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The market, which started off on a positive note after the S&P 500 hit a two-month low in the previous session, reversed course to turn negative after Bernanke started speaking. He acknowledged a slowdown in the economy, but offered no suggestion the central bank is considering any further monetary stimulus to support growth.

Bernanke also issued a stern warning to lawmakers in Washington who are considering aggressive budget cuts, saying they have the potential to derail the economic recovery.

"It's not like the market was expecting a positive comment from him, but not quite this negative, either. But I think the impact would be limited. I don't see this carrying over to tomorrow's market," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Bernanke indicated the latest bout of weakness probably would not last very long and should give way to some growth in the second half of the year.

A batch of weak economic data recently, especially in the job market, has pushed major indexes below their support levels.

The Dow Jones industrial average .DJI slipped 19.15 points, or 0.16 percent, to end at 12,070.81. The Standard & Poor's 500 Index .SPX declined 1.23 points, or 0.10 percent, to 1,284.94. The Nasdaq Composite Index .IXIC shed 1.00 point, or 0.04 percent, to finish at 2,701.56.

CORRECTION SEEN, BUT NO BEAR

The S&P 500 has fallen 4.2 percent from a month ago. But a veteran chief equity strategist said the three major U.S. stock indexes could fall as much as 10 percent from their May highs, suggesting that a low in the market might be not far off.

Barring unexpected shocks, though, a bear market is unlikely, Tobias Levkovich, the Citigroup strategist, told the Reuters 2011 Investment Outlook Summit in New York.

"I think we are in a correction," said the Canadian-born strategist, whose year-end forecast for the benchmark S&P 500 index is 1,400 points.

A 10 percent drop from the May 2nd intraday peak of 1,370.58 would put the S&P 500 at 1,233.52.

Defensive stocks in the healthcare and utility sectors added to gains after Bernanke's comments, but financials and

info technology, sectors closely related to growth, turned negative. The KBW bank index .BKX which rose 1 percent earlier, ended down 0.2 percent.

Volume was thin with 6.67 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, below the daily average of 7.61 billion.

"The problem for institutions on a day like today is the volume being light. Any concerted effort to raise funds (sell positions) could have a disproportionate impact on pricing as buyers will be on the thin side," wrote Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey, in a note to clients.

In company news, International Paper Co (IP.N) launched a $3.3 billion unsolicited offer for rival Temple-Inland Inc (TIN.N). Shares of Temple-Inland shot up 40.4 percent to $29.49, while IP's stock rose 0.4 percent to $29.78. Temple-Inland said it adopted a stockholder rights plan to fend off the hostile takeover.

Declining stocks outnumbered advancing ones on the NYSE by 1,684 to 1,297, while on the Nasdaq, decliners beat advancers by 1,440 to 1,131.

(Reporting by Angela Moon; Editing by Jan Paschal)

Obama, whose political prospects have suffered from persistently high unemployment and ballooning U.S. debt, has pinpointed the euro zone crisis as one foreign "headwind" hitting the U.S. economy.

After a meeting with German Chancellor Angela Merkel, he stressed the importance of German "leadership" on the issue -- a hint that he expects Berlin to help -- while expressing sympathy for the political difficulties European Union countries face in helping a struggling member state.

"I'm confident that Germany's leadership, along with other key actors in Europe, will help us arrive at a path for Greece to return to growth, for this debt to become more manageable," Obama said.

"But it's going to require some patience and some time. And we have pledged to cooperate fully in working through these issues, both on a bilateral basis but also through international and financial institutions like the IMF."

A proposal for a second Greek bailout package worth 80 billion (117 billion dollars) to 100 billion (146 billion dollars) euros over three years was taking shape, euro zone sources said.

Merkel, under political pressure at home to avoid being the financial savior for other struggling European countries, said Germany understood its role.

"We've seen that the stability of the euro as a whole will also be influenced if one country is in trouble," she said. "So we do see clearly our European responsibility and we're shouldering that responsibility, together with the IMF."

With U.S. unemployment at 9.1 percent, Obama has blamed outside forces for impeding the economy, including high fuel prices, the earthquake in Japan and the euro zone crisis.

"America's economic growth depends on a sensible resolution of this issue," he said. "It would be disastrous for us to see an uncontrolled spiral and default in Europe because that could trigger a whole range of other events."

REFORMS, FOREIGN POLICY

Obama said Greece had to make structural reforms and instill greater transparency in its economy.

But his main message was aimed at EU countries -- and, by default, wealthy Germany -- to step up to help Athens.

