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The investigation began before S&P, a unit of McGraw-Hill, downgraded the long-term U.S. debt from a AAA rating to AA-plus this month, the paper said.

In the mortgage investigation, the Justice Department has been asking about instances in which S&P analysts wanted to assign lower ratings to mortgage bonds but may have been overruled by S&P business managers, the Times reported.

Justice Department spokesman declined to comment on the story upon being contacted by Reuters. S&P did not immediately respond to phone calls seeking comment outside regular U.S. business hours.

It was unclear whether the Justice Department investigation also involves the other two ratings agencies, Moody's Corp and Fimalac SA's Fitch, or only S&P, the newspaper said.

The paper quoted Ed Sweeney, a spokesman for S&P, in an e-mail that the agency had received several requests from different government agencies over the last few years and that it was cooperating with these requests.

The Times said that despite the outcry over the ratings agencies' failures in the financial crisis, investors still rely heavily on ratings from the three main agencies for their purchases of sovereign and corporate debt, as well as other complex financial products.

Companies and some countries, though not the United States, pay the agencies to receive a rating. For decades, the government issued rules that banks, mutual funds and others could rely on a AAA stamp of approval for investing decisions -- which bolstered the agencies' power, the newspaper said.

A successful case or settlement against a giant like S&P could accelerate the shift away from the traditional ratings system, the Times said.

For instance, the Dodd-Frank financial reform overhaul sought to decrease the emphasis on ratings, but bank regulators have been slow to spell out how the reform would work.

S&P has been under fire from lawmakers, market players and the U.S. Treasury Department since its decision to cut the U.S. credit rating.

The U.S. Securities and Exchange Commission was also reviewing whether S&P followed all of its policies leading up to the credit downgrade, according to sources familiar with the review.

Key committees in Congress may also hold hearings about the downgrade and reforms of the ratings industry.

(Reporting by Soham Chatterjee in Bangalore and JoAnne Allen in Washington; Editing by Philip Barbara and Ramya Venugopal)

The Labor Department said on Wednesday its seasonally adjusted index for prices paid at the farm and factory gate, excluding food and energy, rose 0.4 percent -- the largest increase since January -- after rising 0.3 percent in June.

That compared with economists' expectations for a 0.2 percent rise.

Overall prices received by producers rose 0.2 percent, above economists' expectations for a 0.1 percent gain, after falling 0.4 percent in June.

"Nobody is going to get too excited about inflation risks at this point," said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.

U.S. financial markets were little moved by the data.

The Federal Reserve last week promised to keep interest rates near zero for the next two years to stimulate growth, saying the outlook for inflation over the medium-term was subdued.

A spike in food and energy prices pushed up inflation early this year, but weak economic growth and high unemployment kept underlying price pressures contained.

In the 12 months to July, core producer prices increased 2.5 percent, the largest rise since June 2009.

Tobacco accounted for almost a quarter of the rise in the monthly core PPI rate, with light motor trucks and pharmaceuticals also making significant contributions.

Light truck prices increased 1 percent, while tobacco surged 2.8 percent, the largest increase since March 2009.

Overall producer prices were bumped up by food costs, which rose 0.6 percent as potatoes recorded their biggest increase in almost a year. Gasoline prices, however, fell 2.8 percent.

In the 12 months to July, producer prices rose 7.2 percent after increasing 7.0 percent the prior month. The rise was above economists' expectations for a 7.0 percent advance.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

At 5:06 a.m. EDT, futures for the S&P 500, Dow Jones and Nasdaq 100 were down between 0.1 and 0.4 percent

The FTSEurofirst 300 .FTEU3 index of leading European shares was down 0.5 percent, after the meeting between German chancellor Angela Merkel and French president Nicolas Sarkozy failed to calm worries over the euro zone debt crisis.

The two leaders announced plans for a tax on financial transactions. Bourse operators London Stock Exchange (LSE.L), Deutsche Boerse (DB1Gne.DE) and NYSE Euronext (NYX.PA) fell between 3.7 and 3.9 percent. Inter-dealer broker ICAP (IAP.L) was also hit, down 5.2 percent.

