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However, risky assets may be on borrowed time.

With the clock ticking in Washington before an August 2 deadline on the federal borrowing limit, political leaders were still at an impasse. Europe also appeared no closer to sealing a deal for a second bailout of Greece ahead of Thursday's European Union summit.

Investors for the most part appear to be assuming that the U.S. debt ceiling will be lifted and a default averted, with the 10-year Treasury yield camped comfortably below 3 percent, but stakes are running high in the euro zone.

Italian and Spanish 10-year bond yields rose above 6 percent on Monday in the wake of stress tests on the region's banks, pulling further away from German Bunds and reflecting a low degree of confidence that policymakers can contain the crises. Funding costs are perceived to be unsustainable if yields rise over 7 percent.

"There is rising risk that disappointment at the EU Summit (21st July) on the absence of support measures for Spain and Italy will see the crisis worsen. This is our base case scenario, given that Europe will deal with Greece more than one year too late," Royal Bank of Scotland strategists said in a note.

Japan's Nikkei share average was down 0.8 percent .N225, well off a four-month high hit on July 8. Markets in Tokyo had been closed on Monday for a holiday.

"Foreigners are selling mega banks and buying defensive names like NTT," said a trader at a European brokerage, referring to a telecom company.

HIDDEN GEMS

China's benchmark stock indexes were down across the board after the Shanghai composite hit a two-month high on Monday.

Some investors were on the prowl though for value in Chinese equities, where uncertainties about high municipal debt and a second-half slowdown in China's economy have made valuations shrink.

Khiem Do, head of multi-asset group at Barings Asset Management in Hong Kong, told Reuters Television that Chinese bank stocks were what he considers a hidden gem being overlooked by markets.

Investors should be buying them and other cyclical stocks versus defensive names, Do said.

Australia's benchmark stock index was down flat .AXJO after earlier hitting a 10-month intraday low.

Shares of News Corp listed in Sydney were up 2.8 percent (NWS.AX) after Bloomberg reported the media conglomerate -- suffering from a spreading phone hacking scandal -- was considering elevating the current Chief Operating Officer to be a chief executive.

The company said it is fully behind current CEO Rupert Murdoch.

The MSCI index of Asia Pacific shares outside Japan initially ticked up 0.2 percent .MIAPJ0000PUS, helped by the technology sector, after IBM (IBM.N) said business at its services division was running ahead of expectations, easing fears of a cyclical slowdown in other tech companies.

But then that index slipped to be off 0.1 percent.

Hopes may also be running high ahead of Apple Inc's (AAPL.O) quarterly results due later. Thomson Reuters Starmine's SmartEstimate for the June quarter earnings, which gives a greater weighting to more accurate forecasters, is 3 percent higher than the median expectation, suggesting a chance Apple may surprise to the upside.

FRANCLY SPEAKING

The euro was up against the dollar a touch at $1.4126, and down 0.1 percent against the Swiss franc at 1.1520 francs.

The franc has been a big winner in the past few months, serving as a haven along with gold from fiscally weak G10 countries. Though the rapid move into the Swiss franc has cooled, widening Italian and Spanish bond yield spreads over Bunds will likely trigger fresh selling of euro/Swiss franc.

Deutsche Bank found that a basket trade that is short the dollar, sterling, yen and the euro -- that is, and long the rest of the G10 currencies -- has annual excess returns of 8.1 percent so far this year.

Precious metals have also been a beneficiary of investors seeking hard assets as debt crises in Europe and the United States grow. Spot gold edged lower 0.1 percent to $1,601.86 an ounce in early Asian trade, off the record high of $1,607.01 reached on Monday.

Silver has been catching up lately with gold's advance, though was nearly flat on Tuesday, at $40.48 an ounce, off Monday's high of $40.70 -- its highest since May 4.

(Editing by Richard Borsuk)

But a Reuters investigation finds that many are still taking the same shortcuts they promised to shun, from sketchy paperwork to the use of "robo-signers."

In its effort to seize the two-bedroom ranch house of 87-year-old Margery Gunter in this down-on-its-luck Florida town, OneWest Bank recently filed a court document that appears riddled with discrepancies. Mrs. Gunter, who has lived in the house for 40 years and gets around with the aid of a walker, stopped paying her loan back in 2009, her lawyer concedes. To foreclose, the bank submitted to the Collier County clerk's office on March 3 a "mortgage assignment," a document essential to proving who owns a mortgage once the original lender sells it off.

But OneWest's paperwork is problematic. Among the snags: state law permits lenders to file to foreclose only if they already legally own a mortgage. Yet the key document establishing ownership wasn't signed and officially recorded until months after OneWest filed to foreclose on Mrs. Gunter. OneWest declined to comment on the case.

Reuters has found that some of the biggest U.S. banks and other "loan servicers" continue to file questionable foreclosure documents with courts and county clerks. They are using tactics that late last year triggered an outcry, multiple investigations and temporary moratoriums on foreclosures.

In recent months, servicers have filed thousands of documents that appear to have been fabricated or improperly altered, or have sworn to false facts.

