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With Rupert Murdoch's younger son under increasing pressure from the phone-hacking scandal enveloping the company, News Corp executives want to be prepared if he wants to "take a breather," one News Corp source said.

"The company is still trying to operate as if James isn't going anywhere," said another high-ranking insider. "But everyone is thinking about what will happen if he has to step aside."

Through a representative, Rupert Murdoch and News Corp senior management said it was "absolutely not true" the company was thinking about the possibility that James may step aside.

James is known for "doing his own thing", one News Corp executive noted. A tattooed, ear-pierced record label owner before becoming the last of Rupert's children to join the company, he now presents the image of a nattily dressed, conservative corporate executive.

"I'm waiting for the moment when he says, 'What the hell am I doing here, I need a breather,'" the source said. "And I wouldn't be surprised if the people who are speaking to him and watching him aren't wondering if the time has come for him to drop the (corporate) act."

A third source close to the Murdoch family added, "There needs to be some kind of separation for James from this issue before he can run the company more broadly."

James Murdoch is News Corp's deputy chief operating officer and chief executive of News International, which oversees the company's European and Asian businesses.

Last week, during a conference call to discuss News Corp's earnings, Rupert Murdoch said in response to a question about any near-term succession that Chief Operating Officer Chase Carey "is my partner, and if anything happened to me I'm sure he'll get it immediately, if I went under a bus." He added: "But Chase and I have full confidence in James."

Three sources pointed to that comment as evidence that News Corp was at least considering life without James.

The sources asked not be identified because of the sensitive nature of the matter.

RELOCATING TO NEW YORK

News Corp remains insistent that James Murdoch will retain his current position and is the front runner to succeed his father in the long term.

Plans are still in place for James to relocate to New York early next year.

But the first News Corp insider characterized the move to New York as an attempt by the company to remove him from the line of fire in the UK, not as a logical step in his ascension.

The hacking scandal, which led to the closure of News Corp's News of the World newspaper, was thrust back into headlines on Monday after UK authorities publicized a letter by fired News of the World reporter Clive Goodman accusing senior executives of knowing about phone hacking by the paper.

The letter was written four years ago by Goodman as an appeal to News Corp's then head of human resources, Daniel Cloke, against his dismissal from the tabloid. Goodman had been fired after being accused of phone hacking.

Goodman, a former royal reporter at News of the World, said in the letter that the practice of hacking had been openly discussed until then-editor Andy Coulson banned any reference to it.

Until earlier this year, News of the World's parent company News International, a unit of News Corp, had maintained that Goodman was a "rogue reporter" acting on his own. Goodman spent four months in jail in 2007 for hacking.

James Murdoch, who took charge of News International shortly after Goodman and private detective Glenn Mulcaire went to jail, has repeatedly claimed that he only learned recently that phone hacking by the newspaper had gone beyond those two individuals.

On Thursday, however, James Desborough, a former Hollywood reporter for News of the World, was arrested on suspicion of phone-hacking, the 13th arrest made as part of the investigation in the scandal.

The Parliamentary committee overseeing the phone hacking investigation has said it plans to question additional News Corp executives next month, and there is speculation that James Murdoch will be called back to give additional testimony.

"Legally, it's clear this stuff has got to get sorted with him," said a third source involved with the company.

"His position does appear to be getting weaker," one investor in BSkyB, where James is chairman, told Reuters, though he added that he was not aware of any institutional pressure for action to remove Murdoch from his role.

Even if James was pressured into leaving News Corp, two of the sources said the departure would not likely be permanent.

"Even if he did step out of the spotlight for a while, that wouldn't necessarily mean he wouldn't come back when things are quieter," said another source who asked not to be named because of a relationship with the family.

FAMILY TIES

Murdoch's children have moved in and out of the company at various times. Elisabeth Murdoch, Rupert's daughter, recently reemerged when News Corp bought her company, Shine Group, and her father has expressed his desire to bring eldest son Lachlan back into the company's fold. Lachlan, who once held the deputy COO position now held by James, left News Corp in 2005.

Two of the sources said that when Lachlan was in London a few weeks ago helping his father and brother prepare for their appearance in Parliament, Rupert again asked him if he would accept a position in the company.

Lachlan declined, the sources said.

"He's happy where he is," one of the sources said. Lachlan Murdoch owns an Australian investment firm called Illyria. He is also interim chief executive of Australian television company Ten Network Holdings.

