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The euro nursed heavy losses early in Asia while the yen gained across the board as worries about sovereign debt problems in Europe and the United States prompted investors to unwind carry trades.

Spot gold prices firmed below their record high, as the S&P move and other developments further stoked investors' interest in bullion.

The S&P cut in outlook on United States debt jacks up pressure on the Obama administration and Congress to slash the yawning federal budget deficit.

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, said the move signals at least a one-in-three chance that it could eventually cut its long-term AAA rating on the United States within two years.

Japan's benchmark Nikkei average .N225 was down 1.2 percent, or 113.89 points at 9,442.76, while the broader Topix .TOPX shed 1.0 percent to 827.88.

The euro fell to as low as 116.41 yen -- the lowest since March 30. The dollar also underperformed the yen, falling to a near three-week low around 82.16, before recovering slightly to last stand at 82.59.

Spot gold gained 0.8 percent to $1,493.29 an ounce by 8:19 p.m. EDT, below the record high of $1,497.20 hit in the previous session.

NYMEX crude for May delivery, which expires on Tuesday, was down 6 cents at $107.06 a barrel by 8:35 p.m. EDT, after settling down $2.54 at $107.12 a day earlier.

Brent crude for June fell 1 cent to $121.60 a barrel versus a $121.61 settlement in the previous session.

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, slapped a negative outlook on the country's top-notch credit rating and said there's an at least a one-in-three chance that it could eventually cut the country's long-term AAA rating.

A downgrade, which would leave Germany and France with a higher rating, would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.

If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields would crank up borrowing costs for consumers and businesses. That would threaten to hurt the economy as it recovers from the worst recession since World War II.

"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets and has a short position on U.S. government debt.

Major U.S. stock indexes shed more than 1 percent after the announcement. Longer-dated government bond prices initially fell but recovered in afternoon trade and the dollar rose.

More immediate fiscal problems in Greece, traders said, hurt the euro and supported some U.S. assets.

The cost of insuring Treasury debt against default at one point on Monday neared a 2011 high, though it was well below lofty levels hit two years ago when fears of a double-dip U.S. recession raged.

BUDGET BATTLE

The threat of a downgrade raises the stakes in the struggle between President Obama's Democratic administration and his Republican opponents in the House to get control over a nearly $1.5 trillion budget deficit and $14.27 trillion debt burden.

The White House last week announced plans to trim $4 trillion from the deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich. Congressional Republicans want deeper spending cuts and no tax increases.

The deficit problem has become crushing since the financial crisis of 2008. Now for every dollar the federal government spends, it takes in less than 60 cents in revenue.

A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.

Even so, Austan Goolsbee, the top economist at the White House, downplayed S&P's move, telling CNBC on Monday it was a "political judgment" that "we don't agree with."

Investors also focused on Greece, where financial markets are increasingly convinced the country will have to renegotiate the terms of its public debt. Greek officials denied that some form of debt rescheduling was imminent.

The CBOE Volatility Index .VIX rose 11.2 percent, after earlier climbing as much as 24.5 percent, its largest daily percentage jump since February 22. It closed on Friday at its lowest since July 2007.

S&P downgraded its outlook on the United States credit rating to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

"We're a little surprised that the VIX is as low as it is, since market risks have risen and there's been some complacency," said David Joy, chief market strategist at Columbia Management in Boston, which oversees $347 billion. Joy added that Columbia Management had taken some short-term exposure off the table.

The stock market's vulnerability was demonstrated by its strong sell-off. In comparison, the reactions of the U.S. Treasury debt and dollar markets were more subdued. See and

"The behavior of the bond market suggests that we could get a rebound in stocks, at least one related to the S&P news," Joy said. "I'm not so sure we'll get a rebound related to Europe."

The Dow Jones industrial average .DJI was down 147.35 points, or 1.19 percent, at 12,194.48 The Standard & Poor's 500 Index .SPX was down 14.65 points, or 1.11 percent, at 1,305.03. The Nasdaq Composite Index .IXIC was down 32.34 points, or 1.17 percent, at 2,732.31.

In Monday's sell-off, the S&P 500 fell below 1,300 for the first time since March 24. Short-term support is seen near the 1,285 area.

On Friday, the S&P 500 fell for a second week as concern spread that growth expectations may have to be trimmed.

As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities .GSPU, consumer staples .GSPS and healthcare .GSPA posted the smallest losses in Monday's slide.