"Other countries in the euro zone are going to have to provide them a backstop and support," he said. "And frankly, people who are holding Greek debt are going to have to make some decisions, working with the European countries in the euro zone, about how that debt is managed."

The euro debt problems dominated discussions between Merkel and Obama, who also touched on foreign policy issues such as the wars in Afghanistan and Libya.

Obama welcomed Merkel at a formal ceremony on the White House lawn with firing cannons and military musicians adding to the pomp of an official visit.

Later in the evening Obama and his wife Michelle hosted Merkel and her husband, Joachim Sauer, for a state dinner, where the president awarded her the "Medal of Freedom" -- the highest U.S. civilian honor.

Obama noted the event, held open-air in the Rose Garden to take advantage of a warm Washington evening, was the first such state dinner of his presidency for a European leader.

"Tonight we honor Angela Merkel, not for being denied her freedom, or even for obtaining her freedom, but for what she achieved when she gained her freedom," Obama said.

In public the two leaders referred to each other by their first names and joked about looking different from their predecessors. Obama is the first black U.S. president and Merkel is the first female chancellor of Germany.

Their show of partnership did not mask differences between them -- and Libya has been one of those issues in the past.

The United States cautiously endorsed military action in Libya while Germany confounded its NATO partners by refusing to take part.

Obama said he would expect Germany to help once Libyan leader Muammar Gaddafi was gone and recovery work was needed in the North African country. He thanked Merkel for Germany's stepped-up support in Afghanistan, which he said had freed up other NATO members to be active in Libya.

Merkel, meanwhile, advocated for French Finance Minister Christine Lagarde to take over the top job at the International Monetary Fund, according to a German delegation source. The United States has stayed publicly neutral in the race for that post, saying it wants the best candidate to win.

($1=.6845 Euro)

(Additional reporting by Andreas Rinke, Alister Bull, Laura MacInnis and Matt Spetalnick; Editing by Eric Walsh)

German Chancellor Angela Merkel, meeting with Obama on an official visit, said the euro zone shared a common interest in ensuring that the currency bloc was not endangered.

The two leaders said they discussed the debt crisis extensively. A proposal for a second Greek bailout package worth 80 billion to 100 billion euros over three years was taking shape, euro zone sources said.

Obama said Germany would be key to solving the crisis.

"I'm confident that Germany's leadership, along with other key actors in Europe, will help us arrive at a path for Greece to return to growth, for this debt to become more manageable," he said.

"But it's going to require some patience and some time. And we have pledged to cooperate fully in working through these issues, both on a bilateral basis, but also through international and financial institutions like the IMF."

Obama has cited the crisis as one in a handful of foreign "headwinds" affecting the U.S. economy.

Merkel, who is under political pressure at home to avoid being the financial savior for other struggling European countries, said Germany understood its role.

"We've seen that the stability of the euro as a whole will also be influenced if one country is in trouble," she said.

"So we do see clearly our European responsibility and we're shouldering that responsibility, together with the IMF."

Obama welcomed Merkel at a formal ceremony on the White House lawn with cannon shots and military musicians adding to the pomp and circumstance of an official visit -- the first visit by a European leader under Obama's presidency.

The show of partnership did not mask differences that the two leaders have over economic and security issues.

The United States cautiously endorsed military action in Libya while Germany confounded its NATO partners by refusing to take part.

Obama said he would expect Germany to help with Libya once Gaddafi was gone and recovery work was needed in the country, and he thanked Merkel for Germany's stepped-up support in Afghanistan, which freed up other NATO members to be active in Libya.

(Additional reporting by Steve Holland, Alister Bull, Laura MacInnis and Matt Spetalnick)

The S&P 500 has fallen 4.9 percent since a recent high at the start of May and closed Monday at its lowest level since March 18, having fallen through its April low. Some investors looked for further volatility and a possible move lower before equities stabilize.

"We did get oversold and we're probably due for this bounce, but I don't think it's anything more than a bounce in a continued downtrend," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

The Dow Jones industrial average .DJI gained 61.38 points, or 0.51 percent, to 12,151.34. The Standard & Poor's 500 Index .SPX added 7.83 points, or 0.61 percent, to 1,294.00. The Nasdaq Composite Index .IXIC rose 14.88 points, or 0.55 percent, to 2,717.44.

Bank stocks, heavily sold in recent weeks, were among the biggest gainers. Bank of America Corp (BAC.N) rose 1.6 percent to $11.01, while the KBW bank index .BKX was up 1.1 percent.