One of the sources even thought the scandal could end up helping James in the long run. This source said that James was a forward-thinking executive with a lot of credibility in the business world, and that the strong performance of News Corp's Indian and German assets, along with BSkyB, Sky Italia and the Times newspaper's digital strategy, is owed to him.

"When he gets through this he will be a better executive and a better candidate for CEO. He will have been battle-tested like his father," the source said.

Ultimately, James' fate rests in the hands of his father.

"There's only one decision maker, of course, and he is often willing to hold his course against public opinion," said one of the sources close to the family, referring to Murdoch senior.

Though the Murdoch patriarch is loath to bow to public opinion, he has already been forced to sacrifice two of his closest executives, Les Hinton and Rebekah Brooks, as a result of the phone hacking scandal.

(Additional reporting by Yinka Adegoke and Jennifer Saba in New York, and Sinead Cruise in London; Editing by Toni Reinhold and Ted Kerr)

The $2.5 trillion U.S. money market funds industry -- which supplies short-term dollar funding to banks -- has retreated from the euro zone in recent months, concerned that the continent's debt crisis is spiraling out of control.

That and the drying up of interbank lending has led to a trebling of dollar funding costs for euro zone banks in the last month. One bank was forced to borrow dollars at the European Central Bank on Wednesday.

In a dramatic shift, the U.S. branches of foreign banks became net borrowers of dollars from their overseas affiliates for the first time in a decade, Federal Reserve data released last week showed.

The Fed's New York branch -- which oversees U.S. units from many European banks -- is now asking for more information about whether the banks have reliable access to the funds needed to operate in the United States, the Wall Street Journal said.

New York Fed officials "are very concerned" about European banks facing funding difficulties in the United States, a senior executive at a major European bank who has participated in the talks told the Wall Street Journal.

The New York Fed was not available to comment.

On Wednesday, one euro zone bank borrowed $500 million from the European Central Bank at a rate much above those at which banks can get dollars in the open market. It was the first time since February 23 a bank used the central bank's facility.

Fed officials recently have held meetings with U.S.-based executives from top European banks to discuss their funding positions, the Wall Street Journal said.

Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U.S. arms, sources told the newspaper.

Regulators recently have ramped up pressure on European banks to transform their U.S. businesses into self-financed units to insulate them from problems at their parent companies, the WSJ cited a senior bank executive as saying.

French banks are most exposed to U.S. short-term funding, and it is access to U.S. dollar liquidity that is of particular concern. BNP's short-term borrowings were $94 billion and SocGen's were $56 billion, Citi analysts estimated last month.

European bank shares were 3.5 percent lower on Wednesday after hefty drops last week. But this time the fall was along with other sectors such as automobiles and construction shares, on concerns about global growth.

Franco-Belgian Dexia was hardest-hit, standing 8 percent lower at 6:09 a.m. EDT. The bank was the biggest borrower of the Federal Reserve's so-called discount window -- an emergency facility -- during the financial crisis.

(Reporting by Douwe Miedema and Steve Slater in London and Soham Chatterjee in Bangalore; Editing by David Cowell and Hans-Juergen Peters)

The Labor Department said its Consumer Price Index increased 0.5 percent, the largest gain since March, after falling 0.2 percent in June. Economists polled by Reuters had expected a 0.2 percent rise last month.

Gasoline, which rose 4.7 percent after falling 6.8 percent the prior month, accounted for about half of the rise in CPI last month.

Core CPI -- excluding food and energy -- rose 0.2 percent after rising 0.3 percent in June. Last month's gain was in line with economists' expectations.

The Federal Reserve last week promised to keep interest rates near zero at least until mid-2013 to boost growth and said the outlook for inflation over the medium-term was subdued.

Data on Wednesday showed wholesale prices, excluding food and energy, rose at their quickest pace in six months in July, with the year-over-year increase the largest since June 2009.

Given limited pricing power for producers as consumers grapple with a 9.1 percent unemployment rate, inflation is not regarded as a threat now for an economy which barely grew in the first half of the year.

Food prices rose 0.4 percent after increasing 0.2 percent in June, also contributing to the large gain in the CPI rate.

