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Moody's Investors Service and Fitch Ratings maintained U.S. ratings for now, but said additional deficit-reduction measures are needed for the government to put its finances in order and retain the coveted rating.

Underscoring that threat, Moody's assigned a negative outlook to the Aaa rating, which means a downgrade is possible in the next 12 to 18 months.

Fitch promised to conclude a more thorough review of the United States by the end of the month and did not rule out slapping a negative outlook on the rating.

Now investors await Standard & Poor's. The agency has been tougher than its rivals, threatening to downgrade U.S. ratings by mid-October if lawmakers did not come up with a plan to meaningfully cut the budget deficit.

The actual plan approved in Washington called for budget savings of $2.1 trillion in the next 10 years, nearly half the amount S&P has said would be enough to support the AAA rating.

"If they stick to what they said, they would downgrade (the United States). But I suspect they are under tremendous pressure not to do so," said Mohamed El-Erian, co-chief investment officer at PIMCO.

Lingering anxiety about a possible U.S. downgrade contributed to the poor performance of U.S. stocks on Tuesday, adding to worries about the economy. The S&P 500 turned negative for the year after closing in the red for a seventh day. In Tokyo, the Nikkei average fell more than 2 percent.

ECONOMIC CONCERNS

Both Moody's and Fitch have expressed heightened concern about the performance of the U.S. economy, which is crucial for the efforts of stabilizing the country's debt ratios.

The U.S. economy stumbled badly in the first half of 2011, coming close to contraction in the first quarter. It expanded just 0.4 percent in the first quarter, a sharp downward revision from the previously reported 1.9 percent gain, and rose 1.3 percent in the second quarter.

"The downward revisions of the GDP were bigger than we expected and a source of concern," David Riley, Fitch's top analyst for the United States, told Reuters in an interview.

For Moody's, that economic performance may be just an adjustment period, or may be a sign that the financial crisis permanently damaged the growth potential of the United States.

"We would expect that growth would accelerate in 2012 from the first half of the year," Steven Hess, Moody's top analyst for the United States, said.

"But if it doesn't, that means that the whole process of fiscal consolidation and the plans to achieve lower deficits and lower debt ratios will be made all the more difficult."

Another issue that will be closely monitored by Moody's is the evolution of U.S. borrowing costs in the next few years.

The agency would see it as normal if yields paid on U.S. 10-year Treasury notes rise from the currently "abnormal level" of around 2.6 percent to near 4 percent by 2012 and almost 5 percent by 2016, Hess said, referring to the economic assumptions of the Congressional Budget Office.

DEFICIT REDUCTION

The main difference between Standard & Poor's and its rivals is that S&P has said a meaningful deficit reduction deal, if not agreed now, would be even more difficult in 2012, when presidential elections are likely to increase political divisions in Washington.

Moody's and Fitch seem to be more flexible with that time horizon and willing to give the lawmakers the benefit of the doubt.

The plan just approved in Washington includes initial savings of $917 billion and another $1.5 billion by the end of the year, based on recommendations of a bipartisan joint House and Senate committee. Automatic across-the-board spending cuts would kick in if this mechanism fails.

However, Moody's stressed the new framework is "untested."

"Attempts at fiscal rules in the past have not always stood the test of time," the ratings agency said in a statement. "Therefore, should the new mechanism put in place by the Budget Control Act prove ineffective, this could affect the rating negatively."

(Editing by Richard Borsuk)

Moody's negative outlook is a sign that a downgrade is still possible in the next 12 to 18 months.

The ratings agency affirmed the United States' Aaa rating after Congress agreed to raise the country's debt ceiling, which will allow the Treasury to keep servicing U.S. debt obligations.

Moody's had placed U.S. ratings on review for a possible downgrade on July 13, fearing that the government could miss debt payments if lawmakers failed to increase the country's legal borrowing limit by early August.

"Today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the U.S. government debt metrics within Aaa parameters over the long run," Moody's said in a statement.

With the debt ceiling issue resolved, the agency said it is focusing on the long-term challenges to U.S. public finances, burdened by a deficit that has reached about 9 percent of the country's economy -- close to the highest since World War II.

Moody's said that while the combination of the law's congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested.

"They are simply saying they are waiting to see what develops with the new deficit budget commission. It is certainly reasonable given the U.S.'s fiscal position," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina. "Now that we are past the deficit issue, the fiscal issues over the long run will be the story."