Reuters also identified at least six "robo-signers," individuals who in recent months have each signed thousands of mortgage assignments -- legal documents which pinpoint ownership of a property. These same individuals have been identified -- in depositions, court testimony or court rulings -- as previously having signed vast numbers of foreclosure documents that they never read or checked.

Among them: Christina Carter, an employee of Ocwen Loan Servicing of West Palm Beach, Florida, a "sub-servicer" which handles routine mortgage tasks for banks. Her signature -- just two "C"s -- has appeared on thousands of mortgage assignments and other documents this year.

In a case involving a foreclosure by HSBC Bank USA, a New York state court judge this month called Carter a "known robo-signer" and said he'd found multiple variations of her two-letter signature on documents, raising questions about whether others were using her name. That and other red flags prompted the judge to take the extraordinary step of threatening to sanction HSBC's chief executive officer.

In a phone interview, Carter acknowledged signing large numbers of mortgage assignments this year, but said they all were legally done. To her knowledge, she added, no one else used her name.

'CUTTING CORNERS'

One of the industry's top representatives admits that the federal settlements haven't put a stop to questionable practices.

Some loan servicers "continue to cut corners," said David Stevens, president of the Mortgage Bankers Association. Nearly all borrowers facing foreclosure are delinquent, he said, but "the real question is whether the servicer complied with all legal requirements." The loss of a home is "the most critical time in a family's life," and if foreclosure paperwork is faulty homeowners should contest it. "Families should be using every opportunity they can to protect their rights."

Federal bank regulators signed settlements in March with 14 loan servicers -- banks and other companies that perform tasks for mortgage investors such as collecting payments from homeowners and when necessary, filing to foreclose. The 14 firms promised further internal investigations, remediation for some who were harmed and a halt to the filing of false documents. All such behavior had stopped by the end of 2010, they said.

Of these companies, Reuters has found at least five that in recent months have filed foreclosure documents of questionable validity: OneWest, Bank of America, HSBC Bank USA, Wells Fargo and GMAC Mortgage.

So have half a dozen large servicers that weren't party to the agreements, including Ocwen Financial Corp and units of Credit Suisse Group AG.

Spokesmen for the banks and servicers named in this article said that they halted any wrongdoing after disclosures last autumn of robo-signing led them to revise their practices, and they denied filing false documents since then.

In general, they said their foreclosure cases were legitimate, but for a small number of exceptions, and that criticism by defense lawyers and judges of some types of documentation is based on misinterpretation of the law.

The persistence of the paperwork mess poses a dilemma for American policymakers and society at large.

The vast majority of homeowners in foreclosure are in fact delinquent on their mortgage payments. Many bankers and judges view the issue as a technicality. Regardless of legal niceties, they say, people should pay up or lose the collateral on the loans -- their houses and condos.

Increasingly, though, courts are holding that the trusts suing to foreclose don't actually own the mortgages. Judges have ruled that foreclosing based on flawed or missing evidence violates longstanding laws meant to protect all Americans' property rights.

In a landmark decision in January, the Massachusetts Supreme Judicial Court overturned a foreclosure because of a lack of proper documentation.

"The holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order," wrote Justice Robert Cordry in a concurring opinion. "Although there was no apparent actual unfairness here to the (homeowners), that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it."

(U.S. Bank National Association, trustee, vs. Antonio Ibanez, 458 Mass. 637.)

A THOUSAND QUESTIONS

Reuters reviewed records of individual county clerk offices in five states -- Florida, Massachusetts, New York, and North and South Carolina -- with searchable online databases. Reuters also examined hundreds of documents from court case files, some obtained online and others provided by attorneys.

The searches found more than 1,000 mortgage assignments that for multiple reasons appear questionable: promissory notes missing required endorsements or bearing faulty ones; and "complaints" (the legal documents that launch foreclosure suits) that appear to contain multiple incorrect facts.

These are practices that the 14 banks and other loan servicers said had occurred only on a small scale and were halted more than six months ago.

The settlements included the four largest banks in the United States -- Bank of America Corp, Wells Fargo, JP Morgan Chase & Co, and Citigroup Inc. The other parties were lending units of Ally Financial Inc, HSBC Holdings PLC, MetLife Inc, PNC Financial Services Group Inc, SunTrust Banks Inc, U.S. Bancorp, Aurora Bank, EverBank, OneWest Bank and Sovereign Bank.

The pacts were struck with the Office of the Comptroller of the Currency, the main regulator of national banks, as well as with the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision.

Some state and federal officials have called the settlements weak. Authorities are still working out financial penalties to be imposed on the 14 firms. The banks didn't admit or deny wrongdoing, and many of the practices banned were previously illegal anyway, such as filing false affidavits and making false notarizations. And regulators left it to the banks to oversee their own internal investigations.

The OCC confirmed it has received complaints that questionable practices continue. But spokesman Bryan Hubbard said the settlements "are intended to address many of the root causes of improper foreclosure actions," thus preventing future harm.

WAVE OF FORECLOSURES

The collapse of the housing boom in late 2006 led to a wave of foreclosures. Federal Reserve data show that some 4.5 percent of U.S. mortgages are in foreclosure. In 2010, 2.5 million foreclosures were initiated, with a similar number expected this year.