Citigroup Inc (C.N) rose 0.9 percent to $4.46 after it reported a first-quarter profit that was slightly higher than expected, while Eli Lilly & Co (LLY.N) fell 0.6 percent to $35.78 on concerns about looming generic drugs competition.

Mitch Rubin, chief investment officer at RiverPark Advisors in New York, said the day's earnings suggested volatility in the near term.

"Market movement will be driven by earnings, and we've seen a lot of mixed results," Rubin said. "There's been disappointment about bank results."

China raised banks' required reserves on Sunday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world's second-largest economy.

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, said the move signals at least a one-in-three chance that it could eventually cut its long-term AAA rating on the United States.

A downgrade, which would leave Germany and France with a higher rating, would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.

If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields would crank up borrowing costs for consumers and businesses. That would threaten to hurt the economy as it recovers from the worst recession since World War II.

"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets and has a short position on U.S. government debt.

Major U.S. stock indexes shed more than 1 percent after the announcement. Longer-dated government bond prices initially fell but recovered in afternoon trade and the dollar rose.

More immediate fiscal problems in Greece, traders said, hurt the euro and supported some U.S. assets.

The cost of insuring Treasury debt against default at one point on Monday neared a 2011 high, though it was well below lofty levels hit two years ago when fears of a double-dip U.S. recession raged.

BUDGET BATTLE

The threat of a downgrade raises the stakes in the struggle between President Obama's Democratic administration and his Republican opponents in the House to get control over a nearly $1.5 trillion budget deficit and $14.27 trillion debt burden.

The White House last week announced plans to trim $4 trillion from the deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich. Congressional Republicans want deeper spending cuts and no tax increases.

The deficit problem has become crushing since the financial crisis of 2008. Now for every dollar the federal government spends, it takes in less than 60 cents in revenue.

A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.

Even so, Austan Goolsbee, the top economist at the White House, downplayed S&P's move, telling CNBC on Monday it was a "political judgment" that "we don't agree with."

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, said the move signals at least a one-in-three chance that it could cut its long-term rating on the United States within two years.

A downgrade would further undermine the status of the United States as the world's economic powerhouse. It would also push up mortgage rates and tighten credit conditions across the economy, possibly derailing a U.S. recovery from the worst recession since World War II.

"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets.

Longer-dated U.S. government bond prices fell, while major U.S. stock indexes shed more than 1 percent. But the dollar held gains against the euro.

The cost of insuring U.S. Treasury debt against default neared a 2011 high, though it remained well below lofty levels reached in March 2009 when fears of a double-dip U.S. recession flared.

The move will push the Obama administration and Congress to work harder to come up with an aggressive long-term plan to cut a nearly $1.5 trillion federal budget deficit, equal to about 9.8 percent of output.

"It's a wake up call that we need to do something," said Axel Merk, president and portfolio manager of Merk Hard Currency Fund in Palo Alto, California. S&P is "absolutely correct that this is something serious that needs to be addressed."

TROUBLE FOR TREASURIES

Outstanding public U.S. debt has swelled to more than 60 percent of total output in the aftermath of the 2007-2009 financial crisis. With a budget deficit running at nearly 10 percent of output and expected to grow, that total is expected to swell further.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said in a release.

The picture had become bleak enough to prompt PIMCO, the world's largest bond fund, to announce in February it had sold all U.S. Treasuries in its $236 billion Total Return Fund.

Bill Gross, PIMCO's chief investment officer, said he expected interest rates to climb, the dollar to fall and the United States to lose eventually its AAA credit rating.

The Obama administration last week announced plans to trim $4 trillion from the budget deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich.

A top administration official on Monday reiterated U.S. commitment to act and said S&P underestimated that resolve.

Investors also were focused on Greece where financial markets are increasingly convinced the country will have to renegotiate the terms of its public debt, recognizing

that its economy cannot grow fast enough to service a burden that is set to swell to 160 percent of national output.

"You saw the dollar gain on worries over Greek sovereign debt restructuring," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey. "That has added to nervousness (because) this market has had trouble dealing with a stronger dollar vis-a-vis the euro."

The 200-day correlation between the S&P 500 and the euro is near 0.7 and has been positive since the fourth quarter, with a perfect correlation scoring 1.

Greek officials denied again on Monday that some form of debt rescheduling was imminent.

