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With Ainslie's Maverick Capital, Altman's Owl Creek Asset Management and other major funds backing away from the banking sector in the first quarter, financials suffered the biggest decrease in sector holdings among the Smart Money 30, a group of some of the largest stock-picking hedge funds.

Ainslie, Altman and Stephen Cucchiaro's Windhaven Investment Management dumped their entire holdings in Citigroup and Bank of America during the quarter, according to data compiled by Thomson Reuters.

Eric Mindich's Eton Park Capital, Philippe Laffont's Coatue Capital and Andreas Halvorsen's Viking Global Investors also rushed for the Citigroup exits.

Citigroup, the third-largest U.S. bank, was the top decrease in existing positions by the Smart Money 30.

After making a killing buying the big banks at their nadir, savvy investors are moving on. Bank stocks are still cheap, but investors expect lackluster revenue growth and new regulations to keep prices depressed for some time.

"Financials have become hated in recent months," said Alan Villalon, a senior bank analyst at Chicago-based Nuveen Investments, which owns bank stocks.

The move to sell may be early, but it is no easy task to unwind such huge positions, even for some of the largest hedge funds.

Citigroup remained the top holding of the Smart Money funds even as they sold off almost 29 percent of their combined stake in the company in the first quarter. Bank of America and regional bank Huntington Bancshares Inc were also among the top decreases in existing positions.

Investors even shied away from stronger banks. Appaloosa manager David Tepper sold off his stakes in JPMorgan Chase & Co and Wells Fargo & Co at the same time that he dumped some of his shares of Bank of America and Citigroup. Lone Pine Capital also reduced its stake in JPMorgan Chase and Citigroup.

SOFTER ECONOMY

U.S. banks have largely recovered from the worst losses of the financial crisis. But their profits over the past year have come largely from releasing reserves they once set aside to cover bad loans.

Citigroup, Bank of America and even JPMorgan Chase all reported year-over-year declines in revenues in the first quarter as a volatile trading environment hit investment banking results and loan books shrank.

The broader economy also suffered during the quarter as political turmoil in the Middle East and the earthquake and tsunami in Japan roiled global markets.

"Banks are macro plays on the economy," said Jason Ware, a senior analyst with wealth management firm Albion Financial. "As the economy starts to hit a softer patch, those types of investments become less attractive."

To be sure, not everyone in the Smart Money 30 group was selling the big banks.

John Paulson made only small trims to his huge stakes in Citigroup and Bank of America. And Brookside Capital Investors bought into Citigroup and increased its stake in Bank of America. Glenview Capital also increased its Citigroup stake while buying into JPMorgan Chase.

Both Bank of America and Citigroup are relatively cheap compared to bank stocks in general, Ware said, calculating that both companies are trading under their tangible book value while banks in general are trading slightly above tangible book value.

NEW RULES

Bank investors are also worried about the increased impact of regulation. The U.S. Dodd-Frank financial reform law passed last year will restrict banks' profits from a host of businesses, from trading to debit card processing.

But the industry is still awaiting a slew of rulemaking and in many instances does not yet know exactly how deeply the law will cut into revenues.

Bank of America, the country's largest bank, is particularly vulnerable to increasing regulation of the financial sector. The bank has estimated that it could lose $2 billion in annual revenues from Dodd-Frank's restrictions on debit card processing fees.

Citigroup has a relatively smaller U.S. business and less exposure to Dodd-Frank. But its international focus and dependence on growth in emerging markets means it was particularly vulnerable to global instability in the first quarter, including the Middle East upheaval.

"There's been concern about the tightening we've seen in emerging markets and debt issues in Europe. There are some questions about international growth and a bit of softening in U.S. growth," said Timothy Ghriskey, co-founder of Solaris Group, which owns Citigroup shares.

The banking sector is also facing government scrutiny beyond Dodd-Frank. Investors were reminded of that in March, when the Federal Reserve concluded a second round of bank stress tests and allowed only some of the largest U.S. banks to raise their dividends.

