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Shares elsewhere in Asia .MIAPJ0000PUS fell slightly and U.S. oil prices recovered to nearly $85 a barrel partly due to a surprise drop in weekly crude stocks.

Stocks in emerging markets in Asia have underperformed those in developed countries this year. Underscoring that trend, MSCI's Japan share index .MIJP00000PJP has risen around 7.5 percent this year, compared with a drop of more than 2 percent in MSCI's Asia Pacific share index excluding Japan.

But some analysts remain skeptical that such a trend will continue for long.

Rodrigo Zorrilla, head of markets Asia-Pacific, Citigroup, said some $10 billion of funds had moved from emerging market dedicated funds to the United States during the first two weeks of February.

"The question everybody is asking is whether that is the reversal of a trend of the bullish emerging market story or is that just a rebalancing of portfolio," Zorrilla said, adding that he supported the second view.

"We think the fundamentals are still very strong in Asia. And while there are some scares in the market relating to the political issues in the Middle East and inflation concerns around the world, as soon as the dust settles we will see that trend (of outflows) to slow down and stop."

INFLATION REPORT EYED

Sterling rallied to a 5- month peak against a currency basket after data on Tuesday showed inflation in Britain jumped to 4 percent, twice the Bank of England's target, prompting Governor Mervyn King to acknowledge that rates might rise more rapidly than economists had expected.

Analysts now expect a rate rise in May and the next market focus is the BoE's inflation report due at 1030 GMT.

Yuuki Sakasai, a strategist at Barclays Capital, said the inflation report would support King's comments overnight that suggested an early rate increase.

"But we do think that King is likely to use his news conference later on to warn against aggressively pricing in rate hikes. So the pound could gain on the report and fall on King's comments. On the whole we think risk is skewed to the downside," he said, adding that the pound could fall to around $1.60.

Sterling last traded at around $1.6150, compared with a high of $1.6170 overnight. The pound has gained some 3 percent against the U.S. dollar so far this year.

The euro edged up against the dollar, standing at around $1.3520 as of 0544 GMT.

Against the yen, the dollar last traded at around 83.75, not far from an eight-week high of around 83.90 yen hit the previous day, helped by the recent rise in U.S. Treasury yields.

Sanofi will pay $74 a share in cash and a contingent value right for the U.S. biotechnology company. The CVR is a tradable right to additional payments if Genzyme's multiple sclerosis drug, Lemtrada, reaches regulatory and sales targets or 2011 production volumes of Cerezyme and Fabrazyme are achieved.

Sanofi said the deal would boost business net earnings per share from the first year following its completion, which it expects early in the second quarter, and also predicted it would lift its earnings by 0.75-1.0 euro per share by 2013.

The deal is the second-biggest in biotech history and gives France's Sanofi, which has pursued Genzyme for nearly nine months, a foothold in the market to treat rare diseases. It will help Sanofi compensate for declining revenue from drugs that have lost, or are set to lose, patent protection.

The CVR runs until the end of 2020 and entitles holders to a series of payments worth up to $14 in total, depending mainly on the success of Lemtrada.

Genzyme will become Sanofi's global specialist in rare diseases and maintain a sizeable presence in Boston, where it based, the companies said in a joint statement.

Sterling rallied to a 5- month peak against a currency basket after data on Tuesday showed inflation in Britain jumped to 4 percent, twice the Bank of England's target, prompting Governor Mervyn King to acknowledge that rates might rise more rapidly than economists had expected.

Analysts now expect a rate rise in May and the next market focus is the BoE's inflation report due at 1030 GMT.

Sterling last traded at around $1.6165, nearing a high of $1.6170 overnight. The pound has gained some 3 percent against the U.S. dollar so far this year.

Against the yen, the dollar last traded at around 83.75, not far from an eight-week high of around 83.90 yen hit the previous day, helped by the recent rise in U.S. Treasury yields.

Japan's benchmark Nikkei average .N225 extended gains, rising 0.4 percent, and broke above 10,800 points for the first time since May as a softer yen lifted exporters and countered declines on Wall Street.

Tokyo Electron (8035.T) and Advantest (6857.T) were among the exporters whose shares gained. Both stocks were up by around 1.7 percent. A weaker yen makes Japanese exports cheaper and boosts company profits. .T

"It's a weaker yen that's lifting sentiment, but foreign investors are also picking up domestic-demand stocks," said Shinichiro Matsushita, a market analyst at Daiwa Securities, adding that financials were attracting foreign interest due to the Nikkei's strong performance.

High trade volumes also lifted the mood. The Tokyo stock exchange's first section has seen more than 2.0 billion shares change hands for seven consecutive sessions.

ASIAN STOCKS STEADY

Some traders said Japanese retail investors were behind the yen's recent mild drop. The dollar could rise further as it is seen supported with bids at levels near 84.40 yen and 84.20 yen, they said.