All of the S&P's sectors were positive, with strength in the consumer discretionary sector .GSPD, gaining 1 percent, also from a heavily oversold condition.

Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey, said light volume and lack of buyers could mean any bounce is short-lived.

"The problem for institutions on a day like today is the volume being light. Any concerted effort to raise funds (sell positions) could have a disproportionate impact on pricing as buyers will be on the thin side," he wrote in a note to clients.

The declines in the market have left the S&P 500 up just 2.9 percent for the year so far.

International Paper Co (IP.N) launched a $3.3 billion unsolicited offer for rival Temple-Inland Inc (TIN.N). Temple-Inland shot up 41.5 percent to $29.74, while IP rose 2.1 percent to $30.25.

The dollar hit a record low against the Swiss franc and fell against a basket of currencies .DXY, helping to put a floor on commodity prices, after a Chinese official said the greenback would continue to weaken.

Commodity-linked shares gained, with Freeport McMoRan Copper & Gold Inc FXC.N rising 1.1 percent to $50.38 and Alcoa Inc (AA.N) adding 2.4 percent to $16. The S&P's materials sector .GSPM gained 1 percent.

Also helping the rebound, European Central Bank chief Jean-Claude Trichet said a restructuring of Greece's public debt, which many in the market see as inevitable, is inappropriate as long as the government follows through on reforms.

Federal Reserve Chairman Ben Bernanke is due to speak on the U.S. economic outlook at a banking conference in Atlanta.

Fed officials have said recent data was a disappointment, with Eric Rosengren, president of the Boston Fed, suggested it could delay the Fed's exit from its extremely easy monetary policy. Bernanke is set to start shortly before the market closes.

(Editing by Jeffrey Benkoe)

A senior Greek official also said the government expected parliament to vote by the end of June on its medium-term austerity plan, a condition for the new international package as Athens struggles to avoid defaulting on its debt.

A team from the IMF, EU and European Central Bank reached an agreement last Friday, under which Athens would impose more austerity and faster privatization to cut its budget deficit.

But Bob Traa, the IMF's senior representative in Greece, said the European Union needed to do more work before the Fund's board could release more loans.

"I believe there is a summit in Europe, in June, where some hard nuts need to be cracked. They need to make some decisions, and then we will go to our board and disburse in early July," he told a banking conference.

EU officials are struggling to find a solution for Greece's financing needs for the next few years which avoids triggering a default but pushes some of the burden onto the private sector.

"What needs to be decided is how to fill the various parts of the financing. This is not something that we can do as a team," said Traa.

Greece agreed a 110 billion euro rescue with the EU and IMF a year ago. But this assumed Athens could resume borrowing commercially in early 2012, which is now inconceivable as yields on Greek debt are sky high in the secondary market.

"VOLUNTARY" PARTICIPATION

Details of the new deal to supersede the May, 2010 rescue have yet to be hammered out, but it assumes Greece's funding needs will be covered by a mix of new EU and IMF loans, budget deficit cuts including tax increases and state asset sales, and a "voluntary" participation by private creditors.

One possibility is that creditors would agree to buy new Greek bonds when old ones they hold mature, meaning that Athens would not have to produce the cash up front.

The managing director of ratings agency Moody's sovereign risk group said on Tuesday it was hard to see how a private sector rollover of Greek debt would be truly voluntary and it would therefore likely constitute a default.

"It's hard to imagine in the current circumstances that people would voluntarily do this," Bart Oosterveld told reporters in Paris. "Our default definition contemplates that for something to be voluntary it has to be truly voluntary ... More likely than not this would be a credit event in our view."

The IMF's Traa warned that a major restructuring of Greek debt would create untold problems in the euro zone but hinted that the IMF was open to other solutions.

"Stretching out payment terms, for instance in loans from euro area partners and the IMF, is a reasonable thing to think about because we have amortization right at the end of the program. This is a technical issue we can think about," he said.

Greece has already won an extension of the time it has to repay EU loans. The IMF has said it was also open to a similar move but first needed an agreement with Brussels.

Greek sovereign debt totals 340 billion euros or about 150 percent of GDP and Traa said the government needed to move fast on its problems. "Greece is at a critical juncture and has no time to waste, now is not the time to slow down," he said.

It is unclear whether private sector banks would sign up to such a deal, how much they would be prepared to contribute and whether ratings agencies would look on such a move as a default.

Germany's BDB banking association said private creditors should only be involved as a last resort and that that point had not been reached yet.