"They don't have control of their own destiny at this point," Ghriskey said.

Even though Citigroup and Bank of America have shed U.S. government ownership, the March dividend increases also highlighted their continuing weakness compared to stronger rivals.

JPMorgan Chase raised its dividend to 25 cents a share from 5 cents with the Fed's blessing, but the regulator rejected Bank of America's bid to boost its own payout later this year.

Citigroup had to make do with reinstating a one-penny dividend, which it could only afford after shrinking its outstanding share count with a reverse stock split. Investors have not looked kindly upon the split, which was seen as largely cosmetic; Citigroup shares have fallen about 9 percent since the reverse split took effect in early May.

"There's almost going to be a have and have-not environment -- those banks that return capital to shareholders are going to do well, those that can't, are not," said Ware.

"The interest in owning some of these names is squarely looked upon as, 'How much cash are they going to return to me as a shareholder?'" he said.

(Reporting by Maria Aspan; editing by Aaron Pressman and John Wallace)

By a vote of 318-97, the chamber overwhelmingly rejected President Barack Obama's call to increase the $14.3 trillion debt limit without conditions. Even some Democrats supporting Obama's position voted against it.

"I'm going to advise my members that they not subject themselves to the demagoguery that is sure to follow" if they vote for the measure, chief Democratic vote-counter Steny Hoyer said before the vote.

Polls show the public does not support a further increase in borrowing authority even as the Treasury Department scrambles to avoid a default that could push the country back into recession and rattle markets across the globe.

The Treasury Department has been tapping alternate funding sources, such as federal employee pensions, to cover its obligations since the debt limit was reached on May 16, but has warned it will run out of options if Congress does not act by August 2.

For now, markets are little concerned by the possibility of default on what is viewed as one of the world's safest investments. Yields on the benchmark 10-year Treasury bond reached a new 2011 low earlier in the day and traders predicted even lower yields later in the week.

"If we were having this conversation at the end of July it would be a different story. If the vote fails tonight, I don't think it impacts prices," said Christian Cooper, head of U.S. dollar derivatives trading at Jeffries & Co. in New York.

House Republicans held the vote in the late afternoon, well after markets had closed.

WHITE HOUSE MEETING ON WEDNESDAY

Obama will press the case on why the debt limit should be raised when he meets with House Republicans at 10 a.m. on Wednesday, the White House said.

Republicans say they will not back an increase in the country's borrowing authority that does not include deep spending cuts to ensure that debt remains at a manageable level relative to the economy.

"This vote makes clear that deficit reduction will be part of any bill to increase the debt limit," said Republican Representative Dave Camp, who sponsored the bill even though he does not support it.

In talks led by Vice President Joe Biden, Republicans and Democrats have identified hundreds of billions of dollars in possible spending cuts, and both sides say they could ultimately find more than a trillion dollars in deficit savings.

But they must resolve a dispute over the biggest-ticket items. Democrats say they will not consider cuts to popular health benefits until Republicans consider tax increases.

Tuesday's vote came after the Senate defeated three separate Republican budget plans in largely symbolic votes last week. The Senate also voted down Obama's budget proposal, which was considered to be irrelevant after he unveiled a more aggressive plan.

Democrats were split on the House bill, with 97 voting for a "clean" increase and 82 voting against it. No Republicans voted for the measure.

The vote could clear the way for a compromise by allowing lawmakers to say they voted against an increase that did not reduce deficits, but one analyst warned it did not guarantee support from conservative Republicans affiliated with the Tea Party movement.

"Some representatives would vote against it just because it would increase the government's borrowing limit, others would oppose it because of the specific spending cuts and revenue increases, and others would vote 'no' because they want deeper deficit reduction," Stan Collender, a budget analyst with Qorvis Communications, wrote in Roll Call, a congressional newspaper.

(Additional reporting by Thomas Ferraro and Caren Bohan in Washington and Emily Flitter in New York; Editing by Peter Cooney)

"The question is, 'Is the softer data we're seeing transitory, or is it likely to persist throughout the remainder of 2011?' Right now, that's an open question that investors are trying to figure out," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

The U.S. economy grew at a tepid 1.8 percent annual rate in the first three months of the year, and these fresh signs suggest the recovery is still struggling to gain momentum.