"Bids are starting to emerge on the downside and I wouldn't be surprised if the dollar were to make another try for the upside," said a trade for a Japanese brokage in Tokyo.

The euro edged up against the dollar, standing at around $1.3530 as of 0253 GMT.

Elsewhere in Asia, MSCI's Asia Pacific share index excluding Japan .MIAPJ0000PUS edged up 0.1 percent.

Hong Kong stocks rose 0.7 percent, while the Korea Composite Stock Price Index (KOSPI) .KS11 advanced 0.3 percent.

Its forecast for a 5 to 9 percent rise in current fiscal-year revenue also modestly surpassed Street targets.

Dell executives expressed full confidence that the company could sustain the boost in profitability, but some analysts questioned that premise. Dell posted a gross margin of 21.5 percent -- about 15 percent above the average forecast -- aided in part by falling prices of items like memory chips and LCD screens.

Shares of Round Rock, Texas-based Dell leapt nearly 6 percent to $14.70 after hours, following a brief trading suspension, from a regular Nasdaq close of $13.91. It had spiked briefly as much as 8 percent after the news.

Shares of larger rival Hewlett-Packard Co, which would also benefit from lower input costs and better corporate spending, gained more than 1 percent to $48.54 after hours.

Dell's servers and networking revenue climbed 16 percent, while commercial personal computer revenue rose 10 percent, as businesses spent to upgrade outdated hardware.

"There's still a majority of our customers who have not begun the corporate refresh, or who have started and still have a long way to go," Chief Financial Officer Brian Gladden said in an interview.

Although Gladden said he expects component costs to remain favorable through the first half of the new year, he downplayed input cost declines as the central factor in Dell's improved profitability. He stressed supply chain improvements and disciplined pricing. Dell's quarterly operating income was its highest in 5 years.

But many analysts still need convincing that Dell's turnaround effort is bearing fruit.

"I still don't think in the long term they can sustain gross margins based on lower input costs because that will get competed away," said Michael Holt, an analyst at Morningstar.

Dell still pulls in most of its revenue from selling PCs. It has benefited from a surge in spending as businesses of all sizes spend again on equipment after two years of recession.

Dell is waging an uphill battle to diversify its revenue base: it wants to become a larger player in the data center equipment market, a provider of IT services, and gain a toehold in the fast-growing mobile space with tablets and smartphones.

But it faces stiff competition in those markets from the likes of International Business Machines Corp, HP and Apple Inc

Investors have remained on the sidelines as Dell's turnaround plan proceeds in fits and starts. Analysts say they are still looking for the company to prove it can sustain higher levels of profitability.

(For a graphic comparing Dell's share price performance and other key metrics with rivals, click r.reuters.com/kyr97r)

Energy and basic materials stocks led the slide in the S&P 500's worst day since January 28, and billionaire investor Ken Fisher told Reuters he is "more neutral on stocks than I've been in years."

Volume remained light with 7.1 billion shares changing hands on the combined New York Stock Exchange, NYSE Amex and Nasdaq, below last year's estimated daily average of 8.47 billion.

U.S. retail sales data cast doubts on a rebound in consumer spending, a vital part of the economic recovery, and import prices jumped, while a gauge of manufacturing in New York State climbed to its highest in eight months.

The S&P retail index .RLX closed flat after being down earlier in the day.

"More and more companies are worried about the price of input," said Kim Caughey Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

"There's a lot of conflicting data. Low volume means there's no conviction either way: whenever you really don't have an idea, you're not trading," she said.

The Dow Jones industrial average .DJI lost 41.55 points, or 0.34 percent, at 12,226.64. The Standard & Poor's 500 Index .SPX fell 4.31 points, or 0.32 percent, at 1,328.01. The Nasdaq Composite Index .IXIC slipped 12.83 points, or 0.46 percent, at 2,804.35.

Shares of JDS Uniphase Corp (JDSU.O) dropped 10.2 percent to $25.05 after brokerage Bernstein cut its rating on the stock to "market-perform" from "outperform." An index of chipmakers' shares .SOX was down 1.1 percent.

The S&P energy sector .GSPE carried most of the day's losses, falling 1.1 percent. Brent crude oil fell more than 1 percent on the U.S. retail sales data and as China continued to struggle to keep inflation at bay.

Exxon Mobil (XOM.N) was down 2.3 percent to $82.97, following a 2.5 percent gain on Monday.

The S&P 500 has nearly doubled from lows hit in March 2009, but waning volume suggests investors are having a harder time finding value.

"I'd not be overly optimistic right now," said Fisher, chief investment officer and founder of Fisher Investments, a money management firm in Woodside, California that oversees about $43 billion in assets.

The spread between daily winners and losers has been narrowing for months, suggesting more of the market's gains are coming from fewer stocks -- generally a sign of a weakening market.

