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The rating agency said costs related to the March 11 earthquake, tsunami, and nuclear power plant disaster will increase Japan's fiscal deficit above prior estimates by a cumulative 3.7 percent of GDP through 2013.

"We revised the outlook on the long-term rating on Japan to negative to reflect the potential for a downgrade if fiscal deterioration materially exceeds these estimates in the absence of greater fiscal consolidation," S&P said in a statement.

"In light of the evolving developments at the TEPCO nuclear power plant, in particular, we regard these projections as uncertain. Much will depend on Japan's political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future," it said.

The yen dipped shortly after the announcement with the dollar climbing to an intraday high of 81.781 yen.

"Given the huge damage from the earthquake, everyone knows that government spending will be massive," said Junko Nishioka, chief economist at RBS Securities Tokyo.

"We are not expecting big new government bond issuance for the coming second supplementary budget but political deadlock is likely to heighten the negative risk for sovereign debt."

S&P affirmed its long-term rating on Japan at AA minus.

The government's top spokesman, Yukio Edano, said that while fiscal steps are needed for quake relief, Tokyo will strive to maintain trust in Japanese government bonds.

(Reporting by Leika Kihara; Editing by Joseph Radford)

Shares were down 1.2 percent after Amazon reported a 32.8 percent decline in first-quarter profits. But that was a far cry from the big sell-off when the company last reported quarterly results and shares lost 9 percent.

"The concern that people had, that they were going to spend more than the Street was expecting, happened," said Ken Sena, analyst at Evercore Partners. "But when you look at the kind of growth acceleration they are showing on the top line and surpassing pretty much all Street expectations, I think that clearly shows what they are doing makes sense."

In recent years, Amazon has fought to win market share through its Prime program of low-cost delivery of its retail goods and by offering inexpensive electronic books for its Kindle e-reader.

More recently, it has invested heavily in areas such as "cloud computing" and "music lockers" where fans store their music on Amazon's servers, to take on its rivals Google Inc and Apple Inc.

Amazon expects that its investing to win market share will work. It forecast current-quarter revenue of $8.85 billion to $9.65 billion, above Wall Street expectations of $8.7 billion, according to Thomson Reuters I/B/E/S.

Chief Financial Officer Tom Szkutak told analysts on a conference call that Amazon has to spend money to develop the technology infrastructure and distribution centers and support its growth. Revenues nearly doubled between 2008 and 2010.

For the company's first quarter, which ended March 31, revenue was $9.857 billion, above the average analyst estimate of $9.57 billion and 38.2 percent above a year earlier.

In contrast, data firm eMarketer estimated that U.S. retail e-commerce sales rose 13 percent in the quarter compared with a year earlier.

Amazon's sales increase was led by a 45 percent rise in North America. Growth elsewhere was 27 percent excluding the effect of currency exchange. Szkutak said that would have been 32 percent if not for Japan's massive earthquake last month.

But net income in the first quarter was $201 million, or 44 cents per share -- down from $299 million, or 66 cents per share, a year earlier. That was far below the 61 cents expected by Wall Street, according to Thomson Reuters I/B/E/S.

The company posted an 18.2 percent dip in operating profit for the quarter, reflecting the costs of competing in the highly promotional retail environment, with beefed-up investment in its cloud computing services.

SHRINKING OPERATING MARGINS

Operating margin, which Amazon has said is the best gauge of its profitability given the variety of items it sells, came to 3.3 percent, in the middle of the range it had forecast.

Still, that was a significant drop from the 5.5 percent margin in the year ago quarter.

"It's not a revenue problem, it's a profit problem," said BGC Partners analyst Colin Gillis. "But at the end of the day, you've got to remember that these guys are a discount retailer."

Amazon said it expects operating profit in the current quarter of $95 million to $245 million, after costs of $180 million for stock-based compensation and amortization of assets. Amazon had operating profit of $207 million in the second quarter last year.

Amazon shares were off 1.2 percent at $180.17 in trading following the earnings report, after slipping 1.7 percent, or $3.12, to end at $182.30 in regular-session Nasdaq trading.

(Graphic: Amazon.com: income and sales growth r.reuters.com/pet29r)

(Additional reporting by Nichola Groom and Lisa Baertlein in Los Angeles and Jessica Wohl and Brad Dorfman in Chicago; Editing by Gary Hill)

The company also forecast revenue for the current quarter that would beat Wall Street estimates and profit margins were in line with the company's expectations, helping lift its shares in after-hours trading.

