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The pact, which includes an option for Rosneft to invest in Gulf of Mexico and Texan properties, ended any hope of Britain's BP reviving its deal with state-owned Rosneft to develop the same Arctic territory. That deal was blocked in May by the billionaire partners in another BP Russian venture.

The pact gives Exxon, the biggest U.S. oil company, access to substantial reserves in Russia, the world's top oil producer. For Rosneft, it's about bringing in one of the few companies capable of drilling in the harsh, deep waters of the Arctic.

Russia has shown greater willingness in the past year to secure foreign partners, even if some deals later fell apart. The Exxon announcement comes only months after the demise of a Rosneft deal with Chevron Corp for a $1 billion investment in an estimated $32 billion Black Sea project.

Analysts cited differences between Chevron and Rosneft over the choice of contractor, the joint venture's domicile and the jurisdiction of arbitration for any business disputes.

Yet Chevron, like Royal Dutch Shell Plc, was also considered a potential partner for Rosneft's Arctic venture.

Russian Prime Minister Vladimir Putin attended the Tuesday signing -- in the Black Sea resort of Sochi -- by Exxon Chief Executive Rex Tillerson and Russia's top energy official, Deputy Prime Minister Igor Sechin.

"New horizons are opening up. One of the world's leading companies, Exxon Mobil, is starting to work on Russia's strategic shelf and deepwater continental shelf," Putin said.

Exxon and Rosneft agreed to invest $3.2 billion to develop East Prinovozemelsky Blocks 1, 2, and 3 in the Arctic Kara Sea and the Tuapse licensing block in the Black Sea.

Rosneft will own 66.7 percent and Exxon the rest of the joint venture to develop the blocks, which Exxon said were "among the most promising and least explored offshore areas globally, with high potential for liquids and gas."

"The fact that someone with the stature of Exxon Mobil is willing to give it a stab is very significant," said Amy Myers Jaffe, of the Baker Institute at Houston's Rice University.

While Rosneft will tap Exxon's expertise to open up one of the last unconquered drilling frontiers, it will also diversify further by getting a piece of some of Exxon's U.S. developments.

"To get into Russia offshore you give up some of your domestic offshore. I think it's a fair trade," said Brian Youngberg, senior energy analyst at brokerage Edward Jones in St. Louis, who has a "hold" rating on Exxon shares.

It marks a big move for Exxon after it spent a year swallowing XTO -- a much-criticized purchase that shifted its profile toward the depressed U.S. natural gas market. "Now Exxon Mobil is starting to look elsewhere for deals," Youngberg said.

Analysts also said the Rosneft-Exxon agreement indicates that the reset in relations Obama sought was working to reduce the political risk for U.S. businesses operating in Russia.

"Three years ago, American companies were being excluded. Here, an American company is at the center of a flagship announcement. This deal demonstrates that reset has had a positive effect on U.S.-Russia energy relations," said Cliff Kupchan, director of Eurasian Practice at Eurasia Group.

An Obama administration official said the deal was a result of the new cooperation between the United States and Russia.

"Today's announcement of a deal between Exxon-Mobil and Rosneft valued at $3.2 billion is another example of the expanding economic relationship and the potential for mutually beneficial collaboration between Russian and American businesses," the official said.

In explaining the deal's significance, Myers Jaffe pointed to previous failed efforts in the past decade to foster joint energy interests. "There was a lot of disappointment on both sides," she said. "The U.S. industry just gave up on Russia."

PLAN B FOR ROSNEFT

Rosneft said the Kara Sea blocks contain an estimated 36 billion barrels of recoverable oil resources. Total resources are estimated at 110 billion barrels of oil equivalent -- more than four times Exxon's proven worldwide reserves.

The Black Sea block is estimated to hold 9 billion barrels of oil reserves. First drilling is planned to start in 2015, with Exxon shouldering most of the costs.

"The Russians very quickly had a Plan B, and Plan B was Exxon," said Fadel Gheit, energy analyst at Oppenheimer & Co, referring to the quick switch to Exxon from BP.

The deal marks a turnaround in Russia for Exxon, which was widely thought to be on the verge of taking over Yukos, then Russia's largest oil company, before Yukos's boss, Mikhail Khodorkovsky, was arrested in 2003.

Khodorkovsky was subsequently jailed for fraud and tax evasion and Yukos's prime assets were bought at bankruptcy auctions by Rosneft, now Russia's industry leader and with enough reserves to cover 27 years of production.