The Senate on Tuesday approved the $2.1 trillion deficit-reduction plan by a 74 to 26 vote and President Obama signed it into law.

The law lifts the debt ceiling enough to last beyond the November 2012 elections, calls for $2.1 trillion in spending cuts spread over 10 years and creates a bipartisan joint House and Senate committee to recommend a deficit-reduction package by late November. It does not include any tax increases.

(Reporting by Walter Brandimarte and Daniel Bases; Editing by Dan Grebler)

However, Fitch pointed out that without significant changes in fiscal policy the U.S. debt to gross-domestic product ratio "will reach 100 percent by the end of 2012, and will continue to rise over the medium term - a profile that is not consistent with the United States retaining its AAA sovereign rating."

The firm said it expects to conclude its scheduled review of the U.S. sovereign rating by the end of August.

Even after a bruising battle in Congress to complete a $2.1 trillion deficit reduction deal, Fitch said the AAA status remains strong.

Financial markets took the release differently.

U.S. Treasuries added gains after the Fitch comments. Wall Street stocks and the dollar were stuck in negative territory.

"Fitch expectedly kept the rating AAA, which is essentially what the market had already been pricing in. The more important question here is whether the bill will be enough to appease S&P, which wanted $4 trillion in cuts, with many in the market believing that there is a realistic chance of a downgrade from S&P," said Gennadiy Goldberg, fixed income analyst at 4Cast Ltd. in New York

(Reporting by Daniel Bases, Pam Niimi, Chris Sanders, and Richard Leong; Editing by Andrew Hay)

Just hours before the Treasury's authority to borrow funds runs out -- risking a damaging U.S. debt default -- the Senate was expected to approve the deal to cut the country's bulging deficit and lift the $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.

The bill cleared its biggest hurdle on Monday evening when the Republican-led House of Representatives passed the measure despite noisy opposition from both conservative Tea Party members, who wanted more spending cuts, and liberal Democrats angered by potential hits to programs for the poor.

The vote in the Democratic-controlled Senate, due to take place at noon EDT (1600 GMT), is expected to be less dramatic. If approved, Obama would sign the bill into law shortly afterward.

That would mark the end of a fierce partisan battle that has paralyzed Washington for weeks and spooked investors already nervous about the weak U.S. economy and sovereign debt woes in Europe.

But it would by no means signal an end to uncertainty over the sustainability of U.S. tax-and-spending policies and the deep political divide that the deficit debate has exposed.

Relief in financial markets over an end to the gridlock on Monday quickly turned to concern about the struggling U.S. economy and the risk that the deal is not enough to avoid a possibly damaging downgrade of the top-notch U.S. debt rating.

The plan approved by the House on Monday would raise the existing $14.3 trillion borrowing limit by enough to last into 2013. It calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.

Two major ratings agencies have said that $4 trillion in deficit cuts would allow them to confirm America's AAA rating.

A ratings cut would probably push up U.S. borrowing costs, further hampering the economy.

"The resolution to the debt ceiling does remove one cloud of uncertainty but it does not change the economic reality," said Greg McBride, senior financial analyst at Bankrate.com.

"It's going to take years to come out of this. We're sitting in the terminal waiting for the economy to take flight and instead it's just being delayed month after month after month."

MORE STRIFE AHEAD

The compromise deal was agreed after weeks of angry debate and brinkmanship between Democrats and Republicans.

With unemployment above 9 percent and the economy barely growing so far this year, Americans have become increasingly angry over the partisan attacks and refusals to compromise.

They may soon face the next round of noisy sparring over ideologically fraught tax and spending policies.

The new debt committee's work is likely to launch sharp political rhetoric as the November 2012 presidential and congressional elections near and arguments break out over the expiration at the end of 2012 of tax cuts pushed through by former President George W. Bush.

The deal in Congress is a far cry from a $4 trillion deficit-reduction pact including revenue increases that Obama and House Speaker John Boehner, the top Republican in Congress, appeared close to clinching just over a week ago.

Although all sides conceded some ground to secure a deal, the final bill represented a triumph for the Tea Party camp in the Republican Party, which dug in its heels against any tax hikes and pushed for spending cuts.

Many congressional Democrats were dismayed that Obama and their party leadership did not do more to include some tax increases and provide more protection for social programs.

