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Blankfein was called to testify by prosecutors in Manhattan federal court about Goldman's results in 2008, and a crucial investment that September by billionaire Warren Buffett at the height of the financial crisis -- secrets that prosecutors said were given to Rajaratnam.

The Goldman CEO's appearance on the witness stand for more than three hours on Wednesday intensified the focus on what is already the largest Wall Street insider trading case since the prosecutions of speculator Ivan Boesky and junk bond financier Michael Milken in the 1980s. Rajaratnam, a one-time billionaire, could face 20 years in prison if convicted.

Blankfein replied "yes" when prosecutor Andrew Michaelson asked whether disclosure of boardroom talks by former director Rajat Gupta went against the bank's confidentiality policies. The CEO gave his answer after a recording was played of an FBI wiretap in which Gupta and Rajaratnam discussed possible Goldman deal activity.

Rajaratnam, 53, looked pensive as Blankfein spoke. Following the end of morning testimony, Blankfein shook Rajaratnam's hand after jurors had left the courtroom.

Blankfein called Galleon a "prominent client" for Goldman but said he did not regularly communicate with the hedge fund. Goldman has not been accused of wrongdoing.

Prosecutors say Rajaratnam, the founder of Galleon Group, illegally made $45 million from 2003 to 2009 in stock trades based on tips from insiders, including highly placed executives in corporate America.

KEEPING INFORMATION PRIVATE

Blankfein, 56, told jurors that Gupta broke Goldman policies by telling Rajaratnam about the board's discussion in June 2008 of a possible merger with the commercial bank Wachovia Corp or an insurance company.

Asked whether American International Group Inc was under discussion, Blankfein said, "I don't have a specific recollection, but it probably would have been."

Prosecutors played an FBI tap of Rajaratnam's mobile phone from July 29, 2008, in which Gupta and Rajaratnam discussed Goldman, Wachovia and AIG.

But during cross-examination, Rajaratnam lawyer John Dowd showed Blankfein press reports from June 24 and July 11 of 2008 suggesting that Goldman might buy a commercial bank.

Rajaratnam's defense is that his trades were based on his own research and publicly available information. He has vowed to clear his name at trial.

Blankfein also said it would have been confidential information that Goldman on September 23, 2008, would get a $5 billion injection from Buffett's Berkshire Hathaway Inc, given that investors would view it as a "very positive sign."

He also said it would have been confidential to disclose the following month that Goldman was on its way to a surprise fourth-quarter loss, its first as a public company.

Blankfein was called to testify by prosecutors in Manhattan federal court. His appearance intensifies the focus on what is already the largest U.S. insider trading case in decades.

Dressed in a dark suit, white shirt and blue tie, the Goldman chief walked swiftly to the witness stand in the tense, packed courtroom of U.S. District Judge Richard Holwell.

He hesitated slightly when asked for his name, saying "Lloyd, uh, Blankfein," before spelling it for the court reporter.

He told jurors that former director Rajat Gupta violated Goldman confidentiality policies by revealing to Rajaratnam the board's June 2008 discussion of a possible merger with Wachovia Corp or an insurance company.

Asked whether American International Group Inc was the insurer, he said, "I don't have a specific recollection, but it probably would have been." Prosecutors played a July 2008 wiretapped phone call in which Gupta and Rajaratnam discussed Goldman.

Prosecutors have accused the Sri Lankan-born Rajaratnam, a one-time billionaire, of illegally making $45 million from 2003 to 2009 based on tips from insiders, some of whom were highly placed executives in corporate America.

Rajaratnam, 53, has said his trades were based on his own research at his Galleon Group hedge fund and publicly available information. He has vowed to clear his name at trial.

Gupta was accused by the U.S. Securities and Exchange Commission of tipping Rajaratnam about Goldman's 2008 financial results, as well as a $5 billion investment in September 2008 by Warren Buffett's Berkshire Hathaway Inc at the height of the financial crisis. The SEC said Rajaratnam reaped $17.5 million from the illicit tips.

Blankfein testified that it is important for Goldman directors not to disclose private discussions about the publicly-traded bank's business.

"We don't want information about our company to get out until it's appropriate," he said.

He also said premature disclosure inhibits the "free exchange" of ideas among directors, who might otherwise fear that what they say privately could become public.

Gupta, a former worldwide managing director at the McKinsey & Co consulting firm, has denied the SEC's accusations and sued the agency last week.

Goldman has not been accused of wrongdoing. Blankfein, 56, has been Goldman's chief executive since June 2006.

During a break, Blankfein grinned and leaned on the jury box. He made a joke to the court staff and looked relaxed. Rajaratnam, meanwhile, stared straight ahead, expressionless.

The Commerce Department said on Wednesday sales dropped 16.9 percent to a seasonally adjusted 250,000 unit annual rate, the lowest since records began in 1963, after an upwardly revised 301,000-unit pace in January.

Sales plunged to all-time lows in three of the four regions last month. Economists polled by Reuters had forecast new home sales edging up to a 290,000-unit pace last month from a previously reported 284,000 unit rate.

"It's been a disappointing February for home sales and there are no signs of a turnaround," said Kurt Karl, chief U.S. economist at Swiss Re in New York.

"We're going to have a continuing slowdown in the next few months, but people will start to feel better in the second half of the year and construction and sales should do better later this year and into next year."

U.S. stock indexes fell on the data, while government debt prices rose marginally. The dollar was little changed.

Compared to February last year sales were down 28 percent.

An oversupply of homes exacerbated by an increasing flood of properties falling into foreclosure is frustrating recovery in the housing market. Data on Monday showed a steep drop in sales of previously owned homes in February, with prices tumbling to a near nine-year low.

HOUSE PRICES PLUNGE

The median sales price for a new home plunged 13.9 percent last month to $202,100, the lowest since December 2003. Compared with February last year, the median price fell 8.9 percent. Persistent price declines could dampen hopes of a pick-up in sales during spring.

In the face of stiff competition from foreclosed properties, which typically sell well below market value, builders are holding back on new construction.

At February's sales pace, the supply of new homes on the market rose to 8.9 months' worth, the highest since August, from 7.4 months' worth in January.

There were 186,000 new homes available for sale last month, matching the prior month's inventory. That was still the smallest supply of home since 1967.

Despite lean inventories, new home sales will likely continue to bounce along the bottom for a while until the glut of previously owned homes is whittled down. New home sales account for less than 10 percent of overall sales.

According to the National Association of Realtors, new home prices have been running 45 percent higher than existing home prices, a premium that is historically about 15 percent, indicating previously owned homes are selling well below the cost of construction.

Separately, the Mortgage Bankers Association said applications for home loans rebounded 2.7 percent last week.

(Reporting by Lucia Mutikani; Additional reporting by Ellen Freilich in New York; Editing by Andrea Ricci)