On Tuesday, declining stocks outnumbered advancing ones on the NYSE and the Nasdaq by a ratio of about 8 to 5.

But some analysts questioned whether its gross margin of 21.5 percent -- about 15 percent above the average forecast -- was sustainable given a big boost from the falling prices of memory chips for computers and other production costs.

Shares of Round Rock, Texas-based Dell leapt nearly 5 percent to $14.60 after hours, following a brief trading suspension, from a regular Nasdaq close of $13.91. It had spiked briefly as much as 8 percent after the news.

Chief Financial Officer Brian Gladden said he was confident about the company's ability to sustain a sharp gain in its margins.

Others disagreed.

"I still don't think in the long term they can sustain gross margins based on lower input costs because that will get competed away," said Michael Holt, an analyst at Morningstar.

"But they're definitely benefiting a bit from their focus to build out services and enterprise technology."

Dell, which is trying to shed a reputation for specializing in low-margin computers, still pulls in most of its revenue from selling personal computers. It has benefited from a surge in spending as businesses of all sizes spend again on equipment after two years of recession.

Its non-GAAP gross margin came in well ahead of analysts' estimate of 18.6 percent. Revenue rose 5 percent to $15.7 billion, matching Wall Street's target.

HOW SUSTAINABLE?

The No. 2 PC maker on Tuesday reported a net profit of $927 million, or 48 cents a share, in the fiscal fourth quarter ended January 28, up from $334 million, or 17 cents a share, a year ago. Excluding items, Dell earned 53 cents a share, beating the average estimate of 37 cents a share, according to Thomson Reuters I/B/E/S.

For fiscal 2012, Dell expects revenue growth of 5 to 9 percent, and non-GAAP operating income growth of 6 to 12 percent.

The quarterly results offered some affirmation of Dell's efforts to turn itself around and boost profitability.

Dell is waging an uphill battle to diversify its revenue base: it wants to become a larger player in the data center equipment market, a provider of IT services, and gain a toehold in the fast-growing mobile space with tablets and smartphones.

But it faces stiff competition from the likes of International Business Machines Corp, Hewlett-Packard Co and Apple Inc.

While shareholders of the German exchange will control 60 pct of the new company and 10 of 17 board seats, there are suspicions in Germany that NYSE management will be in the driver's seat. There are also concerns in the United States that the New York Stock Exchange will lose influence and independence.

That tension could raise obstacles to regulatory approval of the deal, which values the two-century-old icon of American capitalism at about $39 a share.

No name has yet been given to the combined group. NYSE Euronext Chief Executive Duncan Niederauer, who will have the same title at the combined group, said talks were continuing to find a name that would address political concerns on both sides of the Atlantic.

Niederauer acknowledged at a news conference that the name of the new company would be an "emotional decision" for everyone involved. He said he hoped to give the board some name possibilities in a month or two.

Reto Francioni, CEO of Deutsche Boerse, will become chairman of the combined companies. He argued at a news conference that the deal, which he said "reshapes our entire industry," would strengthen the roles of both New York, as the financial capital of the world, and Frankfurt, as a European financial capital.

Still, U.S. Senator Charles Schumer, who first raised the name issue over the weekend, has been insisting that NYSE should come first in the name of the group, which will have headquarters in both New York and Frankfurt.

Schumer reiterated those concerns after the deal was announced on Tuesday, calling the NYSE a "preeminent brand" and saying there was no reason for it not to come first in the name chosen for the combined companies.

The combined entity will have more than $20 trillion in annual trading volume, and operations in the United States, Germany, France, Britain, Amsterdam, Portugal and Belgium.

Under the terms of the deal, each NYSE Euronext share will be exchanged for 0.47 share in the new company; Deutsche Boerse shares will be swapped on a one-for-one basis, the companies said in a statement.

A source familiar with the deal said 55 percent of the shareholders in the new company will be from the United States, with 11 percent from Germany, 11 percent from the UK and 23 percent from the rest of the world.

The exchanges face intense competition in their traditional stock-trading business from younger trading venues geared toward today's increasingly dominant high-speed electronic traders.

NYSE -- created by brokers and merchants who met under a buttonwood tree in lower Manhattan -- is one of several exchanges that have responded by investing in technology and moving into more profitable derivatives trading.

But the Big Board's once dominant market share in U.S. equities trading has steadily dwindled in recent years, and NYSE Euronext shares are down 61 percent since early 2007, compared with an 8.3 percent drop in rival Nasdaq OMX.

"This merger -- if approved -- creates a true thousand-pound gorilla," said Herbie Skeet, analyst at exchange consultancy Mondo Visione. "The new entity will be a global powerhouse, which will dominate derivatives trading in Europe and be a major force in U.S. and European cash equities trading."

Volume was lighter than average, totaling about 3.5 billion shares around midday. Volume on Monday was the lowest so far this year.