Uncertainty persists over whether Putin or President Dmitry Medvedev will seek the presidency next March. Putin can now show off the deal as a success if he decides to run.

The transaction also marks a comeback for Sechin, who was ousted as Rosneft chairman earlier this year in a purge of state company boards ordered by Medvedev. Sechin estimated total investment in the project at $200 billion-$300 billion.

In anticipation of all the money flowing there, oilfield services companies including Schlumberger Ltd, Baker Hughes Inc and Weatherford International Ltd WFT.N> have been picking up assets in Russia.

Environmental concerns are unlikely to create barriers to oil extraction in Russia's remote Arctic regions, if moves this year by the country's Natural Resources Ministry to shift nature reserve boundaries are any guide.

U.S. UPSTREAM

Rosneft will be offered an equity interest in Exxon exploration projects in North America, including deepwater Gulf of Mexico and fields in Texas, as well as in other countries.

The deal thus fulfills a demand for reciprocity often made by Putin, helping Rosneft, which already works with Exxon offshore Russia's Sakhalin island, toward its long-term goal of being a global energy major.

It was not clear whether any such investments by Rosneft would need approval from the Committee on Foreign Investment in the United States. An Exxon spokesman declined to comment.

There is no exchange of equity in the agreement, while the BP deal called for a $16 billion share swap in which BP would have exchanged a 5 percent stake for 9.4 percent in Rosneft.

"Exxon is double or triple the size and market value of BP," said Gheit at Oppenheimer. "So, obviously, this would be much more important for a BP than it is for Exxon."

While Rosneft shares rose 1.4 percent in Moscow, Exxon fell slightly on the New York Stock Exchange on Tuesday. (Additional reporting by Vladimir Soldatkin, Katya Golubkova, Michael Erman and Ernest Scheyder; Writing by Douglas Busvine and Braden Reddall; Editing by Dan Lalor, Tiffany Wu, John Wallace, Steve Orlofsky and Phil Berlowitz)

Tuesday's data kept alive concerns the United States could slide back into recession, spurring investors to buy government bonds on bets the Federal Reserve would try harder to push down borrowing costs.

The private-sector Conference Board said its index of consumer attitudes sank to 44.5, from a downwardly revised 59.2 in July. The August reading was the weakest since April 2009, when the country still languished in recession, while the drop was the largest since October 2008.

"What we are effectively going through is a crisis of confidence," said Tom Porcelli, an economist at RBC Capital Markets in New York.

Economists had expected a much-less-pronounced decline.

Consumers' flagging confidence might lead them to shut their wallets, although retail sales data has not pointed in that direction yet.

So far, data from industrial production to employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output. But economists are watching closely for signs of a fresh downturn and will focus sharply on a reading on employment in August on Friday.

"There is basically nothing for consumers to be confident about," said Gennadiy Goldberg, a fixed income analyst at 4CAST in New York.

Stock markets slid sharply in early August as investors were shaken by the politically contentious fight over cutting the U.S. budget and raising the nation's debt limit. Discouraged by the political process, Standard & Poor's stripped the nation of its top-notch AAA credit rating.

The consumer sentiment data weighed on stocks for most of Tuesday's session, although the Standard & Poor's 500 Index closed higher.

FED EYES STEPS TO SUPPORT RECOVERY

Worries over the economy led the Fed in early August to consider new steps to support growth, like tying the path of interest rates to a specific unemployment level, minutes of the central bank's August 9 meeting released on Tuesday showed.

At that meeting, the central bank decided to announce that it expected to hold rates near zero until at least mid-2013.

While that decision drew three dissents, the most in nearly 20 years, the minutes showed some officials wanted even bolder action. Chicago Federal Reserve Bank President Charles Evans made clear in an interview with CNBC that he would have preferred a stronger course of action.

The high level of joblessness is weighing on sentiment and holding the economy back. Friday's jobs report is expected to show the unemployment rate held at 9.1 percent in August.

The Conference Board data suggested things may be getting worse, not better, with an index gauging how difficult it is to find a job hitting its highest level since November 2009.

HOME PRICES WEAK

A separate report showed U.S. single-family home prices fell slightly in June, the latest sign the economy's recovery will not be able to count on help from the housing sector.

