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U.S. crude eased almost 50 cents, or 0.5 percent, to just under $105 a barrel, as traders assessed efforts to stem fighting in Libya that threatens to spiral into civil war.

A rally in the euro ran out of steam as investors who had been betting against the dollar took profits.

Market players have been focused on the prospect of a European Central Bank interest rate rise as early as next month, but the euro zone debt crisis returned to the fore on Monday, when Moody's slashed Greece's sovereign rating by three notches.

The euro struggled to make much headway in Asia after its rally stalled just above $1.40 overnight, helping an oversold dollar edge off four-month lows against a basket of major currencies.

The euro traded around $1.3965, down from a high of around $1.4036 on Monday, while the dollar index .DXY was steady around 76.517.

"We are still USD bears, but the scale of speculative market net shorts in the USD is significant," said Peter Frank, strategist at Societe Generale.

"With the aggregate net short at $39.5 billion, surpassing even the pre-Lehman 2007 peak, the USD could benefit from profit-taking in the near-term."

Japan's Nikkei benchmark edged higher as investors covered short positions after selling heavily on Monday, but analysts said gains may be limited as concerns about turmoil in the Middle East and oil prices persist.

"The market's fundamentals are recovering on corporate earnings so sentiment for the longer term is good. But for the short-term, the market may see some correction due to continuing worries about developments in the Middle East," said Hajime Nakajima, deputy general manager at Cosmo Securities.

Japan's Nikkei .N255 rose 0.38 percent and Hong Kong's Hang Seng Index .HSI was up 0.24 percent helped by a broadly stronger energy sector and gains in Chinese large caps.

Seoul shares .KSII were up 0.96 percent after sharp falls in the previous session, lifted by shipbuilders and technology plays.

After an early fall, MSCI's index of Asia Pacific shares outside Japan .MIAPJ0000PUS was up 0.28 percent helped by gains in energy and industrials.

"It will be difficult for risk markets such as equities and industrial commodities to push into higher ranges whilst the threat to oil supplies remains elevated," said Ric Spooner, chief market analyst at CMC Markets in Australia.

U.S. stocks fell on Monday, with the S&P 500 .SPX down 0.8 percent and the Nasdaq .IXIC off 1.4 percent.

The prospects of further unrest in oil-rich Middle Eastern countries has driven investors to seek safe-haven assets. Spot gold traded around $1,432.30 an ounce, down a little from a record $1,444.40 scaled on Monday.

(Additional writing by Alex Richardson; Editing by Nick Macfie)

China, Brazil and other fast-growing nations have struggled to contain inflation and control heavy inflows of investment money. Although the IMF has been warning for months of the risks of price pressure, the comments by the Fund's first deputy managing director, John Lipsky, suggested the IMF is growing increasingly concerned.

"For the emerging economies, growing at 6.5 to 7 percent, their margins of excess capacity have been largely used up, and as a result we're starting to see incipient signs of overheating," Lipsky told Reuters Insider in an interview.

After the global economic slump of 2008 and 2009, the recovery took divergent paths, with emerging markets powering ahead while advanced economies merely trudged along.

With growth and interest rates remaining unusually low across the developed world, investors have flocked to emerging markets, bringing much-needed capital but also a risk of inflation.

Rising oil prices have compounded the inflation problem, but Lipsky said the IMF has not cut its growth forecast because it thinks the oil price spike will prove temporary.

He said until unrest spread to oil-producing Libya, much of the rise in oil prices in late 2010 and early 2011 reflected an improved economic outlook. However, the latest worries about supply disruptions created a "fear factor" that drove oil above $100 a barrel, which if sustained would pose a bigger threat to growth.

Rising food prices are also worrisome, particularly for poorer countries where food consumes a larger percentage of household budgets, he said. The cost of food was one of many reasons behind the recent upheaval in Egypt and Tunisia.

"We have to be concerned even in places where there is no political upheaval," Lipsky said. "The social strains and real difficulties for poor residents in many economies is something that has to be attended to."