"The concern that people had, that they were going to spend more than the Street was expecting, happened," said Ken Sena, analyst at Evercore Partners. "But when you look at the kind of growth acceleration they are showing on the top line and surpassing pretty much all Street expectations, I think that clearly what they are doing makes sense."

The company has been willing to sacrifice some profitability to win customers and build its new businesses. It has invested heavily in areas such as "cloud computing" -- which allows companies to store data on its servers -- to take on its rivals Google Inc and Apple Inc.

Amazon is also laying out money to open new distribution centers and cement its lead as the world's largest online retailer.

For the company's first quarter, which ended March 31, revenue was $9.857 billion, above the average estimate of $9.57 billion and 38.2 percent above a year earlier.

Net income in the fourth quarter was $201 million, or 44 cents per share -- down from $299 million, or 66 cents per share, a year earlier. That was far below the 61 cents expected by Wall Street, according to Thomson Reuters I/B/E/S.

The company posted an 18.2 percent dip in operating profit for the quarter, reflecting the costs of competing in the highly promotional retail environment, with beefed-up investment in its cloud computing services.

Operating margin, which Amazon has said is the best gauge of its profitability given the variety of items it sells, came to 3.3 percent, in the middle of the range it had forecast.

But Amazon expects that its investing to win market share will pay off. It forecast current-quarter revenue of $8.85 billion to $9.65 billion, above Wall Street expectations of $8.7 billion, according to Thomson Reuters I/B/E/S.

Amazon said it expects operating profit in the current quarter of $95 million to $245 million. In the same quarter last year, Amazon had operating profit of $207 million.

Amazon shares were nearly flat following the earnings report, after slipping 1.7 percent, or $3.12, to end at $182.30 in regular-session Nasdaq trading.

(Reporting by Phil Wahba; Editing by Gary Hill)

Even so, the overall consumer confidence reading was low by historical standards, and in a reminder of some of the weaker spots in the economy, a separate report on Tuesday showed the housing market continues to struggle: home prices fell for an eighth straight month in February, inching closer to an April 2009 trough.

The Conference Board, an industry group, said its index of consumer attitudes rose to 65.4 in April from a revised 63.8 in March. The reading topped analysts' forecasts for 64.5. March was originally reported as 63.4.

The present situation index climbed to its highest since November 2008, rising to 39.6 from 37.5 the month before. The expectations index climbed to 82.6 from 81.3, and consumers' expectations for inflation in the coming 12 months fell to 6.3 percent from 6.7 percent.

Despite the fall in the proportion of those who said jobs were hard to get, to 41.8 percent from 44.4 percent the month before, the longer term view was mixed.

Those expecting more jobs in the next six months declined to 17.5 percent from 19.6 percent, while those anticipating fewer jobs in the months ahead also declined to 19 percent from 20.5 percent.

"Confidence improved in April, but consumers remain far from optimistic," Chris Low, chief economist with FTN Financial Group, wrote in a note.

Higher energy prices from the political unrest in the Middle East and North Africa have weighed on consumers lately and there has been debate over whether the price increases will be temporary.

"In our view, confidence is not likely to go up meaningfully until gas prices and unemployment come substantially down," Wells Fargo said in a note.

The U.S. economy faces new headwinds from soaring oil prices, U.S. Treasury Secretary Timothy Geithner said on Tuesday, but he said a forecast of 3 to 4 percent growth seemed reasonable.

HOUSING PRICES SCRAPE 2009 LOWS

The consumer data gave U.S. stocks a lift, as did solid earnings from bellwether companies.

Separate data on Tuesday showed the housing market continues to struggle as U.S. single-family home prices fell for an eighth straight month in February, inching closer to an April 2009 trough.

The S&P/Case-Shiller composite index of 20 metropolitan areas declined 0.2 percent in February from January on a seasonally adjusted basis, slightly better than economists' median forecast for a drop of 0.3 percent.

The 20-city composite index was at 139.27, holding just a hair above its 2009 low of 139.26. Average home prices across the United States are back to levels where they were in the summer of 2003, S&P said.

Prices in the 20 cities have fallen 3.3 percent year over year, in line with expectations.

"There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing," David Blitzer, chairman of the Index Committee at S&P Indices, said in a statement.

The glut of houses up for sale has kept prices low and the market has struggled to regain traction since a home buyer tax credit expired last spring.