Energy stocks have been among the market's leaders in the recent rally, with the S&P energy index up 45 percent since the start of September, while the benchmark S&P 500 is up 26 percent.

On the day, Exxon Mobil (XOM.N) was down 2.2 percent to $83.06, while the S&P energy index .GSPE was down 1.1 percent, as oil prices slumped.

Technology, too, has outperformed the broader market in that period, with the S&P tech index .GSPT up 33 percent.

Shares of JDS Uniphase Corp (JDSU.O) dropped 7.5 percent to $25.81 after Bernstein cut its rating on the stock to "market-perform" from "outperform."

An index of semiconductors .SOX was down 0.8 percent.

"It's getting a little sloppy after the huge run we've had," said Robert Francello, head of equity trading for Apex Capital in San Francisco.

But he said the market could still end higher. "No matter what we throw at it, there seems to be a bid for the market."

Shares of NYSE Euronext (NYX.N) fell 3.3 percent at $38.14 after it agreed to be acquired by Deutsche Boerse (DB1Gn.DE) to create the world's largest exchange operator. The deal dodges key questions that could threaten its completion.

Shares of other U.S. exchanges also fell, including Nasdaq OMX Group Inc (NDAQ.O), off nearly 5 percent at $28.16.

The Dow Jones industrial average .DJI was down 34.59 points, or 0.28 percent, at 12,233.60. The Standard & Poor's 500 Index .SPX was down 3.10 points, or 0.23 percent, at 1,329.22. The Nasdaq Composite Index .IXIC was down 6.81 points, or 0.24 percent, at 2,810.37.

Data showing a smaller-than-expected rise in retail sales raised doubts about a rebound in consumer spending, a vital part of the economic recovery.

But the S&P retail index .RLX was up 0.2 percent after being down earlier in the day.

The retail sales report contrasted with recent economic data, most of which has suggested the recovery was gaining traction.

In other economic data, a gauge of manufacturing in New York State climbed to its highest in eight months in February, while U.S. import prices jumped at nearly double the forecast rate as energy costs shot up in another sign of creeping inflationary pressures.

(Editing by James Dalgleish)

Shares of NYSE Euronext (NYX.N), fell 1.3 percent at $38.92 after it agreed to be acquired by Deutsche Boerse (DB1Gn.DE) to create the world's largest exchange operator. The deal dodges key questions that could threaten its completion.

Shares of other U.S. exchanges also fell, including Nasdaq OMX Group Inc (NDAQ.O), off 4.8 percent at $38.23.

Sales at U.S. retailers in January fell more than forecast, likely reflecting the effects from snowstorms that had slammed large parts of the country.

The S&P retail index .RLX dipped 0.1 percent.

The report contrasted with recent economic data, most of which has suggested the recovery was gaining traction.

"If you look at what the equity market has done over the last (several months), you would assume the recovery is self-sustaining," said Subodh Kumar, an investment strategist based in Toronto. The S&P 500 is up 26 percent since September.

But the day's data was a "splash of cold water" on that view.

The Dow Jones industrial average .DJI dropped 56.04 points, or 0.46 percent, at 12,212.15. The Standard & Poor's 500 Index .SPX was off 5.73 points, or 0.43 percent, at 1,326.59. The Nasdaq Composite Index .IXIC declined 13.43 points, or 0.48 percent, at 2,803.75.

Volume totaled about 1.68 billion shares, average for morning trade.

Shares of JDS Uniphase Corp (JDSU.O) fell 6.8 percent to $25.98 after Bernstein cut its rating on the stock to "market-perform" from "outperform."

In other economic data, a gauge of manufacturing in New York State climbed to its highest level in eight months in February, while U.S. import prices jumped at nearly double the forecast rate as energy costs shot up in another sign of creeping inflationary pressure.

(Additional reporting by Edward Krudy; editing by Jeffrey Benkoe)

Though dressed up as a merger, the deal, which values NYSE at about $10.2 billion, is effectively a takeover, with 60 percent of the new company to be owned by the German company's shareholders and 10 of 17 board seats bound for the Frankfurt group's management.

But while no name has yet been given to the combined group, the two parties have reached one important compromise. The group will have headquarters in both New York and Frankfurt.

And in a bid to keep worried U.S. lawmakers happy, the chief executive role will go to NYSE head Duncan Niederauer, while Reto Francioni of Deutsche Boerse will become chairman.

The combined powerhouse will have more than $20 trillion in annual trading volume and operations in Germany, France, Britain, Amsterdam, Portugal, Belgium, and the United States.

Under the terms of the deal NYSE Euronext stock will be exchanged for 0.47 shares in the new company, while Deutsche Boerse shares will be swapped on a one-for-one basis, the exchanges said in a statement on Tuesday.