In the housing boom, lenders created millions of new mortgages, packaged them into pools, and securitized them rapidly for sale to investors in so-called mortgage-securities trusts.

The agreements setting up the trusts, called "pooling and servicing agreements," require that key documents, properly executed and endorsed, be turned over immediately for each mortgage when a trust is established. The two most important ones are a promissory note and mortgage assignment.

A mortgage really has two parts. One is the actual mortgage (in some states called a "deed of trust"). Its purpose is to pledge the home as collateral for the loan. To transfer ownership of this collateral pledge, the seller must issue a document called a mortgage assignment. The other is the promissory note, which is the loan agreement itself. The homeowner signs it, promising to pay principal and interest.

The Reuters examination turned up thousands of instances --more than 2,000 in Florida alone -- involving recently filed mortgage assignments which ostensibly transferred mortgages to these trusts years after they were formed.

The problem, according to Georgetown University law professor Adam Levitin, an expert on securitization: About 80 percent of all trust agreements provide that New York State law applies, and under New York law, any mortgage assignments made later than specified in the agreements would be void.

Reuters has also uncovered problems with the other key document used in foreclosure cases, the promissory note.

To foreclose, a trust, bank or mortgage finance giant such as Fannie Mae or Freddie Mac must possess the original "blue ink" signed promissory note. The crucial parts of the note are at the bottom -- the endorsements, somewhat like those on the back of a check. The agreements establishing trusts require a proper chain of endorsements showing legal transfers of a note from the original lender, through any intermediary owners, and finally to the trust itself.

Attorneys defending homeowners contend that improper endorsements are rife. Reuters obtained from public court records and defense attorneys more than 100 examples of notes that for various reasons appear to be improper.

MYSTERY OF MARY ARTHUR

One example: The attempt by Credit Suisse unit DLJ Mortgage Capital to foreclose on Mary Arthur of Dobbs Ferry, New York. Mrs. Arthur, 63 and legally blind, works part time as an assistant in a doctor's office. Originally from Trinidad, Mrs. Arthur became delinquent on her $427,500 loan after her parents and sister died and she ran up debts traveling home for the funerals, according to her attorney, Linda Tirelli.

The loan servicers, Select Portfolio Servicing of Salt Lake City, threatened to foreclose on DLJ's behalf. Mrs. Arthur arranged with Select Portfolio a trial mortgage modification to see if she could keep up with the reduced payments. She made the payments but, Tirelli said, Select Portfolio filed to foreclose.

DLJ filed in two separate court cases what it said were authentic copies of Mrs. Arthur's promissory note. Because they were supposed to be copies of the same document, the endorsements filed with both courts should be identical.

But a look at the documents shows that the version filed in state court and the one filed in bankruptcy court had completely different endorsements on them -- naming different owner banks and signed by different people. Tirelli said she has brought this to the attention of the bankruptcy judge and is awaiting a ruling.

Credit Suisse, which owns both DLJ Mortgage Capital and Select Portfolio Servicing, declined to comment, as did Casey Howard, the lawyer representing DLJ in the bankruptcy case.

Bank of America, meanwhile, is coming under fire from a New York federal bankruptcy judge.

Last Tuesday, Judge Robert Drain ordered an investigation involving a foreclosure case brought by the bank. Two earlier copies of a promissory note filed in court had lacked any endorsement, but then one appeared on the note when bank lawyers produced the original.

The judge said the sudden appearance of an endorsement, and his own close look at it, raised questions about whether it had been added illegally to make the note look legitimate.

It "raises a sufficiently serious issue as to when and more importantly by whom this note was endorsed," the judge said.

A Bank of America spokesman said the bank will produce evidence that "will demonstrate to the court's satisfaction that the endorsement is proper."

(In re: Priscilla C. Taylor, Debtor, United States Bankruptcy Court, Southern District of New York, Case # 10-22652.)

MISSING SIGNATURES

These banks aren't alone in filing doubtful documents. Reuters found cases in which Wells Fargo didn't obtain mortgage assignments -- and hence the right to foreclose -- until well after it had filed foreclosure cases.

Wells Fargo, as a trustee, has moved to foreclose on homeowners who have mortgages from now-defunct Option One Mortgage Corp. In June, a bankruptcy appellate panel of the federal Ninth Circuit Court of Appeals overturned a decision to allow Wells Fargo to foreclose on an Option One mortgage. It said that there was no evidence that the note and mortgage had ever been turned over to Wells Fargo as trustee.

In court files of Florida foreclosure cases by Wells Fargo on Option One mortgages, none of the promissory notes filed as exhibits in 10 cases found by Reuters had any endorsements on them.

A Wells Fargo spokeswoman said it is possible that proper endorsements exist but were omitted from the copies of the promissory notes filed in court.

In other cases reviewed by Reuters, Wells Fargo and GMAC Mortgage, a unit of Ally Financial, this year assigned mortgages from defunct lender New Century Mortgage Corp., which went under in 2007. Securitization lawyers say it is technically impossible for a defunct company to directly assign a mortgage over to another owner.