The consumer also appears to be struggling, with data last week showing consumer spending was crimped by high gasoline prices in April. Consumer spending makes up more than two-thirds of economic activity.

A drop in a gauge of business activity in the Midwest added to other regional reports that have pointed to slower growth in manufacturing this month amid supply chain disruptions from the major earthquake in Japan in March.

It also boded poorly for a national factory report due on Wednesday, which is expected to slow, and casts a cloud ahead of a report on national employment on Friday.

"While weakness in manufacturing may simply reflect auto parts shortages, this is the fifth regional manufacturing index to fall sharply in May," wrote Chris Low, chief economist at FTN Financial.

"(It) reinforces the general sense the economy is losing steam," he added.

U.S. stocks trimmed gains after the consumer confidence and manufacturing data, but Wall Street was higher in late day trading as the data was outweighed by optimism that new financial aid for debt-laden Greece was on the horizon.

HOUSING DOUBLE-DIP

Single-family home prices dropped in March to fall below the low hit in April 2009 during the financial crisis, a closely watched survey showed.

The S&P/Case-Shiller composite index of 20 metropolitan areas declined 0.2 percent from February on a seasonally adjusted basis, in line with economists' expectations.

A glut of houses for sale along with foreclosures, tight credit and weak demand have kept the housing market on the ropes even as other areas of the economy start to recover.

Home prices had been supported last spring by a tax credit, but the housing market has struggled since the credit expired. Prices in the 20 cities fell 3.6 percent year over year, worse than expectations for a decline of 3.3 percent.

"The declines sustained in the last 12 months have almost erased the gains of the previous 12 months," said Cary Leahey, managing director at Decision Economics in New York. "The housing market is treading backward but not drowning."

The Conference Board, an industry group, said its index of consumer attitudes fell to 60.8 in May from a revised 66.0 in April, well below a median forecast of 66.5.

Consumers took a more negative view of business and labor market conditions, while inflation expectations jumped after easing in April.

The Institute for Supply Management-Chicago business barometer dropped to 56.6 in May from 67.6 in April, its lowest reading since November 2009 and missing forecasts for a reading of 62.6.

The index of new orders sank to 53.5 from 66.3, while the employment component fell to 60.8 from 63.7.

Economists expect Wednesday's larger ISM manufacturing survey to ease to 57.7 in May from 60.4 the month before. Friday's payrolls data is forecast to show the economy added 180,000 jobs in May, easing from 244,000 in April.

(Additional reporting by Ellen Freilich and Caroline Valetkevitch in New York and Ann Saphir in Chicago; Editing by Kenneth Barry)

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.2 percent in March from February on a seasonally adjusted basis, in line with economists' expectations.

The price index was below the low seen in April 2009 during the financial crisis. The glut of houses for sale, foreclosures, tight credit and weak demand have kept the housing market on the ropes even as other areas of the economy start to recover.

The 20-city composite index was at 138.16, falling below the 2009 low of 139.26.

"This month's report is marked by the confirmation of a double-dip in home prices across much of the nation," David Blitzer, chairman of the index committee at S&P Indices, said in a statement. "Home prices continue on their downward spiral with no relief in sight."

Eight cities fell 1 percent or more in March, while Washington was the only city where prices increased on both a monthly and yearly basis. Prices in the 20 cities fell 3.6 percent year over year, topping expectations for a decline of 3.3 percent.

"The declines sustained in the last 12 months have almost erased the gains of the previous 12 months. The housing market is treading backward, but not drowning," said Cary Leahey, economist and managing director at Decision Economics in New York.

In the first quarter, the national index fell 1.9 percent on a seasonally adjusted basis, compared to a decline of 1.8 percent in the previous quarter. On a non-adjusted basis, they fell by 4.2 percent in the quarter. Nationally, home prices are back to their mid-2002 levels, the report said.