The S&P/Case-Shiller composite index of 20 metropolitan areas slipped 0.1 percent from the previous month on a seasonally adjusted basis. A Reuters poll of economists had expected prices to be unchanged.

Prices in the 20 cities fell 4.5 percent from a year ago, better than expectations of a 4.6 percent decline.

An excess supply of homes, ongoing foreclosures, tight credit and weak demand have kept the housing market on the ropes and helped to mute the broader economic recovery.

"Basically this is just more confirmation that housing is moving sideways," said Brian Jones, an economist at Societe Generale in New York.

(Additional reporting by Emily Flitter in New York and Pedro Nicolaci da Costa in Washington; Writing by Jason Lange in Washington; Editing by Neil Stempleman and James Dalgleish)

Financial stocks were among the top decliners, with the S&P financial index .GSPF down 1.4 percent.

Bank of America Corp (BAC.N) dropped 2.4 percent to $8.19 and JPMorgan Chase & Co (JPM.N) was off 1.4 percent to $37.10, weighing on the Dow average as the biggest decliners.

Consumer confidence crumbled in August to its lowest level in more than two years as the fallout from political wrangling over a budget deal took a toll.

"This isn't unexpected, given the last month, what with the lack of movement in Washington and the decline in stocks ... If we see positive action there, it will be a blip. Otherwise, I think this could be a trend," said Ron Kiddoo, chief investment officer at Cozad Asset Management in Champaign, Illinois.

The Dow Jones industrial average .DJI was down 72.47 points, or 0.63 percent, at 11,466.78. The Standard & Poor's 500 Index .SPX took off 9.03 points, or 0.75 percent, at 1,201.05. The Nasdaq Composite Index .IXIC slipped 15.86 points, or 0.62 percent, at 2,546.25.

In other data, U.S. single-family home prices fell slightly in June as the market continued to crawl along at depressed levels.

The Federal Open Market Committee releases minutes of its August 9 at 2 p.m. EDT. (1800 GMT) Investors are seeking clues on the policy-setting panel's economic outlook.

Amid concerns about the debt crisis in Europe, Italy's bond sale drew relatively weak demand despite the European Central Bank buying Italian debt in recent weeks.

(Reporting by Angela Moon; editing by Jeffrey Benkoe)

The Conference Board, an industry group, said on Tuesday its index of consumer attitudes sank to 44.5 from a downwardly revised 59.2 the month before. Economists had expected a much less pronounced decline.

Concerns have grown that the United States might be heading toward a new recession. Consumers' flagging confidence might lead them to shut their wallets, although retail sales data hasn't pointed in that direction yet.

"What we are effectively going through is a crisis of confidence," said Tom Porcelli, an economist at RBC Capital Markets in New York.

The United States lost its AAA credit rating earlier this month following a drawn out battle in Washington over spending that nearly led the country to default on its obligations.

U.S. Treasuries prices extended gains on Tuesday on fears a pullback in consumer spending could trigger recession, while U.S. stocks fell. The dollar hit a session low against the yen.

So far this year, data from industrial production to employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output.

"There is basically nothing for consumers to be confident about," said Gennadiy Goldberg, a fixed income analyst at 4CAST in New York.

Concern over the outlook led the U.S. Federal Reserve earlier this month to say it would hold interest rates at rock-bottom level for at least the next two years, a decision that drew three dissents.

Some Fed officials favor doing more to bring down the unemployment rate. A report on Friday is expected to show the jobless rate held at 9.1 percent in August.

The Fed releases the minutes of its August 9 meeting later on Tuesday and investors will scour them for clues on whether the Fed is likely to do more for the economy.

Chicago Federal Reserve Bank President Charles Evans, who is considered to be less focused on inflation risks than some of his colleagues, said on Tuesday he favored strong central bank accommodation for a substantial period of time.

"It's difficult to characterize the labor market as anything other than consistent with being in a recession," he told CNBC television.

"I'm in favor of some of the most aggressive policy actions of anyone on the committee," added Evans, who votes on the Fed's policy-setting Federal Open Market Committee this year.

HOME PRICES WEAK

A separate report showed U.S. single-family home prices fell slightly during June in the latest sign the country's struggling economic recovery will not be able to count on any help from a moribund housing sector.

The S&P/Case-Shiller composite index of 20 metropolitan areas slipped 0.1 percent from the previous month on a seasonally adjusted basis. A Reuters poll of economists had expected prices to be unchanged.