Documents and statements made to courts that are found to be false can amount to crimes under state and federal laws. Daniel Richman, a Columbia University law professor and former federal prosecutor, said such acts can be perjury, and preparing fraudulent documents can be prosecuted under federal mail and wire fraud statutes. The Sarbanes-Oxley Act makes it a crime punishable by up to 20 years in jail to file false documents in a bankruptcy case, including foreclosures.

ROBO-SIGNERS RETURN

Reuters also found that loan servicers are still using the corner-cutting tactic that most captured the public imagination last year: robo-signing.

The investigation identified six known robo-signers who have continued to churn out large numbers of mortgage assignments since the beginning of 2011 - months after the industry vowed to stop the practice.

Among them is Bryan Bly, an employee of Nationwide Title Clearing of Palm Harbor, Florida.

Bly testified in a July 2010 foreclosure case in Florida that he signed up to 5,000 mortgage assignments per day at the loan-servicing company. Although he is an employee of Nationwide, he signed the documents as a "vice president" of Option One Mortgage, Deutsche Bank, CitiBank and other institutions. (Case # 2009-CA-1920, Circuit Court of the Fourth Judicial District, Clay County, FL)

In his deposition, Bly said Nationwide multiplied his output by electronically stamping his signature on additional mortgage assignments that Bly said he never saw. He testified, too, that all the documents then were falsely notarized. Nationwide's notaries were given stacks of the already-signed documents, he said, and attested falsely that Bly had signed the legal papers in front of them. Bly said he didn't verify the information in the papers he signed, and that he didn't understand key words and expressions in them.

Despite these disclosures, a Reuters search of county clerk records in Florida, New York and Massachusetts shows that Bly continued to sign thousands of mortgage assignments this year.

A Nationwide spokeswoman said there is nothing illegal about signing large numbers of mortgage assignments. After Reuters inquired about Bly, however, she later said that because of recent questions raised about him by Nationwide customers, Bly has been moved to a job at the firm that doesn't involve signing documents.

R. Christopher Rodems, a lawyer for Bly, said there is nothing improper about signing large numbers of mortgage assignments. Rodems said Bly had received death threats after a videotaped deposition Bly gave in November 2010 was posted briefly on YouTube, in which he testified about signing massive numbers of mortgage assignments.

A LAWYER'S NAME

Robo-signing isn't limited to low-level employees at loan servicers.

Lawrence Buckley is a lawyer who manages the Dallas, Texas law firm Brice, Vander Linden and Wernick. In March, he testified that he had allowed his electronic signature to be affixed to sworn court documents that he had never seen. The documents, known as "proofs of claim," included one filed with the federal bankruptcy court in New York. It sought permission for Deutsche Bank to seize the Bronx, New York, house of 59-year-old Virginia Obasi. (United States Bankruptcy Court, Southern District of New York, Case # 10-10494 MG)

Buckley said he had never seen the document, and that another lawyer at his firm had filed it using Buckley's electronic signature. The signature appears on the document as "/s/ Lawrence J. Buckley."

Buckley said that other lawyers at his firm were permitted to use his signature to file documents electronically with bankruptcy courts. He testified that it was standard practice at the firm not to review any of the original documents the claim was supposed to be based on, such as the original promissory note and mortgage.

Luke Madole, a lawyer for Buckley, said he saw nothing wrong with Buckley letting lawyers he directly managed use his electronic signature. Later, in an e-mailed statement, Madole added that what occurred "is nothing like 'robo-signing'" and to use "that loaded term would be unfair in the extreme."

A JUDGE INVESTIGATES

Robo-signer Christina Carter resurfaced in a ruling earlier this month, when Arthur Schack, a New York State court judge in Brooklyn, threw out an attempt by HSBC to foreclose on a Brooklyn house.

Schack said he had instructed HSBC's chief lawyer in the case, Frank Cassara, to confirm key facts directly with HSBC officials. The judge said Cassara subsequently "affirmed 'under the penalties of perjury'" that he had done so. But the judge said it turned out that Cassara had never checked with anyone at HSBC, and that the employees Cassara had said he spoke with at HSBC actually worked for a loan servicer.

The judge also said signatures on documents in the case were filed by known robo-signers, three of whom he identified by name, including Carter of Ocwen Loan Servicing. He personally had examined multiple examples of their signatures, the judge said, and found wide variations, raising the possibility that other people had been signing their names.

Judge Schack then took an unusual step: He formally threatened HSBC's CEO, Irene Dorner, as well as lawyers for the firm, with sanctions for relying on known robo-signers, filing false documents and making false representations to the court. The possible sanctions could range from an oral reprimand to financial and other penalties.

"If HSBC has a duty to make money for its stockholders," Schack wrote, "why is it purchasing nonperforming loans, and wasting the Court's time with defective paperwork and the use of robo-signers?" [ID:nN1E76612C]

HSBC spokesman Neil Brazil said that the servicer, Ocwen, was responsible for what occurred in the case, and that HSBC had had no role in it.

