisis and banks.

"With consumer confidence, the (U.S) ADP jobs report, ISM Manufacturing, jobless claims and nonfarm payrolls report all due in the coming days, there is going to be a lot of nervousness around," said Ben Potter, strategist at IG Markets.

"The market could also be seen as vulnerable given it has rallied ahead of these big economic reports. We think a lot of participants will be employing a 'wait and see' approach as we navigate through the next few days."

Investors would also await the minutes from the Federal Reserve's last committee meeting on Aug 9 which could offer more clues on divisions among board members over further stimulus measures.

Still, the latest gains in stock markets encouraged some investors to switch out of safe-haven assets like the Swiss franc and core government bonds into higher-yielding currencies such as the New Zealand dollar.

An Italian bond auction later in the day will serve as a barometer of investor demand -- and give more hints how much further the euro zone's debt crisis has to run -- after recent bond purchases by the European Central Bank.

CREDIT CRUNCH

The Italian tender is likely to sail through smoothly and could give a temporary boost to risk appetite, but it is unlikely to lift broader concerns that the risk of contagion could still engulf larger economies like Italy, Spain and France.

These concerns have made investors such as U.S. money market funds reduce exposure to European banks and pushed their credit default swap spreads higher.

The Itraxx European senior financials index has pushed beyond the peaks seen during the last crisis, and at 247 basis points the spread is starting to reflect credit ratings that are not in line with their current ones.

The euro was down 0.2 percent against the dollar at $1.4484, and also eased against the Swiss franc.

The franc, hit by Switzerland's efforts to weaken it in the past month, traded slightly down against the dollar, at 0.8160 francs, hovering near a five-week low touched on Monday.

Spot gold stabilized around $1,797 per ounce levels after falling by nearly seven percent in about a week. It hit a record $1,911 last week.

"In terms of fundamentals, (gold) still looks good. The only risk to the downside is if the CME raises margin requirements again," said Natalie Robertson, a commodities strategist at ANZ.

The CME Group (CME.O) raised margins on gold futures by about 27 percent last week.

German Bunds reversed early gains as European equity markets opened higher. German Bund futures briefly dipped into negative territory and were last 9 ticks higher at 134.48.

(Additional reporting by Atul Prakash in London)

The Commerce Department said on Monday consumer spending increased 0.8 percent on strong demand for motor vehicles, after slipping 0.1 percent in June.

Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent.

When adjusted for inflation, spending rose 0.5 percent last month, the largest gain since a matching increase in December 2009, after being flat in June.

The data was the latest to suggest the economy started the third quarter with some strength after growth almost stalled in the first half of the year.

It also offered hope that output would continue to expand, though at a moderate pace. However, the risks of a new recession have risen following a sharp drop in stock prices and the erosion of consumer sentiment.

"If anybody was concerned about this recession risk people were taking about, this personal spending number seems to be another point against that recession argument," said Jeffrey Greenberg, an economist at Nomura Securities in New York. "It seems at least through July, the economy was not too poor."

U.S. stock index futures held onto earlier gains after the data, while U.S. Treasuries prices added to losses. The dollar held steady versus the euro and maintained slight gains versus the yen.

Industrial production, retail sales and employment data have so far been consistent with a slow economic growth scenario rather than an outright contraction in output.

Consumer spending braked sharply to a 0.4 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year.

The overall economy grew at a 1 percent pace in the second quarter after expanding only 0.4 percent in the prior quarter.

Real spending on durable goods increased 2 percent last month, likely reflecting a pick-up in motor vehicle sales as the shortage of autos caused by the supply disruptions from Japan eased.

Overall spending in July was lifted by a 0.3 percent rise in income as employers stepped-up hiring. Income rose 0.2 percent in June and economists had expected a 0.3 percent increase last month.

Disposable income increased 0.3 percent, but when adjusted for inflation fell 0.1 percent -- the first decline since September.

With spending outstripping real disposable income, savings fell to an annual rate of $582.8 billion from $638.6 billion in June.

The report also showed inflation pressures remain elevated. The personal consumption expenditures price index, or PCE, rose 0.4 percent after slipping 0.1 percent in June.

Compared to July last year, the index was up 2.8 percent, the largest increase since October 2008, after advancing 2.6 percent in June.

The core PCE index -- excluding food and energy - rose 0.2 percent for the second straight month.

The core index, which is closely watched by Federal Reserve officials, increased 1.6 percent in the 12 months through July, the largest increase since May 2010, after rising 1.4 percent in June. The Fed would like to see it close to 2 percent.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

The New York Stock Exchange, the Nasdaq Stock Market and the alternative BATS venue said they will start the week as usual. IntercontinentalExchange said Monday openings for some U.S. futures products will be delayed by one hour.