At a 60-40 ownership split, the 55 percent of shareholders in a combined company would be from the United States, with 11 percent from Germany, 11 percent from the UK and 23 percent from the rest of the world, a source familiar with the deal said.

The exchanges face intense competition in their traditional stock-trading business from younger trading venues geared toward today's increasingly dominant high-speed electronic traders.

NYSE and others have responded by investing heavily in technology and moving into more profitable derivatives trading.

Together, Deutsche Boerse's Eurex unit and NYSE Euronext's London-based Liffe unit would dominate European exchange-based futures trading, with more than 90 percent overall, raising antitrust questions among market regulators.

CONSOLIDATION WAVE

After a few years' hiatus that included the financial crisis and the beginning of a global regulatory revamp, the world's exchange operators are back in the takeover game.

Singapore Exchange bid for Australia's ASX late last year. And last week, London Stock Exchange said it would buy Toronto Stock Exchange operator TMX Group, just hours before Deutsche Boerse and NYSE Euronext said they were in advanced talks.

Local concerns over the wave of consolidation sweeping the industry surfaced in Asia on Tuesday as Singapore Exchange tweaked its $7.9 billion bid for ASX to allow more Australian directors onto a combined board in an attempt to win over skeptical Australian politicians.

Nationalism has long been one of the biggest hurdles to exchange mergers. The marketplaces are often symbols of national pride and important to attracting business and capital.

Sales at U.S. retailers in January were pressured by anemic receipts at building materials and restaurant outlets, likely reflecting the effects from snowstorms that had slammed large parts of the country.

The S&P retail index .RLX fell 0.1 percent. Family Dollar Stores Inc (FDO.N) dropped nearly 1 percent to $43.43, while Saks Inc (SKS.N) lost 0.7 percent to $12.44.

"I don't know if today's data was soft enough to take the legs from underneath the market, but interestingly it's indicative of some spending exhaustion occurring in the consumer space," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

The Dow Jones industrial average .DJI dropped 48.28 points, or 0.39 percent, to 12,219.91. The Standard & Poor's 500 Index .SPX fell 4.39 points, or 0.33 percent, to 1,327.93. The Nasdaq Composite Index .IXIC lost 8.78 points, or 0.31 percent, to 2,808.40.

In other economic reports, a gauge of manufacturing in New York State climbed to its highest level in eight months in February. Separate data showed U.S. import prices jumped at nearly double the forecast rate as energy costs shot up in another sign of creeping inflationary pressure.

In company news, Deutsche Boerse (DB1Gn.DE) and NYSE Euronext (NYX.N) said they reached agreement on a combination to create the world's largest exchange operator. NYSE Euronext fell 5.4 percent at $37.29.

China reported 4.9 percent inflation, below forecasts, but price pressures could force the central bank to keep tightening monetary policy.

(Additional reporting by Ryan Vlastelica; editing by Jeffrey Benkoe)

A key compromise is an agreement to headquarter the combined group in both New York and Frankfurt. 60 percent of the group will be owned by Deutsche Boerse shareholders and the remainder by NYSE investors. However there was no name given to the proposed group.

The new company will have a single tier board, with 10 seats out of 17 going to Deutsche Boerse but with NYSE Euronext taking the all-important chief executive post.

Under the terms of the deal NYSE Euronext stock will be exchanged for 0.47 shares in the new company, while Deutsche Boerse shares will be swapped on a one-for-one basis, the exchanges said in a statement on Tuesday.

As previously trailed, NYSE head Duncan Niederauer will be chief executive and Reto Francioni of Deutsche Boerse will take on the role of chairman.

The exchanges face intense competition in their traditional stock-trading business from younger trading venues geared toward today's increasingly dominant high-speed electronic traders.

NYSE Euronext and others have responded by investing heavily in technology and expanding into more profitable derivatives trading.

The merger deal creates an unprecedented exchange powerhouse with more than $20 trillion in annual trading volume and operations in Germany, France, Britain, Amsterdam, Portugal, Belgium, and the United States.

The pair promised the takeover would cut combined costs by 300 million euros ($400 million) a year. The companies' combined market capitalization is about $26 billion.

Together, Deutsche Boerse's Eurex unit and NYSE Euronext's London-based Liffe unit would dominate European exchange-based futures trading, with more than 90 percent overall, raising antitrust questions among market regulators.

After a few years off that included the financial crisis and the beginning of a global regulatory revamp, the world's exchange operators are back in the takeover game.

Singapore Exchange bid for Australia's ASX late last year, and, last week, London Stock Exchange announced it would acquire Canada's TMX Group -- hours before Deutsche Boerse and NYSE Euronext said they were in advanced talks.

Local concerns over the wave of consolidation sweeping the industry surfaced in Asia on Tuesday. Singapore Exchange tweaked its $7.9 billion bid for rival ASX to allow more Australian directors onto a combined board in an attempt to win over skeptical Australian politicians.