"I understand that this train is leaving the station, but it is going in the wrong direction," said Representative Jim Moran, a Democrat from Virginia.

(Additional reporting by Jeff Mason, Thomas Ferraro, Lauren LaCapra; Writing by Stuart Grudgings; Editing by Doina Chiacu)

An 11th-hour deal to raise the U.S. debt ceiling cleared its biggest hurdle in the House of Representatives, staving off the prospect of a possibly calamitous default but failing to allay fears Washington could still lose its coveted triple-A credit rating.

U.S. manufacturing grew at its slowest pace in two years in July as new orders contracted, and the economic concerns coupled with uncertainty over the U.S. debt deal boosted demand for safe-haven currencies such as the Swiss franc and weighed on riskier assets such as oil and stocks.

European stock markets were expected to extend a week-long slide, with financial bookmakers calling London's FTSE .FTSE to open flat and France's CAC-40 .FCHI and Germany's DAX .GDAXI down 0.2 percent. .EU .L

S&P 500 index futures fell 0.4 percent, pointing to a weaker start on Wall Street. .N

Japan's Nikkei .N225 fell 1.3 percent, while MSCI's broadest measure of Asian shares outside Japan .MIAPJ0000PUS slipped 1.6 percent.

"While in the short term they've avoided global financial crisis mark two, they're likely to need more budget cuts," Joseph Capurso, strategist at Commonwealth Bank in Sydney, said about the U.S. debt deal.

"When you put that together with very soft U.S. economic data, that raises the odds that the Fed will need to introduce more quantitative easing. I can see the U.S. dollar becoming weaker."

U.S. stocks eased on Monday, with the S&P 500 .SPX closing down 0.4 percent as the weak manufacturing report offset relief that a debt default had been averted. .N

Compounding pessimism about the anemic state of the economy were concerns about the fiscal drag on growth as a result of spending cuts in the U.S. debt deal, which calls for a special Congressional panel to find $1.5 trillion in budget savings by late November.

"While the political cloud of uncertainty may lift somewhat, the economic storm clouds are darkening," Yelena Shulyatyeva, an economist at BNP Paribas wrote in a client note.

"Today's fall is not a big surprise as the market has been concerned about the U.S. economy's long-term outlook, although the country was able to avoid a default," said Naoki Fujiwara, a fund manager at Shinkin Asset Management in Tokyo.

The world's manufacturing sector expanded at its weakest pace in two years last month, surveys showed, as factories reported shrinking orders for the first time since major economies emerged from the banking crisis and recession of 2008.

The dollar traded around 0.7805 Swiss francs on Tuesday, having plumbed a record low around 0.7730 on Monday.

Against the yen, the dollar stood near 77.40, recovering from a low of 76.29 on electronic trading platform EBS on Monday, its weakest since the coordinated intervention by major central banks in mid-March to slow the surging yen.

POSSIBLE INTERVENTION

Japanese officials said the yen, which has gained nearly 5 percent this month, was too strong and could hurt an economy struggling to recover from a massive earthquake in March -- putting markets on alert for possible intervention.

"Coupled with the Bank of Japan's monetary measures, Japan will be able to intervene to push up the dollar against the yen," said Masanari Takada, forex strategist at Nomura Securities.

"Still, it may be difficult to keep the dollar bolstered for long as it is under downward pressure because of caution toward the outlook for the U.S. economy and falling in U.S. Treasury yields."

Others were less convinced that Tokyo would act, however, given that past interventions have only really succeeded when the action has been co-ordinated with other central banks.

"I don't think Japan will intervene," Richard Yetsenga, global head of FX strategy at ANZ Research, told Reuters Insider TV.

"I think what's driving the yen are really global forces rather than domestic forces. It's really about the weakness of the U.S. dollar rather than the strength of the yen."

Gold edged up, supported by news that South Korea's central bank had bought 25 tonnes in recent months to diversify its foreign exchange reserves. Spot gold traded around $1,623.26 an ounce.

"This news reiterates the fundamental view that most investors, asset managers, and even central banks hold true -- that gold remains the quintessential currency hedge, a stabilizing asset for portfolios, and a safe haven in uncertain economic times," said David Meger, director of metals trading at Vision Financial Markets, a futures broker based in Chicago.