Subway service resumed at 6 a.m. on Monday, althoughMetro-North commuter rail service was still closed, stranding many who normally commute in from Connecticut and New York suburbs. So the city suspended for now, the question remains: How light will staffing be on Wall Street?

The decision to open the market was made early Sunday afternoon after regulators, exchange officials and others met to discuss the storm and market operations. The U.S. bond market will also operate as normal on Monday, the Securities Industry and Financial Markets Association said.

New York City regained limited bus service on Sunday evening and the PATH rail line that links New Jersey and Manhattan reopened early Monday.

Big trading firms Citigroup and Knight Capital both said they are ready to go Monday morning.

But a Bank of America Corp spokeswoman said the bank has not made a final determination on whether its operations will be open normally on Monday.

The storm has had little effect on the bank's downtown operations, but Bank of America was waiting word from New York city officials on when public transit will reopen.

"Transit is the big question right now," she said.

The NYSE and broader U.S. marketplace are mostly automated, running quietly out of powerful data centers in New Jersey and elsewhere. Electronic trading is expected to function normally on Monday. But without full staffing, volume will take a hit.

"This is a slow week anyway, and if anything this will just result in lessened volume," said Randy Billhardt, head of institutional sales and trading at MLV & Co in New York.

Hurricane Irene battered New York with heavy winds and driving rain on Sunday, knocking out power for some and flooding some of lower Manhattan's deserted streets, including in the Wall Street district.

Irene was downgraded to a tropical storm on Sunday morning as it sped northward but was still sending waves crashing onto shorelines and flooding coastal areas.

There was about a foot of water in the streets of the South Street Seaport in downtown Manhattan, although there was less damage than many had feared.

BACKUP PLANS

All of Nasdaq's trading members appeared to be ready to go for Monday, said Eric Noll, the exchange's executive vice president of transaction services.

Knight Capital Group, the top trader of NYSE-listed shares with 16.2 percent market share, said it would be fully operational.

"Even in the event of a shutdown of our Jersey City campus -- if that were to occur -- we have redundancy built into our multiple trading desks," Peter Kenny, the firm's Jersey City-based managing director, said in an email. "Our trading desk in Purchase, New York would act as our principle desk as Jersey City does on a day-to-day basis."

"Our sales coverage and technology -- access to market -- will not be compromised on any level," he said.

The New York Mercantile Exchange (NYMEX), a few blocks from the NYSE, also plans at this time to open on Monday, parent CME Group Inc said on Sunday.

The NYSE trading floor now handles a fraction of the buy and sell orders it did five years ago, when about 3,000 brokers, specialists and others worked there.

There are now about 1,000 on the floor, and Lou Pastina, executive vice president of NYSE operations, estimated the Big Board would need half of them to open safely on Monday. Floor specialists are still important, particularly at the open and close of markets, when orders pile up.

Wall Street's biggest firms also said they weathered the storm well. Citigroup spokeswoman Danielle Romero-Apsilos said the bank's downtown buildings on Greenwich Street, which house its investment bank and other institutional client businesses, are fully functional, and employees can return when the city lifts its evacuation order for lower Manhattan.

The bank is looking at transport options for employees for Monday, pending updates on what will be happening with mass transit.

For staffers unable to report to their normal offices, Citi has alternative sites ready, and also offers employees remote access to company systems.

(Writing by Chris Sanders; Additional reporting by Ryan Vlastelica, David Sheppard, Joe Rauch, Dan Wilchins and Soyoung Kim; Editing by Braden Reddall and James Dalgleish)

If politicians ignore their pleas -- including a blunt call from International Monetary Fund chief Christine Lagarde to "act now" -- the slowdown in world growth and debt turmoil in Europe could morph into a deeper crisis, top monetary officials and economists warned at an annual retreat here.

"I hope they listen," said Bank of Israel Governor Stanley Fischer.

Alarm over political deadlock was as obvious a backdrop to the annual meeting of policymakers in the wilds of Wyoming as the thunderstorms that rolled over the nearby Grand Teton peaks and dumped rain on the Jackson Lake Lodge.

"The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States," Angel Gurria, who heads the multi-nation Organization for Economic Co-operation and Development, told Reuters.

"The signals that are coming out of the short-term discussions is, 'We can't even agree on about the time of the day, even if there's a big clock telling us what the time of the day is.'"

In the United States, the political impasse has thwarted moves to tame massive budget deficits which brought the nation to the edge of a debt default and cost the United States its coveted AAA credit rating from Standard & Poor's.

In Europe, leaders are fighting over who should pay for the sovereign debt crisis in the euro zone, which has a unified regime for monetary policy but whose member nations run their own budget policies.

PHONE CALLS, SPEECHES

Lagarde, whose appearance on Saturday was a late addition and reflected her sense of urgency, delivered a hard-hitting pitch against braking spending too fast as nations struggle to rein in long-term budget deficits.