S&P downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

The CBOE volatility index .VIX, better known as Wall Street's fear gauge, surged more than 20 percent, its largest percentage jump since March 16.

The S&P 500 fell for a second week on Friday as concern spread that growth expectations may have to be trimmed. As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities .GSPU, consumer staples .GSPS and healthcare .GSPA posted the smallest losses.

Caterpillar Inc (CAT.N), hurt by both expectations of ballooning funding costs and by China's move to harness liquidity, tumbled 4.2 percent to $102.69.

Referring to the S&P credit action, Krosby said, "Ultimately it's going to cost companies more money to fund. It makes the cost of capital go up."

The Dow Jones industrial average .DJI dropped 220.39 points, or 1.79 percent, to 12,121.44. The Standard & Poor's 500 Index .SPX fell 21.84 points, or 1.65 percent, to 1,297.84. The Nasdaq Composite Index .IXIC slid 52.25 points, or 1.89 percent, to 2,712.40.

"Over the past number of weeks we've seen indications the market has started to get more defensive," Krosby said. "The market is poised for a recalibration unless we see a turnaround in guidance from companies in the next two to three weeks."

Among the companies reporting earnings Monday, Halliburton Co (HAL.N), the world's second-largest oilfield services company, fell 1.1 percent to $46.31 and drugmaker Eli Lilly (LLY.N) fell 1.4 percent to $35.49.

China raised banks' required reserves on Sunday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world's second-largest economy.

While the credit rating agency maintained the country's top AAA credit rating, it said authorities have not made clear how they will tackle long-term fiscal pressures.

S&P said the move signals at least a one-in-three chance that it could cut its long-term rating on the United States within two years.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said in a release.

The move will ratchet up the pressure on the Obama administration and Congress to come up with an aggressive long-term plan to chop a nearly $1.5 trillion deficit, equal to about 9.8 percent of output. It could push up U.S. borrowing costs and put further pressure on the dollar and the government's ability to finance the budget shortfall.

A downgrade to the U.S. AAA credit rating would also cause a spike in mortgage rates and tighten credit conditions across the economy. That would likely derail the economy's recovery from the worst recession since World War II.

"The U.S. debt situation got a reality check this morning from the move by S&P," said John Kilduff, partner at Again Capital in New York. "Only precious metals will be seen as attractive in the aftermath of the outlook downgrade."

MARKETS REACT

Despite the potential implications of the S&P announcement, longer-dated U.S. government bond prices fell modestly, while major U.S. stock indexes showed a sharper reaction, shedding more than 1 percent in early trade.

Outstanding public U.S. debt has swelled to more than 60 percent of total output in the aftermath of the 2007-2009 financial crisis. With a budget deficit running at nearly 10 percent of output and expected to grow, the total is expected to swell further.

The Obama administration last week announced plans to trim $4 trillion from the budget deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich.

A top administration official reiterated U.S. commitment to act on Monday and said S&P underestimated that resolve.

"We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation," said Mary Miller, assistant Treasury secretary for financial markets.

The U.S. dollar managed to hold gains against the euro on Monday, and traders said debt problems in some European countries were lending some support to the U.S. currency.

Even so, the greenback fell about 5 percent against major currencies this year, and record low interest rates together with the S&P move will do little to make it more attractive, said Kathy Lien, director of research at GFT Forex.

"Even though I don't think an actual downgrade would occur, in this very sensitive or vulnerable time for the U.S. dollar, it's enough to spook investors from holding or buying U.S. dollars," she aid.

(Editing by Frank McGurty)

* Citigroup Inc (C.N), off 0.9 percent to $4.38 before the opening bell, is expected to report a drop in quarterly profit and revenue on Monday, as an uncertain trading environment and weak consumer loan demand hinder its efforts to move past the financial crisis. During the week of April 18, 110 S&P 500 companies are expected to report earnings.

* Halliburton Co (HAL.N), the world's No. 2 oilfield services company, advanced 2.8 percent to $48.15 in premarket trading after posting first-quarter results.

* Eli Lilly & Co (LLY.N) climbed 1.7 percent to $36.62 after the drugmaker reported better-than-expected first-quarter sales and earnings, fueled by overseas sales of its prescription medicines.

* Also due to report results on Monday is Texas Instruments (TXN.N).