Paul Koches, Ocwen's general counsel, said in an e-mail: "To our knowledge, there was nothing submitted by our legal counsel to the court that was in any way misleading as to who is the owner of this mortgage and note, nor was there any conduct of any kind that would justify sanctions."

Carter says she did nothing improper, and left Ocwen voluntarily in May for another job.

DOWN IN FLORIDA

The bank now trying to foreclose on Marjorie Gunter has produced a troubled paper trail. OneWest submitted a document signed this February to prove that the original lender for her mortgage, a company called MortgageIT, had signed over ownership to OneWest. But MortgageIT, owned by Deutsche Bank, wasn't in business in February. It had ceased operations three years earlier, in 2008.

A Deutsche Bank spokesman declined to comment.

Even if the February document were authentic, it wasn't recorded until nearly 10 months after OneWest had launched its foreclosure action, which began in May 2010. Real estate law throughout the United States requires that before moving to foreclose, a trust or bank must already own the mortgage and related promissory note. Otherwise, courts have ruled, a forecloser has no right to seize a house.

OneWest also filed two separate copies of what it said was the 87-year-old homeowner's original promissory note. The first had an endorsement only from MortgageIT to now-defunct IndyMac Bank. Weeks later, OneWest filed a second copy of the note, with the addition of a "blank" endorsement -- an endorsement by IndyMac, but with the name of the payee left empty. OneWest has filed no evidence in the case that the note was subsequently transferred to Fannie Mae.

OneWest declined to explain the multiple apparent discrepancies in the Gunter foreclosure documents. A spokesman said in an e-mail: "OneWest is dedicated to ensuring that it meets the needs of its customers, acts in accordance with applicable laws, and complies with its contractual mortgage servicing duties to the highest standards."

A Fannie Mae spokeswoman said Fannie does own the Gunter note, but declined to explain how the mortgage finance giant obtained it, "due to it being in active litigation."

The judge in the Gunter case hasn't ruled yet on OneWest's documents. (20th Judicial Circuit Court in Collier County, FL, Case number 10-2982-CA).

Mrs. Gunter lives in Immokalee, a scrubby town 34 miles inland from Fort Myers on Florida's Gulf coast. About 40 per cent of the townspeople live below the poverty line, census data show. She shares her home with her three dogs; her one surviving son lives in a nursing home.

In an interview at her house, on a dusty road off the main highway, Mrs. Gunter said she doesn't understand why the bank is foreclosing.

OneWest says that Mrs. Gunter now is delinquent by more than $160,000. Her lawyer, Joseph Klein of the Legal Aid Service of Collier County, argues there are extenuating circumstances.

Copies of her mortgage application forms show that in December 2006, an agent for Deutsche Bank's MortgageIT unit signed up Mrs. Gunter for a $149,900 mortgage. The forms, listing her income, show that the agent knew that the monthly payments -- $1,151, including insurance -- were more than her monthly income of $800 from Social Security plus about $200 in food stamps.

In an affidavit filed in court, Mrs. Gunter said she had asked the salesman for a "reverse mortgage," which allows senior citizens to remain in their homes without making mortgage payments, with the value of the house going to the bank when they die. But the documents the salesman gave her to sign were for an ordinary 30-year mortgage.

Losing her place would be a devastating blow, Mrs. Gunter said. "If they take the house," she said, "they'll take me, too."

(Scot Paltrow reported from New York and Washington, Tom Brown from Immokalee; editing by Michael Williams and Claudia Parsons)

French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year.

But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings.

The uncertainty pushed the euro down against other currencies on Monday and the government bond yields of indebted euro zone states rose, with Italy's 10-year yield climbing more than 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.

"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said.

"We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work anymore; the opportunity has been lost."

"CANNOT RULE OUT ANYTHING"

Officials are wrestling with a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek debt that would be conducted at a discount to face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt.

But all of the schemes could face major technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone. Other proposals still appear to be on the table; Germany's Die Welt newspaper reported on Monday that governments were considering a levy on banks as a way to involve private creditors in rescuing Greece.

An official of a major euro zone government who is familiar with the talks said he had not heard of a proposal for a bank levy, but added: "There are at the moment so many proposals that you cannot rule out anything."

If a deal on private creditor participation is reached, it may cut Greece's debt by just 20 or 30 billion euros, not nearly enough by itself to solve the problem. Analysts have estimated the debt would have to be roughly halved, to 80 percent of gross domestic product, to make it manageable in the long run.

German Chancellor Angela Merkel said on Sunday that while this week's summit was "urgently necessary," she would only attend if lower-ranking officials had already prepared a clear rescue plan. "I will only go there if there is a result."

BAILOUT

As part of the second bailout, officials have also been looking at other measures to help Greece including up to 60 billion euros of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalize Greek and European banks; and ways to stimulate Greek economic growth.

Some official sources have said interest rates on bailout loans extended to Greece, Ireland and Portugal may be cut and maturities on those loans extended drastically, perhaps to 30 years.

There has also been talk of expanding the 750 billion euro bailout facility which the European Union and the IMF jointly created last year as the debt crisis erupted.

But de Grauwe said financial markets were now putting so much pressure on weak euro zone states that it was unclear whether cutting interest and extending maturities on their emergency loans would help them regain access to the markets.