She was far from alone.

The Fed has slashed U.S. interest rates to near zero and bought $2.3 trillion in long-term securities in an effort to kick-start the recovery. With monetary policy stretched to its limits, fiscal policy is now key, Fed Chairman Ben Bernanke suggested.

"Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not as a consequence disregard the fragility of the current economic recovery," he said on Friday.

"Fortunately the two goals of achieving fiscal sustainability -- which is the result of responsible policies set in place for the longer term -- and avoiding the creation of fiscal headwinds for the current recovery are not incompatible."

Bernanke said battling long-term joblessness in the United States must be a top priority, and he called on the U.S. government to put a floor under the sagging housing market, remarks that Lagarde echoed forcefully on Saturday.

Bernanke's speech was "the shot across the bow of the government saying, 'don't keep layering expectations on the Federal Reserve, guys, you have a job to do,'" Columbia Business School Dean Glenn Hubbard said in an interview with Reuters Insider.

"The Fed is simply saying, 'We are monitoring the situation very carefully but would encourage the government, both parties, to get their act together and pass a long-term fiscal strengthening package and then perhaps short-term stimulus.

The calls from the world's economic policy elite may give some political cover to President Barack Obama, who faces a tough re-election fight next year with the U.S. unemployment rate stuck above 9 percent.

Obama is preparing for a speech after the September 5 Labor Day holiday in which he is expected to lay out proposals to boost hiring. He is reaching out to other world leaders too.

On Saturday, Obama spoke with German Chancellor Angela Merkel, and the White House said the two leaders vowed to act to shore up a global recovery that now looks at risk.

A day earlier Obama had called Lagarde to talk about fiscal policy. They agreed that the world economy needs further steps to boost growth.

Obama's potential presidential challengers, including leading Republican candidate Mitt Romney, have repeatedly blamed Obama's policies for impeding growth.

The U.S. economy grew less than 1 percent in the first half of the year and has yet to return to its pre-recession size.

EUROPE'S BANKS FACE SCRUTINY

In Europe, the biggest threat is a spreading sovereign debt crisis, and richer euro zone nations, chief among them Germany, have shown a hesitancy in picking up the tab for nations on the debt-strapped periphery.

Stress tests last month exposed the degree to which European banks are exposed to Greek and other shaky government debt, and lenders are balking at extending credit.

Lagarde and European Central Bank President Jean-Claude Trichet both said strengthening bank balance sheets is crucial.

"Although there is clarity on required policies, the uncertainty created by the political stances in both Europe and the United States poses some serious risks," Cornell University Professor Eswar Prasad said.

"Getting the policy balance right is tricky in itself; this adds a layer of uncertainty that will make it that much harder," Prasad said.

(Writing by Ann Saphir; Editing by Braden Reddall)

The sale marks one of the biggest since the downturn in U.S. commercial real estate four years ago.

It attracted more than two dozen buyers, said a source who was not authorized to speak on the record. The total price paid for all the loans was between $7 billion and $8 billion, the source said.

To attract a large pool of potential buyers, the portfolio was broken into eight separate pools according to the performance of the loans and the length to maturity.

The first three pools contained performing loans. JPMorgan was the winner of the first tranche comprising loans with a balance of about $1 billion to $1.5 billion, the source said.

Wells Fargo won the second and third tranches valued at about $3 billion to $3.5 billion, the source said. Wells Fargo recently bought a $1.4 billion performing loan portfolio from the failed Bank of Ireland for about par, another source said.

Global distressed debt and equity investor Lone Star won the remaining five pools of sub-performing and non-performing loans. The five pools have a face value of about $5 billion.

Those loans, which could lead to the buyer either getting the property or restructuring the loans, had attracted other private equity firms, such as TPG Capital LP and Blackstone Group LP.

The winners were notified Thursday night, another source said. Bloomberg first reported the story.

The sales are expected to close in October.

The pools have also been split along the lines of real estate types -- hotels, apartments, condominiums, offices and warehouses, according to an information sheet obtained by Reuters.

Anglo Irish and a spokesman for JPMorgan declined to comment. Representatives from Loan Star and Wells Fargo could not be reached for comment.

Other bidders who were either part of the first or second round of bids included Goldman Sachs Group Inc, Deutsche Bank AG, Vornado Realty Trust, Starwood Capital, and Torchlight Investors, an independent adviser focused on commercial real estate debt investments.

Anglo Irish was one of the most aggressive lenders during the U.S. commercial real estate boom of 2003-2007, but its risk strategy brought it and the Irish economy to the brink of collapse and forced Dublin to seek an 85 billion euros EU-IMF bailout last year.

Once the darling of the Irish stock market, Anglo Irish was nationalized in 2009 and is being wound down, after selling its deposits to former rivals and having ceased lending.