Financial markets saw little reaction to the data, with U.S. stock index futures pointing to a higher open on optimism that new aid for Greece from the European Union was on the horizon.

(Reporting by Leah Schnurr, additional reporting by Ellen Freilich, editing by W Simon )

Europe stepped up efforts to draft a second bailout package for Greece, with private sector participation still an option to help relieve the country of its massive debt burden.

Rising expectations of a second aid package for Greece sent U.S. crude futures up 1.5 percent to $102.13 a barrel. Exxon Mobil Corp (XOM.N) added 1 percent to $83.49, and Chevron Corp (CVX.N) gained 0.6 percent to $103.85 in light premarket trade.

The firming of the euro helped boost metals prices, with copper rising to a four-week high. Mining company Freeport-McMoRan Copper & Gold Inc (FCX.N) advanced 1.5 percent to $52.50.

"The news out of Europe is propelling the market higher in pretrading, following the rest of the global markets. News regarding a Greece bailout is basically fueling the optimism," said Peter Cardillo, chief market economist at Avalon Partners in New York.

"It is causing the dollar to go back down, strengthening the euro, so that is inviting risk back into the marketplace."

S&P 500 futures rose 10.9 points and were well 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 jumped 100 points, and Nasdaq 100 futures climbed 24.5 points.

On the economic front, Standard & Poor's releases its S&P/Case-Shiller Home Price Index for March at 9 a.m. (1300 GMT). Economists expect a fall of 0.2 percent, a repeat of the February decline.

The Federal Reserve Bank of Chicago releases its Chicago Fed Midwest Manufacturing Index for April at 8:30 a.m. (1230 GMT). The index read 85.0 in the prior month.

The Institute of Supply Management Chicago reports its May index of manufacturing activity at 9:45 a.m. <1345 GMT>. Economists forecast a reading of 62.6 in the month, compared with 67.6 in April.

At 10 a.m. (1400 GMT), the Conference Board reports May consumer confidence. Economists expect a reading of 66.5, compared with 65.4 in April.

U.S. chemicals maker Ashland Inc (ASH.N) said it will buy privately held International Specialty Products for about $3.2 billion in cash to expand in high-growth markets such as personal care, pharmaceutical and energy.

European shares rose 1 percent on optimism over a possible Greece deal, with banks among the biggest gainers. .EU

Asian stocks were mostly higher Tuesday, with the Nikkei lifted 2 percent by an upbeat outlook from Japan's manufacturers and a weaker yen, while regional solar stocks gained after Germany said it would phase out nuclear power by 2022.

The Dow and S&P 500 suffered their fourth week of losses despite a small gain on Friday.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

Senior EU finance officials gathered in Vienna to prepare the ground for more high-level talks on the Greek debt crisis. Sources said a range of policy steps were on the table, including a "Vienna Initiative"-style debt rollover and bond maturity extensions.

Greece faces a funding gap of over 60 billion euros in 2012 and 2013. Any private sector involvement is likely to form part of a broader package of measures to fill that hole, including aggressive privatisations, fresh austerity pledges from Athens and new aid from the European Union and the IMF.

Ratings agency Fitch said in a report on Tuesday that Greece's official lenders needed to put up 90-100 billion euros to give it sufficient time to implement reforms and cut debt.

It said Greece's ability to deliver on its fiscal promises in the face of rising opposition from the public and political opposition was "increasingly in doubt.

Underscoring the domestic obstacles, Greece's conservative opposition said a deal between the government and visiting European and IMF inspectors to cut value-added taxes in a bid to win their support was "not good enough.

Greece's conservative opposition have demanded lower taxes as a condition for reaching a consensus with the Socialist government on further austerity measures, which Brussels says is essential to secure any further assistance.

The euro rose above $1.44 to reach its highest level in over two weeks on growing confidence that a deal for Greece would be sealed, before dipping slightly on reports that Germany and other countries were sticking to their insistence on private sector involvement.