"If that was to be a solution, it's a solution we should have implemented months ago, when it would have worked."

Another source of concern is signs that the IMF and other major governments around the world, which want to prevent the European crisis from poisoning debt markets globally, may lose patience with Europe's handling of the problem.

Die Welt quoted unnamed diplomatic sources as saying the IMF was angered by Europe's crisis management and that "influential parties" in the Fund wished not to take part in further bailouts of Greece. It did not elaborate.

Former U.S. Treasury Secretary and White House adviser Lawrence Summers, writing in a column contributed to Reuters on Sunday, said Europe needed to act much more aggressively than it had done so far to prevent the Greek crisis from damaging both the region's single currency and the global economic recovery.

He recommended steps including sharp cuts in interest paid on bailout loans, allowing countries to buy European Union guarantees for their issues of new debt, and a menu of options for private investors to become involved.

"It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown toward European policymakers over the last 15 months," Summers wrote.

Many private economists think some form of regional guarantee for countries' debt along the lines suggested by Summers -- or perhaps even the issuance of joint euro zone bonds -- may ultimately be the only way to emerge from the crisis without one or more weak states being forced out of the zone.

But Germany has shown no appetite for such a sweeping solution, which in any case would require a complex and time-consuming revision of the EU treaty.

"We are against euro bonds," German government spokesman Steffen Seibert said on Friday, repeating Berlin's concern that a common bond for the single currency area would provide no meaningful incentives for national governments to pursue prudent budget policies.

(Writing by Andrew Torchia)

At a news conference in Pretoria, where he began what will be a curtailed visit to Africa, Cameron defended hiring former tabloid editor Andy Coulson, a figure at the center of the scandal, as his spokesman.

He rejected veiled criticism from the police chief, who quit after coming under fire for appointing Coulson's former deputy as a media adviser to his force.

"The situation in the Metropolitan Police Service is really quite different to the situation in government," Cameron said in response to remarks by outgoing Metropolitan Police Commissioner Paul Stephenson, who contrasted the prime minister's response to hiring one ex-journalist to his own resignation over the other.

Having cut short a planned week in Africa as the scandal snowballed, Cameron also said parliament would delay its summer recess to let him address lawmakers again on Wednesday.

The prime minister came under further pressure on Sunday with the resignation of Stephenson and arrest of Rebekah Brooks, who ran British newspapers for Murdoch's News Corp.

Murdoch, the 80-year-old Australian-born magnate whose grip on Britain's media and politicians of all parties have been shaken by two weeks of outrage, faces a parliamentary committee on Tuesday. He and his son James, 38, as well as Brooks, can expect a fierce grilling over allegations the News of the World tabloid hacked thousands of people's voicemails and bribed policemen.

The scandal may be reshaping the British establishment, with the press, police and politicians all facing harsh questioning from the public over cozy relationships and a failure over many years to protect the vulnerable, including child crime victims and the nation's war dead, from intrusive tabloid journalism.

The affair has prompted Murdoch to shut down the 168-year-old News of the World, Britain's top-selling Sunday paper, and to drop a bid for pay-TV network BSkyB that was a key part of its global expansion in television. That in turn has raised questions from investors over the family's management.

News Corp shares plunged during Australian trading on Monday, hitting a two-year low of A$13.65 following global drama for the group during the weekend closure. On Friday, Brooks, a former News of the World editor, resigned, as did Les Hinton, head of Murdoch's Dow Jones & Co, publisher of the Wall Street Journal. Hinton used to run News International in Britain.

The shares ended 4.1 percent lower at A$14.16.

CAMERON UNDER FIRE

In resigning on Sunday, police chief Stephenson said he had done nothing wrong but did not want distractions from the affair to hamper security preparations for next year's London Olympics. And he aimed unusually sharp, if veiled, barbs at Cameron.

Amid public anger at the police's refusal for several years to act on allegations of widespread phone hacking, Stephenson had faced questions over his senior officers' closeness to News International. He was particularly under fire over the appointment of Neil Wallis, a former deputy editor at the News of the World, as a public relations adviser to his force.

Stephenson noted that Wallis, who was arrested last week and is one of 10 journalists so far being questioned as suspects in the phone hacking and bribery case, had not been linked to the scandal when he was hired. He contrasted that to Cameron's hiring in 2007 of Coulson, Wallis's editor at the paper.

Coulson resigned as editor when his royalty correspondent was jailed for hacking the phones of royal aides, although he denied knowing of any wrongdoing. Coulson quit the prime minister's office in January this year as police reopened their investigation of the paper. He was arrested this month.

Asked about Stephenson's comments on his appointment of Coulson, Cameron said: "I don't believe the two situations are the same in any shape or form.

"There is a contrast with the situation at the Metropolitan Police, where clearly the issues have been around whether or not the investigation is being pursued properly.

"In terms of Andy Coulson, no one has argued that the work he did in government in any way was inappropriate or bad. He worked well in government, he then left government."