Core consumer prices last month were held back by new motor vehicle costs, which were unchanged after five straight months of hefty gains. This likely reflects an improvement in supplies as disruptions caused by the March earthquake in Japan fade. Motor vehicle production rebounded sharply in July.

In the 12 months to July, core CPI increased 1.8 percent -- the largest increase since December 2009. This measure has rebounded from a record low of 0.6 percent in October and Fed would like to see that closer to 2 percent.

Overall consumer prices rose 3.6 percent year-on-year, rising by the same amount for a third straight month.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

Japan's Nikkei stock average dropped 1.3 percent, falling below the closely watched 9,000 line, hurt by the yen's persistent strength and fears the United States might be heading for another recession, with many investors on the sidelines ahead of U.S. economic data.

European stocks were down 2.3 percent, with heavyweight miners among the heaviest losers as nagging fears about the outlook for the global economy prompted investors to sell recent gains from the market's tentative recovery rally started last week.

Investors were bracing for a raft of U.S. macro data, including weekly jobless claims, existing home sales and the Philadelphia Federal Reserve Bank's business activity index, seen ticking up to 3.7 from 3.2 last month, suggesting only modest activity growth.

The global economy is "dangerously close to a recession", Morgan Stanley said, as it slashed its growth forecast for 2011 and 2012, citing recent policy errors in the U.S. and Europe and the prospect of further fiscal tightening in 2012.

Morgan Stanley cuts its global gross domestic product growth forecast to 3.9 percent from 4.2 percent for 2011, and to 3.8 percent from 4.5 percent in 2012.

On the earnings front, companies including Hewlett-Packard, Gap and Sears Holdings are due to report results.

Limited Brands Inc reported a higher-than-expected profit as it sold more lingerie at full price and the company raised its August same-store sales and full-year profit forecasts, sending its shares up more than 3 percent.

Data storage equipment maker NetApp Inc posted quarterly revenue below Wall Street projections, saying business fell dramatically in July -- the latest sign that global technology spending is slowing.

JDS Uniphase Corp forecast weak first-quarter revenue on macro-economic challenges and inventory corrections, but said booking trends were encouraging.

Insurance broker Marsh & McLennan Cos Inc said it will buy back an additional $500 million of shares, doubling its share repurchase program to $1 billion.

China Mobile logged its fastest half-yearly profit growth in nearly three years as the world's largest mobile phone operator by subscribers attracts more high-end 3G users upgrading to smartphones.

Tech shares fell on Wednesday after Dell's disappointing sales outlook fanned worries that weak economic growth will hurt earnings in the third quarter.

The Dow Jones industrial average was up 4.28 points, or 0.04 percent, at 11,410.21. The Standard & Poor's 500 Index was up 1.12 points, or 0.09 percent, at 1,193.88. The Nasdaq Composite Index was down 11.97 points, or 0.47 percent, at 2,511.48.

(Reporting by Blaise Robinson; Editing by David Hulmes)

The company's chief executive, Leo Apotheker, who came on board with hopes of reinvigorating a sprawling business empire he blames previous management for stifling, has presided over two quarters when HP was forced to shave 2011 sales forecasts.

Some analysts warn HP may have to do so again after a market sell-off and a downgrade of U.S. government debt reinforced uncertainty about the global economy.

Investors fled hardware shares after Dell Inc this week slashed its fiscal 2012 revenue outlook, afraid that spending by corporations and government will crumble as economic growth slows. HP fell about 4 percent on Wednesday, while Dell plunged more than 10 percent.

"In light of growing signs of economic weakness, increased concerns around government debt levels around the world, plummeting consumer confidence levels and the mini-crash over the past few weeks, we expect HP to take a more cautious tone on this Thursday's conference call," Ticonderoga Securities analyst Brian White wrote on Wednesday.

"We find it hard to believe the company's high European exposure will not be impacted by the current environment, while we expect the company's consumer exposure to be challenged and...the services turnaround could take longer than expected.

Several brokerages however kept "Buy" or "Outperform" ratings on the stock, which is trading at 6.5 times 2011 earnings versus Dell's 8.2 -- one of the lowest among major tech players -- after shedding a quarter of its value in 2011.

Wall Street had braced for a tepid year as governments worldwide grapple with ballooning debt, high unemployment in the developed world discourages consumers, and corporations tighten their belts in the face of uncertainty .

But Dell's move hinted at a worsening outlook.