* Athens repeated it has no plans to restructure its debt, denying a Greek media report it had already requested talks with its lenders as mounting speculation that it would need to cut a deal hit debt markets and the euro.

* China raised banks' required reserves for the fourth time this year on Sunday, stepping up efforts to fight high inflation in the world's second-largest economy.

* S&P 500 futures fell 9 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 fell 74 points and Nasdaq 100 futures fell 15.25 points.

* Healthcare stocks will be in the spotlight after Swiss medical device maker Synthes (SYST.VX) confirmed it is in merger talks with Johnson & Johnson (JNJ.N). Reports said the U.S. company was in talks to buy it for about $20 billion. J&J shares edged up 0.7 percent to $60.97 in light premarket trade.

* NYSE Euronext (NYX.N) would likely want Nasdaq OMX Group (NDAQ.O) to offer a massive fee to guarantee that its takeover bid will pass antitrust regulatory muster before the NYSE is willing to engage in deal talks, two sources with knowledge of the matter said.

* European shares extended losses, with a key index slipping into negative territory for the year, as growing concerns over debt troubles in the euro zone periphery prompted investors to shun risky assets. .EU

* Stocks in Asia ex-Japan remained flat, with investors unconvinced that China's latest moves to cool its economy would hurt the global recovery.

* Encouraging economic indicators sent U.S. stocks higher on Friday but the S&P 500 fell for a second straight week, and some in the market pointed to strong resistance building around 1,340.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

Analysts on average expect the third-largest U.S. bank to report first-quarter profit of 9 cents per share, according to Thomson Reuters I/B/E/S. That compares with a year-earlier profit of $4.4 billion, or 15 cents per share.

Citigroup is slowly climbing out of the massive hole it dug for itself in the run-up to the financial crisis. In January, the bank posted net income of $10.6 billion for 2010, its first annual profit since 2007.

In March, the bank announced a reverse-stock split, which will reduce the number of shares it has outstanding, and reinstated a nominal dividend. The government has shed all of the Citigroup common shares it acquired over the course of three rescues of the bank.

Now, Chief Executive Vikram Pandit has to prove that Citigroup can move past recovery to growth, despite broad challenges facing the banking industry's attempts to boost profits. Net revenue is expected to drop 19 percent from a year earlier, to about $20.5 billion.

Larger rivals JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N) both struggled with shrinking loan books and falling revenue as they reported quarterly results last week. Both banks powered their profits largely by releasing reserves they had set aside for bad loans.

Citigroup's investment banking revenue may also be hurt by a weak trading environment. The stock market during the quarter sagged on Middle Eastern political upheaval, a Japanese earthquake and tsunami that sent the yen to record highs, and markets that were broadly unpredictable.

JPMorgan Chase's bond trading unit performed better than expected last week. But Bank of America's bond trading revenues slumped almost 35 percent from a year earlier, dampening investor hopes that other investment banks would follow JPMorgan Chase's lead.

Citigroup's shares closed down 0.23 percent at $4.42 on Friday. They have lost about 7 percent since the beginning of 2011.

The bank plans to boost its share price to about $45 -- and drastically cut the number of shares it has outstanding -- with a 1-for-10 reverse stock split scheduled for early May.

(Reporting by Maria Aspan, Editing by Bernard Orr)

* European stocks were down 0.4 percent in morning trade, led lower by banking stocks such as Societe Generale (SOGN.PA) and BBVA (BBVA.MC), on growing concern Greece could be forced to restructure its debt.

* Greek daily Eleftherotypia said on Monday Greece told the IMF and the European Union earlier this month that it wants to restructure its debt and discussions on the issue are expected to start in June. The report was later denied by a Greek finance ministry official.

* On Sunday, China raised banks' required reserves for the fourth time this year, stepping up efforts to fight high inflation.

* Earnings will be in focus on Monday, with Citigroup (C.N) expected to report a drop in quarterly profit and revenue, as an uncertain trading environment and weak consumer loan demand hinder its efforts to move past the financial crisis.

* Other companies due to report results include Halliburton (HAL.N), Eli Lilly (LLY.N) and Texas Instruments (TXN.N).

* Dutch consumer electronics group Philips (PHG.AS) is hiving off its loss-making television business as its former flagship products can no longer compete with lower-cost rivals and have dragged down profit at Europe's biggest consumer electronics firm.