Nationalism has long been one of the biggest hurdles to exchange mergers. The marketplaces are often symbols of national pride and important to attracting business and capital.

Regulators are paying close attention to the latest round of deals, including the London Stock Exchange's bid to take over Toronto Stock Exchange operator TMX Group.

Such local concerns over a wave of consolidation sweeping the industry surfaced in Asia on Tuesday. Singapore Exchange tweaked its $7.9 billion bid for rival ASX to allow more Australian directors onto a combined board in an attempt to win over skeptical Australian politicians.

Nationalism has long been one of the biggest hurdles to exchange mergers. The marketplaces are often symbols of national pride and important to attracting business and capital.

Despite this, key details of the Deutsche Boerse and NYSE tie-up have been hammered out and a definitive deal is to be announced later on Tuesday, with a press briefing planned for 1500 GMT, several sources familiar with the plans said.

Earlier Deutsche Boerse's powerful supervisory board met to discuss the deal, a member of the board told Reuters. But several thorny issues have yet to be addressed, adding to concerns on both sides of the Atlantic.

The companies are likely to avoid delicate issues such as a name, and specific details about where job cuts would fall as a way to keep national and political forces on board.

Deutsche Boerse and NYSE Euronext declined to comment.

Regulators are paying close attention to the latest round of deals, including a bid by the London Stock Exchange to take over Toronto Stock Exchange operator TMX Group.

Exchange users have also raised red flags over the proposed deals, which they fear will limit competition.

"Euronext and Deutsche Boerse are still screwing us on fees for clearing, the closing auctions and small and mid-cap trading -- the areas where they still have virtual monopolies," said the head of markets at a large European bank, who declined to be named. "A merger is concerning because together they will be more powerful and better placed to protect these monopolies."

The LSE deal with TMX has already run into foreign ownership concerns in Canada.

But despite rumblings about Middle Eastern ownership in Ontario, LSE shareholder Borse Dubai, which is owned by the ruler of the Gulf Arab emirate, has not been asked to trim its 20 percent stake, a source familiar with the matter said.

Singapore Exchange's willingness to give ground and award an equal number of board seats to Australians and Singaporeans in the combined entity shows how local sensibilities are being overcome as the pressure to consolidate rises. The value of SGX's offer has not been changed under the new proposal.

"All the resistance ... has been political. The steps taken today should address some of those political issues," said Mark Nathan, portfolio manager at Arnhem Investments.

WHO NEXT?

Such local concerns over a wave of consolidation sweeping the industry surfaced in Asia on Tuesday. Singapore Exchange tweaked its $7.9 billion bid for rival ASX to allow more Australian directors onto a combined board in an attempt to win over skeptical Australian politicians.

Nationalism has long been one of the biggest hurdles to exchange mergers. The marketplaces are often symbols of national pride and important to attracting business and capital.

Despite this, key details of the Deutsche Boerse and NYSE tie-up have been hammered out and a definitive deal is to be announced later on Tuesday, with a press briefing planned for 1500 GMT, several sources familiar with the plans said.

Earlier Deutsche Boerse's powerful supervisory board met to discuss the deal, a member of the board told Reuters. But several thorny issues have yet to be addressed, adding to concerns on both sides of the Atlantic.

The companies are likely to avoid delicate issues such as a name, and specific details about where job cuts would fall as a way to keep national and political forces on board.

Deutsche Boerse and NYSE Euronext declined to comment.

Regulators are paying close attention to the latest round of deals, including a bid by the London Stock Exchange to take over Toronto Stock Exchange operator TMX Group.

Exchange users have also raised red flags over the proposed deals, which they fear will limit competition.

"Euronext and Deutsche Boerse are still screwing us on fees for clearing, the closing auctions and small and mid-cap trading -- the areas where they still have virtual monopolies," said the head of markets at a large European bank, who declined to be named. "A merger is concerning because together they will be more powerful and better placed to protect these monopolies."

The LSE deal with TMX has already run into foreign ownership concerns in Canada.

But despite rumblings about Middle Eastern ownership in Ontario, LSE shareholder Borse Dubai, which is owned by the ruler of the Gulf Arab emirate, has not been asked to trim its 20 percent stake, a source familiar with the matter said.

Singapore Exchange's willingness to give ground and award an equal number of board seats to Australians and Singaporeans in the combined entity shows how local sensibilities are being overcome as the pressure to consolidate rises. The value of SGX's offer has not been changed under the new proposal.

"All the resistance ... has been political. The steps taken today should address some of those political issues," said Mark Nathan, portfolio manager at Arnhem Investments.

WHO NEXT?

Wall Street was lifted on Monday by modest gains in the S&P 500 and the Nasdaq, but the lowest volumes so far this year indicated an equities rally may be peaking after rising 13 percent since December.