Markets have grown increasingly skeptical in recent weeks about the ability of policymakers to solve Greece's debt woes because of rising reluctance from countries like Germany, Finland and the Netherlands to provide more aid, as well as new demands by the IMF that Europe commit to long-term guarantees for Greece before it releases more funds.

Late on Monday, however, the chairman of euro zone finance ministers, Jean-Claude Juncker, expressed optimism that a new package was coming together.

"A LA CARTE"

Two European sources involved in the negotiations said the Economic and Financial Committee (EFC) of senior EU finance ministry officials was meeting in Vienna on Tuesday to thrash out options for private sector involvement in a new Greek deal.

They stressed the meeting was preparing the ingredients for a political decision -- a sort of "a la carte menu," where ministers would remain free to choose only dishes they liked.

A summit of EU leaders, preceded by a meeting of euro zone finance ministers, are scheduled for late June.

The range of options under discussion were loosely based on the January 2009 Vienna Initiative on financial stability in central and eastern Europe, agreed by international financial institutions, the European Commission and ECB, key EU governments and commercial bankers.

Under that pact, the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development all agreed to boost credit to the region, the EU agreed to double its balance-of-payments facility for non-euro zone member states, and crucially the main commercial banks agreed to maintain their CEE exposure and roll over credit lines.

The Vienna Initiative was widely credited with preventing a financial meltdown around the region after Hungary took an IMF-led bailout, at a time when western banks faced pressure to repatriate capital to cover losses incurred in the wake of the sub-prime crisis and the collapse of Lehman Brothers.

"There might be a component of a Vienna Initiative type," one source involved in the EFC talks said. "There is no agreed definition yet of what that would mean, but there is discussion of what it would take."

PRIVATE SECTOR OPTIONS

The second source said the options included a voluntary agreement by banks to maintain their exposure to Greece for the duration of a new three-year adjustment program, to extend the maturities of existing bonds or roll over maturing debt.

The source suggested the ECB could live with such a "voluntary" involvement of the private sector without refusing Greek bonds as collateral, but said it was only likely to give its assent at the last minute having seen the entire package.

Greece took a 110 billion euro ($158 billion) rescue package from the EU and IMF last May, but has struggled to meet most of the fiscal goals set out for it as part of that deal.

With a debt mountain of nearly 330 billion euros at the end of last year, many economists believe it will be difficult for it to avoid a restructuring at some point in the future.

But the ECB has warned against any form of restructuring, a message reinforced by Executive Board Member Gertrude Tumpel-Gugerell on Tuesday.

Inspectors from the so-called "troika" are in Athens to decide whether to release a tranche of 12 billion euros that Athens needs next month to avoid an immediate default. In part due to IMF demands, discussions on a new package that would meet Greece's needs through 2014 are taking place in the background.

EU officials said that package, expected to total around 65 billion euros, could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatization program.

(Writing by Noah Barkin, editing by Mike Peacock)

When the fund, controlled by Col. Muammar Gaddafi, made huge losses Goldman offered Libya the chance to become one of its biggest shareholders, the Journal said, citing people familiar with the matter.

Goldman Sachs was not available for comment, outside of normal U.S. business hours.

Among the different proposals put forward by Goldman Sachs to recoup the losses was one in which Libya would get $5 billion in preferred Goldman shares in return for investing $3.7 billion into the securities firm, the paper added.

The documents also show that company Chief Executive Lloyd Blankfein, its finance chief David Viniar and top executive Michael Sherwood were involved in discussions in this regard, the Journal reported.

The Libyan fund had apparently paid $1.3 billion for options on a basket of currencies and on six stocks - Citigroup Inc (C.N), Italian bank UniCredit SpA (CRDI.MI), Spanish bank Banco Santander, German insurance giant Allianz (ALVG.DE), French energy company Électricité de France (EDF.PA) and Italian energy company Eni SpA (ENI.MI), the paper said.

(Reporting by Rachel Chitra in Bangalore; Editing by David Cowell)

(This story was corrected in paragraph two to change the spelling of Muammar Gaddafi)