* Healthcare stocks will be in the spotlight after Swiss medical device maker Synthes (SYST.VX) confirmed it is in merger talks with Johnson & Johnson (JNJ.N) following reports the U.S. group was in talks to buy it for about $20 billion. Synthes stock gained 7 percent.

* NYSE Euronext (NYX.N) would likely want Nasdaq OMX Group (NDAQ.O) to offer a massive fee to guarantee that its takeover bid will pass antitrust regulatory muster, before the NYSE is willing to engage in deal talks, two sources with knowledge of the matter said.

(Reporting by Blaise Robinson; Editing by David Cowell)

A source familiar with the situation told Reuters at the weekend the two sides were in preliminary talks.

Buying Synthes would allow healthcare conglomerate J&J to further diversify its business, but a deal at $20 billion would be a premium of less than 9 percent to Synthes's market value on Friday, which some analysts said looked too low.

Shares in Synthes jumped 7 percent by 0740 GMT, after gaining 6.2 percent on Friday as talk circulated that J&J or Medtronic (MDT.N) could be looking to buy the company.

"In response to market speculation, Synthes Inc confirms that it is engaged in discussions with Johnson & Johnson about a potential business combination transaction," Synthes said in a statement.

Buying Synthes would be J&J's biggest acquisition and would help the cash-rich U.S. healthcare conglomerate further diversify its business by giving it a leading position in equipment to treat broken bones and trauma.

Synthes makes nails, screws and plates to fix broken bones as well as artificial spine discs.

CHAIRMAN IN DRIVING SEAT

Carla Baenziger, an analyst at Vontobel, said Synthes would double J&J's market share in spine work to about 30 percent, while in trauma it would be the clear market leader, with a share of around 57 percent, which could attract the attention of antitrust regulators.

Key to any deal will be Synthes Chairman Hansjoerg Wyss -- the second-richest person in Switzerland, with a net worth of $6.4 billion, according to Forbes -- who holds 40 percent of Synthes directly and another 8 percent through family trusts.

Given that big holding, an acquisition would need his buy-in, said ZKB analyst Sibylle Bischofberger, who is skeptical the deal will come off.

"We would be surprised if Hansjoerg agreed to this as he is still putting his heart and soul into Synthes. But, because he is 75 years old, he is maybe prepared to talk with Johnson & Johnson in order to find a good succession plan," she said.

CONSOLIDATION CRUNCH

The medical device sector has been consolidating as pharmaceutical companies try to find other revenue streams to compensate for drugs going off patent.

Other recent medical device deals include the $5.8 billion acquisition of Beckman Coulter by Danaher Corp (DHR.N), announced in February.

Equities were also weaker on disappointing European earnings and concerns about Japan's coming reporting season.

Gold and silver hit new record highs on inflation fears.

MSCI's all-country world stock index started what is in many places a holiday-shortened week trading down 0.3 percent.

The FTSEurofirst 300 was off half a percent and threatening to fall into the red for the year. Japan's Nikkei closed down 0.36 percent.

Finnish voters handed the anti-euro True Finns party a crucial role in parliament and possibly a path into government.

The significance is that Finland's parliament has the right to vote on European Union requests for bailout funds, meaning it could hold up costly plans to shore up Portugal and bring stability to debt markets.

Talk about Greek restructuring of its debt has also boiled up in recent weeks, including a Greek newspaper report on Monday that the government had asked the International Monetary Fund and European Union to start discussions on a restructuring. A Greek finance ministry source said the report was not true.

Equities, however, were also being hurt by an increasing concern that the current earnings season is not going to be as good as recent quarters.

"Company results haven't been that great and there are concerns that margins for a lot of companies are not going to rise. The bias for the market is more on the downside. There are a lot of risks and you may get a serious knock," said Koen De Leus, strategist at KBC Securities in Brussels.

Dutch consumer electronics major Philips Electronics posted lower-than-expected first-quarter net profit and said it would divest its struggling television business . Citigroup Inc is expected to report a drop in quarterly profit and revenue later, as an uncertain trading environment and weak consumer loan demand hinder its efforts to move past the financial crisis.

WEAKER EURO

The euro hit a 10-day low against the dollar on concerns about Greek restructuring and the Portuguese bailout.

It fell 0.8 percent to $1.4319

"The focus is turning toward the Greek situation and is acting as a dampener on the euro - it would be the first restructuring and the market has no idea when or whether it will happen," said Mic Ingenuus, currency strategist at Nordea in Copenhagen.