Retail sales figures for January, due at 8:30 a.m. EST, may provide further direction for equities. Economists polled by Reuters expected a 0.6 percent rise in retail sales, matching December results.

Peter Cardillo, chief market economist at Avalon Partners in New York, said he expected retail sales to confirm a picture of a steadily improving economy that has helped drive equities recently.

"I don't expect the market to collapse and I don't expect the market to gain much strength today, but I do believe we could tack on another positive session," he said.

S&P 500 futures fell 1.1 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dropped 6 points, and Nasdaq 100 futures were off 1.5 points.

Other data due later Tuesday included import and export prices as well as the New York Fed's manufacturing index for February.

China reported 4.9 percent inflation, below forecasts, but price pressures excluding food were at their strongest level in at least a decade and could force the central bank to keep tightening monetary policy. Gold and copper prices gained, supported by a weaker dollar.

In company news, Deutsche Boerse (DB1Gn.DE) and NYSE Euronext (NYX.N) were expected to announce a deal to create the world's largest exchange operator, putting aside thorny political issues. NYSE Euronext shares were halted, pending news.

Host Hotels & Resorts Inc (HST.N), the owner of over a hundred high-end hotels operated by such brand owners as Marriott International Inc (MAR.N), Starwood Hotels & Resorts Worldwide Inc (HOT.N) reported a higher quarterly revenue. Marriott's shares gained 4.9 percent to $43 in premarket trading.

U.S. Steel Corp (X.N) rose 2.7 percent to $61.95 premarket after Goldman Sachs raised its rating on the stock to "buy" from "neutral," saying the company was well placed to gain from rising steel prices and demand.

(Editing by Jeffrey Benkoe)

Shares on Wall Street were lifted on Monday by modest gains on the S&P .SPX and the Nasdaq .IXIC, though low volumes indicated the equity rally may be reaching a peak.

Major economic data, including retail sales figures for January, will likely provide further direction for equities during the session.

Economists polled by Reuters expected retail sales to have risen by 0.6 percent in January, matching December's rise.

Other data due included import and export prices as well as the New York Fed's manufacturing index for February, both set for 1330 GMT.

In company news, Deutsche Boerse (DB1Gn.DE) and NYSE Euronext (NYX.N) were expected to announce a deal to create the world's largest exchange operator, putting to one side the thorny political issues that pose a challenge to its successful completion.

General Motors (GM.N) will add over 20 new and upgraded models in China, its CEO said, as the U.S. automaker looks to use its leading position in the world's biggest car market to reclaim the No.1 carmaker spot from Toyota Motor Corp.

Biotechnology company Genzyme Corp (GENZ.O) and French drugmaker Sanofi-Aventis SA (SASY.PA), which is seeking to acquire it, are still haggling over price.

Major companies to report quarterly earnings include Dell (DELL.O), with analysts predicting the technology group to show earnings per share of 37 cents, up from 28 cents a year ago.

On the economic front, China reported 4.9 percent inflation, matching figures widely cited by traders in financial markets on Monday.

The pan-European FTSEurofirst 300 .FTEU3 index of top shares edged up in early trade, as upbeat earnings companies including British lender Barclays (BARC.L) and French food group Danone (DANO.PA) helped underpin investor confidence.

(Reporting by Harpreet Bhal; Editing by Dan Lalor)

Highlighting how political concerns are weighing on a wave of consolidation sweeping the industry, Singapore Exchange tweaked its $7.9 billion bid for rival ASX to allow more Australian directors onto a combined board as it seeks to win the support of Australian lawmakers wary of ceding control of the local exchange.

Nationalism is one of the biggest hurdles to the industry mergers as exchanges are often seen as symbols of national pride and important to attracting business and capital. The deals, including a bid by the London Stock Exchange to take over Toronto Stock Exchange operator TMX Group, face intense scrutiny from regulators and politicians around the world.

A number of key details in the Deutsche Boerse and NYSE Euronext merger have been hammered out, sources said. A definitive agreement is expected to be announced on Tuesday, one source said.

But several difficult issues have yet to be addressed, which is likely to add to concerns being raised on both sides of the Atlantic.

Politics is also seen as the driver behind the revised SGX plan that gives an equal number of board seats to Australians and Singaporeans in the combined entity compared to less than half for the ASX under the earlier offer.

The bourses said in a joint statement on Tuesday there would also be three "international" directors although they would initially come from the SGX board. The size of the board has been whittled down from 15 to 13.

"All the resistance to the deal has been political. The steps taken today should address some of those political issues," said Mark Nathan, portfolio manager at Arnhem Investments. "It clearly carves out and maintains some sovereignty within Australia, and there should be a lot less resistance to the deal in its new form."

There is no change to the value of the SGX offer and ASX shareholders will still hold about 36 percent of the company under the new proposal.