"It is in everyone's interest that we overcome the debt crisis and that Greece stays in the European monetary union," BDB President Andreas Schmitz said in a statement, but added: "The involvement of private creditors can come only as a last step as part of a solution that is sustainable for all parties. That point has not yet been reached."

OPPOSITION DEMAND

Earlier, a senior Greek official said the government also planned to cut corporate tax -- a demand of the conservative opposition -- and reduce value-added tax from 2012.

However, these measures would not be part of the medium-term economic plan, he told reporters. "Parliament will vote on the medium-term plan by the end of-June. It will be voted on as a single article," he said, asking not to be named.

Dissenters within the ruling PASOK party have demanded that each part of the plan, which includes 6.4 billion euros in new austerity steps this year, be handled in separate votes.

Voting on the plan as a single package would prevent the doubters from rejecting individual measures such as tax increases or sales of state assets.

PASOK lawmakers were debating the plan, said government spokesman George Petalotis. "The medium-term plan ... is just a staircase, a step for us to get back on our feet."

A second official repeated government assurances that it would not seek early elections despite daily mass protests against yet more budget cuts.

The EU has called on all leading Greek parties to forge a consensus on the medium plan, which covers a period beyond the next scheduled elections in 2013.

(Additional reporting by Ingrid Melander, George Georgiopoulos and Renee Maltezou; writing by David Stamp; editing by Patrick Graham)

Most Asian stock markets fell after the S&P .SPX extended its slide to a fourth day overnight, hitting its lowest since mid-March, as a spate of weak U.S. economic data pointed to slowing growth. .N

The euro traded at $1.4609 at 0443 GMT (12:43 a.m. ET), having fallen as low as $1.4555.

The common currency came under pressure on Monday after Jean-Claude Juncker, chairman of the Eurogroup, made his comment about valuation and a spokesman for the German finance ministry said a second aid program for Greece was not certain.

"Those comments (from Juncker) probably weighed on the euro at the margin. But the direction of a weaker dollar is pretty clear this point in time, so I'm expecting a bounce in the euro," said Richard Grace, chief currency strategist at Commonwealth Bank.

The euro has gained more than 4 percent since climbing from its May 23 trough versus the dollar. Despite uncertainty over a fresh rescue package for Greece, it is being supported by persistent U.S. dollar weakness and expectations that the European Central Bank will signal a July interest rate rise at its policy meeting on Thursday.

Investors will be closely following a speech by Federal Reserve Chairman Ben Bernanke at a conference around 1945 GMT (2:45 p.m. ET) on Tuesday for more clues on the central bank's view of the slowdown and its impact, if any, on the Fed's exit from its extremely easy monetary policy.

The Australian dollar, the world's fifth-most traded currency, fell below $1.0700 after the Reserve Bank of Australia held rates steady at 4.75 percent, from $1.0745 before the decision. Markets had been expecting it to repeat a warning that rates would likely have to rise in the next few months in order to put a lid on price pressures, but no such indication was given.

The Nikkei average .N225 was marginally higher at 9,439.13 as short covering of utilities and some bargain-hunting offset selling on fears that U.S. growth may be stalling, analysts said.

"When the Nikkei trades below 9,400 institutional investors buy global cyclical shares as a long-term investment and retail investors tend to buy defensive shares with high dividend yields, such as drugmakers," said Fujio Ando, a senior managing director at Chibagin Asset Management.

MSCI's index of Asia-Pacific stocks .MIAPJ0000PUS outside Japan fell 0.5 percent.

Technical indicators suggest further declines may be on the horizon, analysts at Barclays Capital said in a research note.

"Various topping patterns in equity markets from different regions suggest the risk of an ongoing corrective pullback in equity markets over the summer," they said.

Brent crude oil for July delivery fell 60 cents to $113.88 a barrel, extending Monday's fall when it closed at its lowest in two weeks, on expectations OPEC will raise production targets when it meets this week.

U.S. gasoline prices fell for the fourth week in a row last week as crude prices recoiled, relieving some pressure on consumers and reinforcing the views of some economists that the current economic "soft patch" will be temporary.

U.S. retail sales data due out later in the day may signal whether lower fuel prices enticed shoppers back into the stores.

Gold was almost around $1.50 higher at $1,544.66 per ounce by 0453 GMT (12:53 a.m. ET), after closing at $1,543.05 on Monday. Gold, one of the chief beneficiaries of worries about the security of currencies and other assets, set a record high of $1,575.79 per ounce in early May.

(Reporting by Ian Chua in Sydney and Ayai Tomisawa in Tokyo; Editing by Kim Coghill)