He reiterated the steps he has taken to tackle the scandal, notably funding the renewed police investigation and setting up an independent public inquiry in response to revelations that the hacking extended beyond the voicemails of the rich, famous and powerful to include those of abducted teenager Milly Dowler, later found murdered in 2002, and many other private citizens.

POLITICAL DAMAGE

Cameron, a 44-year-old former public relations executive, revived Conservative fortunes after taking the leadership in 2005, winning power 14 months ago after 13 years of Labour rule.

Many see the scandal as his biggest test to date, though few see anything other than a remote threat to his political future.

"This crisis has understandably shaken the Cameron circle. Some dared to hope the storm had passed," wrote Andrew Grice, political editor of the Independent newspaper. "Yesterday they realized the storm is still gathering pace. It could last for years. No one knows where it will end, least of all Mr Cameron."

Tim Bale, politics professor at the University of Sussex, said: "It has become almost a crisis of governance in the United Kingdom ... There is a sense of things sliding out of control.

"The actual text of (Stephenson's) statement pointing to parallels between himself and the prime minister is quite breathtaking. It won't make Mr Cameron do the same thing, but it reminds people once again of the Coulson problem."

Iain Dale, a prominent Conservative commentator, wrote on his blog: "I can't believe I am even writing this, but it is no longer an impossibility to imagine this scandal bringing down the prime minister, or even the government."

Yet, he said, that remained far-fetched, as did Toby Young, a commentator blogging at the Conservative-supporting Daily Telegraph, who cited Cameron's assured demeanor in public and efforts to highlight Labour's own long relationship with the Murdoch press as reasons for expecting the crisis to blow over.

"I don't rule out the prime minister being toppled by this scandal," Young wrote. "I just don't think any of the details that have emerged so far, or his handling of the crisis, put him in serious jeopardy."

As well as the issue of hiring Coulson, who edited the News of the World from 2003 to 2007, Cameron has come under fire for his friendship with Brooks, Coulson's predecessor as editor.

She will face parliament's media committee on Tuesday, though many believe her answers will be curtailed due to her having been arrested and bailed after 12 hours of questioning at a London police station on Sunday. Alongside her will be Murdoch himself and his son James, the chairman of News International.

Lawmakers, who gave senior police officers a fierce grilling last week, are expected to do so again on Tuesday in a separate committee hearing covering interior ministry affairs.

Labour, whose hitherto low-profile new leader Ed Miliband has capitalized on Cameron's discomfort, seized on Stephenson's reference to the Coulson appointment in his resignation speech.

"It is striking that Sir Paul Stephenson has taken responsibility and answered questions about the appointment of the deputy editor of the News of the World," Labour's home affairs spokeswoman Yvette Cooper said in a statement.

"The prime minister still refuses to recognize his misjudgment and answer questions on the appointment of the editor of the News of the World at the time of the initial phone hacking investigation."

With politicians from Australia to the United States demanding to know if similar abuses occurred elsewhere in Murdoch's global media business, Murdoch has been forced uncharacteristically onto the defensive and the position of his son James as heir-apparent has been called into question.

Labour leader Miliband called for new rules to curb how much of Britain's media could be controlled by one proprietor: "Concentrations of power damage our culture," he said.

Murdoch, who some media commentators say at first misjudged the strength of public anger, published apologies in several British newspapers at the weekend.

He also met and apologized to the family of murdered schoolgirl Milly Dowler in an acknowledgment of the likely truth of allegations that a News of the World investigator not only listened in to their missing daughter's voicemails but may have deleted some to make way for more -- misleading police who were hunting for her and giving her parents false hope she was alive.

($1 = 0.940 Australian Dollars)

(Additional reporting by Jodie Ginsberg in Pretoria and Stephen Mangan, Christina Fincher, Sven Egenter, Ralph Gowling and Michael Roddy in London; Writing by Alastair Macdonald, editing by Mark Trevelyan)

News Corp (NWSA.O) will be in the spotlight after the company's shares traded in Australia (NWS.AX) sank to a two-year low on Monday as the UK phone hacking scandal fallout worsened. Rebekah Brooks, the former head of the company's UK paper business, was arrested on Sunday and top policeman Paul Stephenson quit over the scandal.

With five days remaining before President Barack Obama's deadline for a deal to raise the U.S. debt ceiling, Republicans and Democrats have yet to agree on a big plan to cut the nation's deficit and raise its debt limit in time to avoid an unprecedented U.S. default. Efforts to reach a comprehensive deficit-reduction deal are at an impasse over tax breaks as lawmakers -- with an eye on 2012 elections -- hold on to entrenched positions.

The euro fell while gold hit record highs on Monday as disappointment over financial health checks on European banks and escalating U.S. and euro zone debt problems sent investors scrambling for safe haven assets.

European stocks were down around 0.6 percent in morning trade, adding to last week's sharp losses, as banking stocks dropped after the region's stress test results published late on Friday failed to dispel investors' concerns over the potential impact from the region's sovereign debt crisis. .EU

On the earnings front, investors awaited results from Gannett Co, Halliburton, Hasbro (HAS.O), IBM, Charles Schwab, Stanley Black and Decker, Wynn Resorts (WYNN.O) and Zions BanCorp. (ZION.O).