Its U.S. portfolio is its premium stock of assets, and a successful sale would represent a huge boost for the Irish government, which has vowed to radically shrink its banking sector and reduce its reliance on emergency funding from the European Central Bank (ECB).

The loans to be sold are secured by a diverse group of more than 280 properties, including office buildings in Massachusetts and retail properties in New Hampshire, South Carolina and Florida.

It also includes apartment buildings in New York City and Boston, warehouses and gas stations in the Midwest, and hotels from Florida to Maine.

(Additional reporting by Carmel Crimmins an Padraic Halpin in Dublin; Editing by Vinu Pilakkott)

Traders juggling European debt worries and soft economic data are assessing the impact of the storm, which knocked out subway and train services across the New York City metropolitan area, issues that may not be resolved by the start of work on Monday.

Though the storm itself wasn't expected to be a factor in broader market direction on Monday -- though many analysts forecast pressure on insurance and transportation-related stocks -- there could be some impact as transportation issues leave many offices short-staffed.

"If anything, this will just result in lessened volume," said Randy Billhardt, head of institutional sales and trading at MLV & Co in New York.

"We don't want to put anyone in danger, so getting in will be based on each person's level of comfort and their ability to get into the city," he said. "Since this is usually a quiet week for markets, I won't push anyone to do anything out of their comfort zone."

Lighter volume could leave equities susceptible to heightened volatility, especially given the persisting issues related to Europe and the upcoming U.S. nonfarm payroll report.

The unusually large storm traveled up the U.S. East Coast Friday through Sunday, threatening 55 million people, and was expected to cause billions of dollars in property damage as it continued to barrel north toward eastern Canada as a tropical storm.

The New York Stock Exchange, the Nasdaq Stock Market and the alternative BATS venue said they will start the week as usual.

With the hurricane mostly out of the way, the focus may shift from the Federal Reserve's economic outlook to the August U.S. payrolls report Friday.

Fed Chairman Ben Bernanke, in a much anticipated speech to central bankers in Jackson Hole, Wyoming, on Friday said most of the burden for ensuring a solid foundation for long-term growth lay at the feet of the White House and the U.S. Congress.

President Barack Obama is expected to detail plans to create jobs after he returns from vacation the week after next. Investors will have a few days to position themselves ahead of Obama's speech, with the key payrolls report for August due Friday.

"This was clearly a punt from Bernanke to Obama, who will announce a jobs initiative soon," said Lance Roberts, CEO of Streettalk Advisors, an investment management firm in Houston. "The market thinks we may now get stimulus from the government."

THE WHITE KNIGHT: TRICHET?

In a move opposite to Bernanke's baton-handing to Washington, some say stocks may find a white knight in the European Central Bank's head Jean-Claude Trichet.

Some hoped that his comments during a panel at Jackson Hole Saturday would open the door for the ECB to buy more bonds from countries struggling with rising borrowing costs.

News this month that the ECB was actively buying government bonds in the secondary market boosted equities by giving some relief to investors worried about the credit and fiscal health of the euro zone.

"I'm going to see if (Trichet) is standing by that policy or shying away from it," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

"If he stands by it, that could be a positive for the equities markets because it's going to suggest that if anything, the ECB will try to step in to handle liquidity problems in the European banking system and they don't have to just rely on the European Union leaders."

Recent concern over the exposure of some European banks to the declining prices of euro-zone bonds pushed lenders' shares sharply lower, with an index of European bank stocks closing lower Friday for a fifth straight week. The long slide has resulted in European bank shares losing more than one-fourth of their market value.

AN UGLY AUGUST

August is shaping up as the worst month for stocks since February 2009, partly on the belief that the U.S. economy was headed for a double-dip recession.

For the month so far, the Dow Jones industrial average is down 7.1 percent, while the Standard & Poor's 500 Index is down 8.9 percent. The Nasdaq Composite Index is down 10 percent, still in correction mode. Those losses for August so far threaten to overshadow the bright spot at Friday's close, when all three indexes ended the day higher and scored their first weekly gains in more than a month.

The payrolls report Friday is expected to show the U.S. economy created 80,000 jobs this month, according to economists polled by Reuters. In contrast, 117,000 jobs were added to U.S. nonfarm payrolls in July.

The U.S. unemployment rate is seen steady at 9.1 percent.

Wall Street will have to deal with a torrent of data throughout the week, including personal income and consumption Monday, S&P/Case-Shiller home prices Tuesday, factory orders Wednesday and the Institute for Supply Management's factory activity index Thursday, before Friday's payrolls report.

A Reuters poll forecasts that ISM's August survey is expected to show factory activity shrank for the first time since the recession.

(Additional reporting by Jonathan Spicer, Edward Krudy and Ryan Vlastelica; Editing by Jan Paschal and James Dalgleish)