WHO NEXT?

Similar political and regulatory hurdles may threaten the Deutsche Boerse-NYSE Euronext tie-up.

"The biggest question mark in general is obviously the European political and regulatory landscape coming out of this," one source said.

The Frankfurt- and New York-based companies were center stage in the merger frenzy that erupted last week and heated up on Monday as Brazil's BM&FBovespa said it was eyeing its own prospects and as traders buzzed that CME Group could jump into the fray.

Fox Business Network reported that CME Group, currently the world's top derivatives exchange group, may make a hostile bid for NYSE Euronext, citing bankers.

A spokesman for Chicago-based CME declined to comment. CME officials have been guiding investors away from expectations that the company would do a merger deal.

The dollar was slightly weaker against a basket of major currencies .DXY, while the euro hovered near three-week lows as concern about euro zone debt rose up again.

World stocks as measured by MSCI .MIWD00000PUS were up 0.2 percent, not far from last week's 30-month highs. Japan's Nikkei .N225 logged a 10-month closing high and Europe's FTSEurofirst 300 was up a quarter of a percent.

A raft of data -- including euro zone fourth-quarter GDP, German business sentiment and UK inflation -- lay ahead during the session.

China's inflation was lower than expected at 4.9 percent in the year to January.

Although price pressures continued to build and will force the central bank to stick to its course of gradual monetary tightening, the report took the edge off concern about firmer action.

"The data probably slightly eased expectations of immediate tightening, although in the overall scheme of things, this doesn't change the fact that China is still in a tightening phase," said Etsuko Yamashita, chief economist at SMBC.

Inflation pressures, particularly in emerging markets, have been part of the motivation this year for investors to move into developed stock markets.

A number of those countries are also having problems, however, particularly Britain. U.S. consumer price data, meanwhile, will be reported on Thursday.

In Europe, the French and German economies expanded by less than expected in the fourth quarter, data showed on Tuesday, suggesting the euro zone may not have accelerated out of a third-quarter slowdown.

EURO PERIPHERY

The euro steadied, supported by Asian demand, but was held back by skepticism that European leaders would come up with a quick and effective solution to tackle the euro zone's debt and banking problems.

It hovered near a three-week low hit a day earlier when reports about ailing lender WestLB triggered another outbreak of worries on euro zone debt and banking problems.

Peripheral euro zone yield spreads have been widening in the past week on uncertainty over a rescue package for the region, and there was some disappointment after a meeting of European finance ministers on Monday.

"Initial optimism at the beginning of the year over a comprehensive bailout package in the euro zone is now starting to fade away," said Lee Hardman, currency strategist at BTM UFJ.

Highlighting how political concerns are weighing on a wave of consolidation sweeping the industry, Singapore Exchange tweaked its $7.9 billion bid for rival ASX to allow more Australian directors onto a combined board as it seeks to win the support of Australian lawmakers wary of ceding control of the local exchange.

Nationalism is one of the biggest hurdles to the industry mergers as exchanges are often seen as symbols of national pride and important to attracting business and capital. The deals, including a bid by the London Stock Exchange to take over Toronto Stock Exchange operator TMX Group, face intense scrutiny from regulators and politicians around the world.

A number of key details in the Deutsche Boerse and NYSE Euronext merger have been hammered out, sources said. A definitive agreement is expected to be announced on Tuesday, one source said.

But several difficult issues have yet to be addressed, which is likely to add to concerns being raised on both sides of the Atlantic.

Politics is also seen as the driver behind the revised SGX plan that gives an equal number of board seats to Australians and Singaporeans in the combined entity compared to less than half for the ASX under the earlier offer.

The bourses said in a joint statement on Tuesday there would also be three "international" directors although they would initially come from the SGX board. The size of the board has been whittled down from 15 to 13.

"All the resistance to the deal has been political. The steps taken today should address some of those political issues," said Mark Nathan, portfolio manager at Arnhem Investments. "It clearly carves out and maintains some sovereignty within Australia, and there should be a lot less resistance to the deal in its new form."

There is no change to the value of the SGX offer and ASX shareholders will still hold about 36 percent of the company under the new proposal.

WHO NEXT?

Similar political and regulatory hurdles may threaten the Deutsche Boerse-NYSE Euronext tie-up.

"The biggest question mark in general is obviously the European political and regulatory landscape coming out of this," one source said.

The Frankfurt- and New York-based companies were center stage in the merger frenzy that erupted last week and heated up on Monday as Brazil's BM&FBovespa said it was eyeing its own prospects and as traders buzzed that CME Group could jump into the fray.

Fox Business Network reported that CME Group, currently the world's top derivatives exchange group, may make a hostile bid for NYSE Euronext, citing bankers.

A spokesman for Chicago-based CME declined to comment. CME officials have been guiding investors away from expectations that the company would do a merger deal.