Google's blowout quarter led the Nasdaq higher on Friday but mounting uncertainty about the government's ability to reach a debt-reduction deal may keep investors at bay in the coming week.

The Dow Jones industrial average .DJI rose 42.61 points, or 0.34 percent, to end at 12,479.73. The Standard & Poor's 500 Index .SPX gained 7.27 points, or 0.56 percent, to finish at 1,316.14. The Nasdaq Composite Index .IXIC advanced 27.13 points, or 0.98 percent, to close at 2,789.80.

(Reporting by Blaise Robinson; Editing by Jon Loades-Carter)

Investors sent News Corp shares down as much as 7 percent in heavy volume after Rebekah Brooks, the former head of the company's UK paper business, was arrested on Sunday and top policeman Paul Stephenson quit over the scandal.

"I think people would rather be cautious and mark it down rather than find a reason to defend it," said Invesco senior investment manager Jackson Leung in Melbourne. Invesco is News Corp's second-largest institutional shareholder with a 1.68 percent stake, according to Thomson Reuters data.

News Corp shares ended down 4.1 percent at A$14.16 after touching a low of A$13.65.

Shares in a News Corp takeover target, pay-tv firm Austar (AUN.AX), also fell on worries the deal may not proceed after the furor in Britain forced News to drop a $12 billion plan to buy all of highly profitable broadcaster BSkyB (BSY.L).

Austar has agreed to a $2 billion-plus takeover offer from its bigger rival Foxtel, which is owned by News Corp's (NWSA.O) News Ltd division, billionaire James Packer's Consolidated Media Holdings (CMJ.AX), and telecoms firm Telstra (TLS.AX).

The Australian government last week said it may review media laws and ownership, following pressure from the influential Greens party.

Rupert Murdoch's News Ltd dominates the Australian newspaper industry, commanding nearly three-quarters of daily metropolitan newspaper circulation, and the UK scandal has riveted attention in his homeland.

Murdoch, who now has U.S. citizenship, started his global media empire in Adelaide when he inherited the now defunct Adelaide News from his father, Sir Keith Murdoch.

He owns 150 national, capital city and suburban news brands in Australia, which include mass circulation daily tabloids in Sydney (Daily Telegraph) and Melbourne (Sun Herald) and the national daily The Australian.

Austar closed down 3.8 percent while Consolidated Media fell 2.9 percent, against a flat broader market, reflecting investor concerns on the future of the deal.

Still, the Austar and Foxtel camps and banking sources familiar with the deal said the offer was on track and did not expect it to be derailed because Foxtel is only 25 percent owned by News Corp.

"This has long been a transaction with a compelling logic to it and is in the best interests of shareholders. We will continue to keep the market informed as and when appropriate," a spokeswoman for Austar told Reuters in an e-mailed message.

Australia's competition watchdog is due to rule on the bid for Austar on July 21.

Murdoch, through BSkyB, also has an interest in 24-hour news channel Sky News Australia, which is 33 percent-owned by BSkyB. Sky News TV in Australia is in a battle with the government-owned Australian Broadcasting Corp to run the country's overseas TV network -- Australia Network.

On Sunday, detectives arrested Brooks, former head of News Corp's British newspaper arm, on suspicion of intercepting communications and corruption.

Stephenson, London's police commissioner, quit in the face of allegations that police officers had accepted money from the paper and had not done enough to investigate hacking charges that surfaced as far back as 2005.

SHARES OFF 18 PERCENT IN JULY

News Corp's Australian shares have dived 18 percent, or nearly A$3, this month as the News of the World hacking scandal engulfed News Corp executives.

On Monday, the shares fell 7.6 percent to an intraday low of A$13.65, the weakest since July 2009, and also a 7.4 percent discount to News Corp's (NWSA.O) last U.S. close, implying a $3 billion drop of market capitalization at that level.

Volume was 11.4 million shares, or 4.5 times the average daily volume over the past 90 days, according to Thomson Reuters data.

A News Ltd spokesman in Sydney declined to comment on the share move, saying any comment would have to come out of New York.

"There's a lot of sentiment and emotion driving the stock," said Simon Burge, chief investment officer at ATI Asset Management in Sydney, which holds News Corp shares.

"From an earnings point of view, News of the World was less than 1 percent of earnings but this has catapulted to something greater and it is hard to quantify."

In a report on its web site, Bloomberg News cited two unnamed sources as saying independent directors of New York-based News Corp have begun questioning the company's response to the crisis and whether a leadership change is needed.

On the board, venture capital executive Tom Perkins and Viet Dinh, a law professor at Georgetown University, were leading the efforts of independent directors, according to one of the people in the Bloomberg report.

However, in an emailed response to Reuters, Perkins denied the report.

"The Bloomberg reporter didn't talk to me. There is no substance to her speculations, as far as I know," Perkins said.

The News of the World, which published its final edition a week ago, is alleged to have hacked up to 4,000 phones including that of murdered 13-year-old Milly Dowler.

(Additional reporting by Michael Erman in New York and Sonali Paul in Melbourne; Editing by Balazs Koranyi and Lincoln Feast)