China's Lenovo Group Ltd, the world's No.3 PC brand, joined rivals in flagging concerns about the impact on demand from the weak global economy and euro zone debt crisis, overshadowing a near doubling in first quarter profits.

GROWING PRESSURE

Former SAP chief Apotheker is now facing mounting pressure to turn things around and enhance management's credibility on the Street after a rocky start.

Apotheker wants to boost earnings by pushing into cloud computing, which involves helping companies revamp their data centers so they can transfer computing tasks online.

That is becoming increasingly crucial as HP's foray into the consumer arena with its TouchPad tablet may already be losing steam. The device has received dismal reviews and has yet to make a dent in Apple Inc's iPad market share.

HP priced its tablet -- powered by the webOS platform it inherited with its $1.2 billion acquisition of Palm -- at $499 when it launched with a huge marketing budget. That was identical to the cheapest iPad.

A month after its July launch, HP slashed that by $100, a pace seldom seen in a red-hot gadget industry. The AllthingsDigital tech blog reported that, of 250,000 TouchPads shipped to retailer Best Buy, only 27,000 had been sold.

Analysts are expecting HP to post earnings of $1.09 per share on revenue of $31.2 billion and gross margins of just under 24 percent in the fiscal third quarter ended July, according to Thomson Reuters I/B/E/S.

Among its largest divisions, Wall Street foresees flat growth at its personal devices arm, and single-digit growth in the services business it is trying to overhaul and jump-start.

"The company will likely guide its October quarter modestly below consensus due to weakness in consumer," Sterne Agee analyst Shaw Wu predicts. "Consensus estimates...will likely turn out too aggressive given our supply chain checks of the likelihood of a more muted holiday season."

(Reporting by Edwin Chan and Poornima Gupta; Editing by Richard Chang and Matt Driskill)

Commodity and technology shares dragged the region's shares lower as investors skimmed off some of this week's gains amid lingering worries on the U.S. economy and eurozone debt.

The Swiss National Bank (SNB) said it would expand its liquidity policy but stopped short of introducing a franc exchange rate peg, a topic hotly discussed in markets over the last few days as a way to cool the red-hot currency.

"What drove the Swiss stronger is less speculation and more fear of things going wrong in the euro zone. Until that's fixed, it's very difficult to see how the SNB can win," said Rob Ryan, FX strategist at BNP Paribas in Singapore.

The dollar traded at 0.7902 Swiss francs, having retreated from a two-week high around 0.8011, while the euro stood at 1.1372 francs, down from Wednesday's peak around 1.1554.

Still, markets are a lot calmer compared with last week, when a crisis of confidence swept through global financial markets after Standard & Poor's cut the United States triple-A credit rating, pushing investors into safe-havens such as gold and the Swiss franc.

GARDEN VARIETY UNCERTAINTY

"The mood has improved over the past week from sheer panic to a more garden-variety uncertainty about the future," said Bricklin Dwyer, economist at BNP Paribas.

With market sentiment still fragile, traders said data due later in the day, including U.S. consumer prices, existing home sales and regional manufacturing data will be closely watched.

Japan's Nikkei stock average slipped 0.42 percent, while stocks elsewhere in Asia as measured by MSCI fell over 1 percent.

Underscoring the cautious mood in Asia, S&P stock futures lost 0.63 percent.

Taiwan's tech-heavy index lost almost 2 percent, making it the biggest loser in the region's major markets, tracking a fall in U.S. tech shares on Wednesday after Dell's disappointing sales outlook heightened worries about the economic growth outlook.

Australian brewer Foster's won 1 percent after the company rejected a $10 billion offer from rival SABMiller for a second time.

Meanwhile, gold traded at $1,789 an ounce, holding not far from a record high around $1,813.79 set last week. U.S. crude was a touch softer at $87.22 a barrel.

The dollar continued its gradual decline against the yen, slipping to 76.60 yen, well off a high above 80.00 set earlier this month after Japanese authorities intervened to weaken the yen.

Japanese Finance Minister Yoshihiko Noda said on Thursday he will closely watch market moves, when asked by reporters about the yen's strengthening against the dollar overnight.

"The Bank of Japan is caught between a rock and a hard place," said Jessica Hoversen, FX analyst at MF Global in New York. "Intervention did not work earlier this month, but investors also do not want to be caught on the wrong side."