WHAT TO DO?

For emerging markets, cooling growth without inflicting too much damage on the global economy will require some delicate maneuvering.

China has made curbing inflation its top policy priority this year. Its finance minister said earlier on Monday China will ensure that spending on social priorities does not fan inflationary fires.

Separately, Zhu Min, special adviser to the IMF's managing director, said China's loan growth was too strong and addressing that was key to safely slowing down the economy.

"It's a fundamental challenge," he said during a presentation to an economists' group meeting in Arlington, Virginia. "So that's a concern, overheating. In China, slowing down economic growth is important."

Brazil and some other emerging markets have increased taxes on foreign investors or raised banks' reserve requirements to try to slow inflows of investment money and ward off inflationary pressures.

The Nasdaq composite index .IXIC dropped 1.4 percent and closed just above its 50-day moving average, a widely followed technical level that if breached could signal more declines in the sector that has helped lead the market rally.

Wells Fargo downgraded the semiconductor sector, noting its strong upward moves. The PHLX semiconductor index .SOX has risen 130 percent since March 2009. The index also is up 45 percent since the start of September, while the broad S&P 500 has advanced about 25 percent in that period.

Also weighing on Nasdaq, communications equipment maker Ciena Corp (CIEN.O) forecast weaker-than-expected sales, sending its shares sliding 9.2 percent to $25.98.

Investors "are jumping on an opportune seasonal slowdown that typically happens between March and July for tech," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco. "It has been one of the leadership groups since August."

Brent crude has been on investors' radar as analysts and economists gauge how it might hurt economic demand if prices continue to rise. Crude edged lower on Monday after hitting its highest since September 2008 on conflict in the Middle East. Brent crude dipped 0.8 percent to $115.20 a barrel.

The Dow Jones industrial average .DJI dropped 79.85 points, or 0.66 percent, to 12,090.03. The Standard & Poor's 500 Index .SPX fell 11.02 points, or 0.83 percent, to 1,310.13. The Nasdaq Composite Index .IXIC lost 39.04 points, or 1.40 percent, to 2,745.63.

Wells Fargo said downgrading the semiconductor sector to "market weight" from "overweight" was "an indication of a moderate though still optimistic view."

Even though gains in semis have outpaced the broader market, the S&P 500 and the semiconductor index have been moving in the same direction, which could mean further declines in the sector and spell more of the same for the overall market.

A 20-day correlation between the S&P 500 and the semiconductor index .SOX was at 0.92, with a reading of 1 suggesting a perfect correlation.

Tech has been a favorite of analysts, along with other cyclical sectors.

The CBOE volatility index .VIX rose 8.2 percent to 20.63. Joe Kinahan, chief derivatives strategist at TD Ameritrade in Chicago said investors were insuring against a possible fall below 1,300 for the S&P 500.

"If we break this level the S&P could continue all the way down to 1,275. So many investors are trying to get ahead of this by paying up for portfolio protection in the form of index and equity options," he said.

Worries about the effects of recent higher oil prices on the economy have been a negative for stocks, but analysts recommend buying the energy sector.

"Industrials are ultimately affected by energy prices, so a sector that works as a hedge would be the energy sector," said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management in Champaign, Illinois.

The offer, at a 60 percent premium to Bulgari's average share price over the past month, could herald the return of consolidation in the luxury market, which bounced back from the 2009 slump much faster than analysts expected.

Bulgari will benefit from world No. 1 LVMH's global retail network, improve margins through cost-sharing and help the owner of Louis Vuitton handbags close the gap with bigger watch and jewelry companies Richemont (CFR.VX) and Swatch (UHR.VX).

Analysts said the high price was justified by the savings.

"The high price is probably explained by the fact that there were rival suitors," said fund manager Gerard Moulin from Delubas Asset Management in Paris.

Rival bidders included the Richemont group and PPR (PRTP.PA), sources close to the groups told Reuters on Monday. Both groups declined to comment.