Other data in the last week has suggested some stabilization in the market with sales of new and existing homes rising in March.

"House prices are still falling due to distressed sales. But the pace of price decline is slowing so things seem to be stabilizing," said Rudy Narvas, senior economist at Societe Generale in New York.

Focus was also on the Federal Reserve officials meeting Tuesday and Wednesday with the discussion likely to focus on the central bank's next move in its monetary stimulus policy.

The Fed looks certain to stick to its plan to complete its $600 billion bond-buying program in June and is unlikely to rush to tighten policy given an uncertain economic outlook.

(Additional reporting by Richard Leong; Editing by Padraic Cassidy)

Ford also said on Tuesday that last month's earthquake in Japan had "minimal" impact on its business.

Lewis Booth, Ford's chief financial officer, said that so far the automaker has lost about 12,000 to 14,000 vehicles of production in Asia, where it has shut several plants temporarily.

Ford beat expectations on Tuesday, which helped send the company's share up 3.5 percent to $16.09. Its fourth quarter 2010 results missed analyst expectations by a wide mark.

Any near-term production losses are likely to recover in late 2011 and into 2012. Production in Ford's business regions outside of Asia have not yet been changed.

Net income rose to $2.55 billion, or 61 cents a share, compared with $2.09 billion, or 50 cents a share, in the year earlier period. It was the highest first-quarter net income since 1998.

Excluding one-time items, it earned 62 cents a share, easily topping the 50 cents analysts polled by Thomson Reuters I/B/E/S had expected. It was the seventh straight quarter of operating profit.

Revenue rose to $33.1 billion from $28.1 billion last year. Analysts had expected $29.7 billion.

(Reporting by Bernie Woodall and Ben Klayman; Editing by Derek Caney)

The main focus is on the two-day meeting of the U.S. Federal Reserve's policymaking committee on Tuesday and Wednesday, with Fed Chairman Ben Bernanke holding a press conference after it ends.

Investors will look for signs about the central bank's stance on monetary policy when the Fed's bond buying program stops in June.

Earnings news is also to be in the spotlight, United Parcel Service (UPS.N), an economic bellwether, first-quarter operating profit is expected to rise to 83 cents per share from 53 cents a year ago, with revenue increasing to $12.72 billion from $11.73 billion, according to Thomson Reuters I/B/E/S.

Analysts expect Amazon.com Inc (AMZN.O) to report a first-quarter profit of 61 cents per share, down from 66 cents a year earlier, according to Thomson Reuters I/B/E/S.

Ford (F.N) is due to report first-quarter results. Toyota Motor Co (7203.T) may slip behind General Motors (GM.N) and Volkswagen (VOWG_p.DE) to No. 3 in the automaker production rankings due to continued worries in the wake of the March 11 Japan's earthquake and tsunami.

In extended trading on Monday, shares of Netflix Inc (NFLX.O), the top movie rental service, fell after the market close, when it issued an earnings outlook below expectations.

Also after the bell, pharmacy benefit manager Express Scripts Inc (ESRX.O) shares fell in extended trading after it reported a lower-than-expected quarterly profit.

Shale gas producers, Chesapeake Energy (CHK.N) said it had "completed efforts to achieve permanent well control" which last week suffered a blowout.

Investors are to eye the U.S. S&P/Case-Shiller Home Price Index for February at 1300 GMT and at 1400 GMT is the release of both the U.S. Consumer Confidence for April and the Richmond Fed Manufacturing, Services Indexes for April.

U.S. crude futures fell more than $1 on Tuesday ahead of the Fed meeting, while silver dropped as traders covered risks ahead of an options expiry.

European Central Bank Governor Jean-Claude Trichet was quoted as saying he shares the view that a strong dollar is in the interest of United States.

European shares gained 0.3 percent on Tuesday, with financial stocks among the top performers after UBS (UBS.N)(UBSN.VX) client inflows outstripped forecasts.

U.S. stocks fell on Monday in light volume after Kimberly-Clark (KMB.N) lowered its outlook raising investor concerns about higher commodity costs on company profits.

The Dow Jones industrial average .DJI dropped 0.2 percent, the Standard & Poor's 500 Index .SPX shed 0.2 percent, but the Nasdaq Composite Index .IXIC gained 0.20 percent.

(Reporting by Joanne Frearson; Editing by Erica Billingham)