Oil slipped, with U.S. crude shedding around a quarter of a percent to $94.66 a barrel, after trading as low as $93.42 on Monday, its weakest since late June. <O/R>

The economic uncertainty boosted demand for government debt, with 10-year Japanese government bond futures rising 0.25 point to 142.02, while the benchmark 10-year yield slipped 3.5 basis points to 1.04 percent, its lowest in nearly 9 months.

(Additional reporting by Ian Chua in Sydney, Ayai Tomisawa in Tokyo and Reuters Insider TV in Hong Kong; Editing by Ramya Venugopal)

Even as the yen climbed down from Monday's peaks, verbal intervention by Japanese officials took on a new, more direct tone, suggesting they were increasingly convinced markets needed a nudge to keep the yen at levels the economy could live with.

The yen traded as high as 76.29 per dollar on the EBS platform on Monday, close to its record high in March of 76.25. The currency backed off to around 77.40 on Tuesday.

"It's hard to comment on current exchange-rate levels. But the yen is being valued stronger than we think ... I'd like to watch currency market conditions especially carefully today," Finance Minister Yoshihiko Noda told parliament.

The yen has soared nearly 5 percent in the past month, as investors dumped the U.S. dollar in favor of other liquid assets out of fear that the world's biggest economy may lose its coveted AAA credit rating because of its huge debt.

The yen fell from Monday's highs after the House of Representatives approved a last-gasp deal to raise the U.S. borrowing limit in a crucial step toward averting a catastrophic debt default.

But Noda made plain the yen was still too high for Tokyo's taste. He said he was in discussions with the Bank of Japan and international partners about the yen's strength, which if persistent would hurt several sectors of the Japanese economy.

A government official, speaking on condition of anonymity, told reporters that Tokyo had not yet decided whether to intervene. But markets players were increasingly convinced it was a matter of when, rather than whether, Tokyo would act.

"Japan could intervene in the currency market anytime," said Masamichi Adachi, senior economist at JPMorgan Securities Japan. "The authorities are likely waiting for a good time not in terms of yen's levels but such factors as market liquidity and changes in sentiment."

"Because Finance Minister Noda is the prominent candidate for the next prime minister, he cannot afford to do nothing or request nothing of the BOJ," Adachi added.

BOJ ON STANDBY

Reinforcing a sense of urgency, the central bank was likely to ease its already ultra-loose monetary policy if the finance ministry decided to intervene and sell yen, sources familiar with the central bank's thinking told Reuters.

The idea of loosening policy would be to amplify the impact of any intervention, they said. The BOJ is due to hold a regular policy review on Thursday and Friday this week.

"If there is intervention, there is a strong chance the BOJ will ease policy," said one source, who spoke on condition of anonymity due to the sensitivity of the matter.

BOJ hopes further easing, likely a move to expand its 10 trillion-yen asset buying program by 5 trillion yen, would also help shore up business confidence threatened by the currency gains, sources said.

The current yen level is still far above the average of 82.59 that Japanese manufacturers have used to make their current earnings forecasts and Japanese exporters, including leading carmakers such as Toyota Motor have become increasingly vocal in their call for action to tame the yen's rise.

The devastating magnitude 9.0 earthquake and tsunami in March, which killed more than 20,000, knocked Japan into its second recession in three years.

The latest yen rally comes just as manufacturers were getting close to restoring pre-disaster output levels.

The central bank and most private economists have been expecting the world's third-largest economy to return to moderate growth later this year, helped by a recovery in exports and reconstruction spending.

But Japanese officials are increasingly worried that a slowdown in global growth, combined with persistent yen gains, could stall Japan's upturn, even if some are skeptical of intervention given that the yen's rise is mainly a function of a broad weak dollar trend.

Japan last intervened to stem the yen in the aftermath of the March 11 earthquake, when speculation that Japanese investors would sell their overseas assets to fund recovery at home pushed the yen to an all-time high of 76.25.

Back in March, Tokyo acted in concert with its Group of Seven peers, but this time most market players believe Japan would have to go it alone given that the yen's gains were mainly driven by investors spooked by the threat of a U.S. credit downgrade.

Tokyo last acted solo in September 2010, when it returned to currency markets after a six-year hiatus and sold 2.1 trillion yen.

(Writing by Tomasz Janowski; Editing by Nathan Layne and Neil Fullick)