Any acquisition of family-controlled assets usually sees a buyer paying a sizeable premium to convince families to sell.

The deal valued Bulgari on a ratio of enterprise value to sales of about 3 times, compared with other potential takeover candidates Burberry (BRBY.L) on 2.7 times and Tiffany (TIF.N) on 2.3 times, using forward sales estimates.

"This multiple is in line with historic deals in the sector and the recent acquisition of (online luxury fashion retailer) Net-a-porter by Richemont," which was roughly 3 times enterprise value to sales, Deutsche Bank said in a note.

The total value of the deal, including 600 million euros of convertible bonds, was 4.3 billion. It will be paid for with 1.9 billion euros of new LVMH shares and 2.4 billion cash to buy out minority shareholders, financed half with debt and half with LVMH's available cash.

Spearheaded by Arnault, LVMH was built on acquisitions and its brands also include Chaumet and Fred jewelry, Celine and Kenzo fashion, Hennessy cognac and Moet & Chandon champagne.

"Bulgari is one of the best known jewelry brands in the world, with lots of potential to grow on the back of LVMH's global distribution reach and financial muscle," Bernstein luxury analyst Luca Solca said.

The deal will double LVMH's watch and jewelry business to make up 10 percent of its sales and about 6 percent of operating profit, analysts estimated.

Analysts believe the deal could lead rival groups to embark on a fresh consoldation wave, encouraged by the strong sales visibility they are getting from big emerging luxury markets such as China.

Bulgari (BULG.MI), established in 1884, had long been seen as a potential target having weakened its finances by embarking on big store investments when its sales were falling. There was regular speculation Swiss group Swatch could take it over.

The move increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs.

Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.

"The likelihood of a default or distressed exchange has risen since its last downgrade of the Greek government debt rating in June 2010," Moody's said in a statement.

The downgrade sent a ripple of anxiety around credit markets, raising the price of insuring Greek, Portuguese and Spanish debt against default and the risk premium on holding Greek bonds rather than benchmark German bunds.

Portuguese government bond yields hit a euro lifetime high of 7.65 percent, heightening pressure on Lisbon to seek an EU/IMF bailout in the wake of Greece and Ireland.

Ahead of a euro zone summit on Friday, European Monetary Affairs Commissioner Olli Rehn made the case for reducing interest rates paid by Athens and Dublin on euro zone rescue loans and extending the maturities to enable them to achieve debt sustainability.

Moody's cited risks to Greece's fiscal consolidation program from a revenue shortfall and difficulties in reforming healthcare and state-owned companies.

Greece signed a 110 billion euros ($154 billion) rescue package with the EU and IMF last May to avoid default in exchange for draconian austerity measures which it has begun to implement. But many see the repayment terms as too onerous.

"The sheer magnitude of the task becomes ever more apparent," said Sarah Carlson, Moody's lead analyst on Greece.

Even if it fulfils the entire three-year adjustment program, its debt is projected to reach 158 percent of gross domestic product in 2013, a level widely seen as unsustainable.

"There is a risk that conditions attached to any kind of continuing support after 2013 could take solvency criteria into account that the country may not be able to satisfy, and therefore could result in a restructuring of existing debt," Carlson told Reuters.

"HIGHLY SPECULATIVE"

The European Central Bank, which has intervened repeatedly since last May to calm bond markets by buying euro zone peripheral sovereign debt, said it made no purchases last week in the run up to Friday's euro zone summit.

Moody's was the first of the three major ratings agencies to classify Greek debt as "highly speculative."

That well-known line from the classic 1967 movie "The Graduate" may sum up the recent investment strategy of some top hedge fund managers, including James Dinan and David Einhorn.

A wave of managers snapped up shares of LyondellBasell Industries, which makes chemicals like propylene and polyethylene, the stuff that goes into plastics.