Global brewer SABMiller (SAB.L) has taken its $10 billion bid direct to Foster's Group (FGL.AX) shareholders, days before Foster's announces its annual results, having failed to win over the Australian company's board.

Inflation comes into the spotlight with the release of U.S. producer prices for July. They are seen having risen 0.1 percent after a 0.4 percent fall in June, but excluding food and energy are forecast up 0.2 percent after a 0.3 percent gain in June.

Earnings reports from companies including teen hot-seller Abercrombie & Fitch (ANF.N) and big box retailer Target (TGT.N) should give an indication of the pace of the back-to-school season and the overall financial health of consumers.

Bank of America Corp (BAC.N) may settle a state and federal probe of foreclosure practices in a deal that lets New York proceed with an inquiry into securitizations, Bloomberg reported citing two people with direct knowledge of the matter.

U.S. stocks fell on Tuesday after three days of gains, partly on disappointment about the outcome of the Sarkozy-Merkel meeting, though retailers Wal-Mart Stores Inc (WMT.N) and Home Depot Inc (HD.N) both gained after the industry bellwethers exceeded analysts' expectations for quarterly numbers.

The Dow Jones industrial average .DJI dropped 0.7 percent; the Standard & Poor's 500 Index .SPX declined 1 percent; the Nasdaq Composite Index .IXIC fell 1.2 percent.

* Shares of Dell Inc (DELL.O) fell in extended trading on Tuesday after the computer company posted quarterly revenue slightly below expectations and said sales for the present quarter would be flat.

(Reporting by Brian Gorman; Editing by Hans-Juergen Peters)

The Swiss franc surged against the euro after the Swiss National Bank said it would expand existing measures to counter the franc strength, but stopped short of announcing more drastic moves which some investors had expected.

France and Germany unveiled far-reaching plans for closer euro zone integration on Tuesday but stopped short of increasing the size of the region's rescue fund and rejected for now the idea of a common euro bond.

Support for a common bond had been growing as it is increasingly seen as a way to allow highly indebted euro zone countries to regain access to commercial markets while providing investors a safeguard through joint liability.

"There weren't any scoops as the proposals had been mentioned over the past few days. Overall, the outcome of the meeting wasn't convincing, with no euro bond project," said Patrice Perois, trader at Kepler Capital Markets, in Paris.

MSCI's world equity index fell a quarter percent, having hit a 1/2 week high on Tuesday. The index hit an 11-month low earlier in August during a volatile week which saw a rush to safe-haven assets.

European stocks fell 1 percent while emerging stocks lost 0.2 percent.

U.S. crude oil rose 0.6 percent to $87.18 a barrel.

Bund futures rose 36 ticks.

The euro fell a quarter percent to $1.4367. The dollar rose 0.1 percent against a basket of major currencies.

(Additional reporting by Blaise Robinson; Editing by Toby Chopra)

A deal would join together the brewer of Miller Lite, Peroni and Grolsch with the Melbourne-based maker of Victoria Bitter, Pure Blonde and Cascade beer, and would be the biggest deal since InBev paid $52 billion to buy Anheuser-Busch to form AB InBev in the world's biggest cash takeover in 2008.

Foster's rejected SABMiller's offer at A$4.90 a share in June, and its chief executive, John Pollaers, said the offer was so low it was not worth discussing.

He recently came under fire from some shareholders for failing to engage with SABMiller.

"As there has been no willingness to engage in relation to SABMiller's proposal on the part of the Foster's Board, SABMiller has decided to make an offer to Foster's shareholders directly," SAB said.

When SABMiller launched its bid for Foster's, analysts said the London-based brewer may have to pay up to A$5.20-A$5.40 to succeed, but now some believe A$4.90-5.10 will win the day, according to a Reuters poll.

($1 = 0.953 Australian Dollars)

(Reporting by Miranda Maxwell and Sonali Paul; Editing by Balazs Koranyi and Ed Davies)