The popularity of plastics and raw materials signals that hedge funds are diversifying commodity bets beyond gold, the darling of 2010 returning 30 percent, as inflationary pressures seep into food and energy.

Top hedge funds' bets on LyondellBasell and other raw materials producers like Penn West Petroleum and Repsol YPF SA suggest investors are seeking out commodity-related plays as the global economy wiggles out of a bruising recession.

LyondellBasell -- the third-largest chemical maker in the United States -- was certainly hurt by the downturn, declaring bankruptcy in early 2009.

But after LyondellBasell emerged back onto the public markets in October, Dinan's York Capital Management and Einhorn's Greenlight Capital, along with Andreas Halvorsen's Viking Global Investors and Thomas Steyer's Farallon Capital Management disclosed their stakes in LyondellBasell.

"LyondellBasell produces a commodity that goes into a lot of things we use every day," said Matthew Eagan, a portfolio manager at $150 billion Loomis Sayles in Boston.

Propylene is a molded plastic used in making rope, clothing, car parts and many other common products. Polyethylene is the most common plastic, used in products from shopping bags to bullet-proof vests.

Global growth is on the rebound, led by nearly 10 percent growth in China, whose urbanization and industrialization have turned it into the world's top consumer of many commodities. This growth and the climbing price of oil could trigger half a trillion dollars of commodity investments by the end of this year, according to Barclays Capital.

"Inventory levels generally remain tight, supply disruptions continue to add further supply pressure for multiple commodities, and demand generally continues to grow in emerging markets and recover in developed markets," said Nelson Louie, global head of commodities at Credit Suisse Asset Management.

Staples like wheat, rice and corn have reached record prices, and gold jumped above $1,400 an ounce recently.

To be sure, there are obvious risks that could slow growth and put a damper on many commodity prices. Rising political tension in the Middle East and North Africa have sent oil surging 7 percent since December. Though still manageable, further increases could deal a significant blow to the economic rebound, another Barclays report said.

Still, the "Smart Money 30," a group of some of the largest stock-picking equity hedge funds, is betting big on commodities. The group is comprised of funds reporting the highest dollar value of equities in quarterly filings. Funds with more than 200 positions are excluded to avoid quantitative and rapid trading strategies.

Collectively, the group had almost 7 percent of its reported assets tied up in the materials sector at the end of 2010, double the sector's weight in the Standard & Poor's 500 index, according to data compiled by Thomson Reuters.

Brent crude rose 1.6 percent to $117.84 a barrel and U.S. oil futures were up 2 percent to $106.43 as fighting in Libya disrupted the nation's oil supplies and on renewed concerns of wider disruptions in the region.

Government troops seeking to dislodge rebels from Libya's coast advanced on an oil town amid accelerating humanitarian efforts to prevent civilian suffering from worsening and a mass refugee exodus.

OPEC is assessing the oil market to determine whether it should hold an extraordinary meeting, Qatar's Energy Minister said. But he added there was no supply shortage in the market.

In major oil producer Saudi Arabia, security forces detained at least 22 minority Shi'ite Muslims who protested last week over what they said was discrimination, according to activists.

S&P 500 futures gained 5.2 points and were above 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 rose 40 points, and Nasdaq 100 futures climbed 14 points.

Citigroup raised its price forecasts for Brent and West Texas intermediate crude for 2011 and 2012, in part citing a "fear premium" on threats of continued output disruptions.

In mergers-and-acquisition news, the London Stock Exchange (LSE.L) is eyeing a takeover of U.S. rival Nasdaq OMX Group Inc (NDAQ.O), just weeks after the London bourse announced a merger with the Toronto stock exchange, the Sunday Times reported.

European equities edged higher, with Alcatel-Lucent SA (ALUA.PA) leading technology shares higher after a brokerage upgrade, but strong oil prices limited market gains and caused Asian stocks to decline. <.

Wall Street erased most of its weekly gains on Friday as fears of more geopolitical turmoil and higher oil prices threaten to stifle rallies in coming weeks.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)