An excess supply of homes, ongoing foreclosures, tight credit and weak demand have kept the housing market on the ropes and helped to mute the broader economic recovery.

"Basically this is just more confirmation that housing is moving sideways," said Brian Jones, an economist as Societe Generale in New York.

Prices in the 20 cities fell 4.5 percent from a year ago, better than expectations for a decline of 4.6 percent.

Friday's jobs will give an idea of how much damage the stock market turmoil inflicted on the already wounded economy.

U.S. nonfarm payrolls likely increased 75,000 in August after rising 117,000 in July, according to a Reuters survey.

(Additional reporting by Emily Flitter; writing by Jason Lange in Washington; Editing by Neil Stempleman)

A group of investors is buying 13.1 billion CCB shares from Bank of America, with the deal expected to close in the third quarter. The U.S. bank declined to name the investors but two sources said Singapore state fund Temasek was among the buyers.

Bank of America needs to boost capital by some $50 billion in the coming years to meet new global rules, according to multiple analyst estimates.

CCB is the second-largest bank by market value in the world, and Bank of America's ties with the Chinese bank are seen as an important source of future growth, particularly as economic growth in the United States is likely to be tepid for now.

Bank of America's willingness to sell part of its CCB investment as soon as it was contractually able to shows how far it must go to meet new capital requirements, analysts said.

"Bank of America's decision to sell that stake is wrong strategically in the long run, but they need money," said Josef Schuster, founder of Chicago-based IPO research and investment house IPOX Schuster.

The bank has said it can raise the capital it needs through earnings and selling off assets, but a number of investors have expressed concern that the bank will need to issue more common shares.

Those dilution concerns helped push the bank's shares this month to their lowest level in two-and-a-half years. Investors are also concerned about the bank's potential losses from mortgages and related litigation. Bank of America's 2008 purchase of Countrywide has brought it billions of dollars of losses and legal payouts.

Bank of America shares gained 8.1 percent to close at $8.39 on Monday.

A $5 billion investment from Warren Buffett's Berkshire Hathaway last week stopped the fall in Bank of America's shares.

For CCB, analysts said the sale helps soothe investor worries about when a sale might take place.

"This removes an uncertainty that's been hanging on China Construction Bank for a while now," said Ivan Li, deputy head of Hong Kong research at Kim Eng Securities.

In the CCB deal, Bank of America sold each share for HK$4.93, an 11 percent discount to the Chinese bank's most recent closing price of HK$5.55.

As lock-up provisions expire on a number of Chinese financial stocks, big investors will have the contractual right to start selling shares. Fears of those transactions have weighed on the sector, along with concerns about the Chinese economy's growth trajectory.

A START

Bank of America will record a $3.3 billion gain in the third quarter as a result of the sale, and a $3.5 billion increase to its core capital under current rules, a spokesman said.

Under proposed Basel III rules, the sale will generate an $8.3 billion gain for Bank of America.

The deal could add 0.3 percent to the bank's core capital until current industry rules and 0.2 percent under proposed Basel III rules, wrote David George, Robert W. Baird & Co bank analyst, in a research note to clients.

For Basel III, the bank's tier one capital levels after the deal are about 5.7 percent, while the bank is targeting somewhere around 6.75 percent or 7 percent by 2013, George said.

In recent weeks, Bank of America has also agreed to sell an $8.6 billion Canadian credit card portfolio to TD Bank Group and is in talks to sell $1 billion of real estate assets to Blackstone Group.

In the last six quarters, Bank of America has generated some $30 billion of proceeds from asset sales.

Fears about the bank's ability to meet its capital requirement have cut the bank's stock price by a third since the beginning of August, including a 20 pct plunge on August 8.

TAPPING INTO GROWTH IN 2005

Temasek has a history of buying CCB shares. In November, it bought Bank of America's entitlement to buy 1.79 billion CCB shares in the Chinese bank's rights offering.

The Singapore fund has another link to Bank of America -- Greg Curl, the U.S. bank's former chief risk officer, is now president, overseeing the financial services sector for the fund.

A Temasek spokesman declined to comment.

Before CCB's IPO in 2005, Bank of America paid $3 billion for a 9.9 percent stake in the Chinese bank.

At the time, then Bank of America Chief Executive Kenneth Lewis said the partnership was designed to give the bank increased access to roughly 1.3 billion Chinese consumers, while CCB would benefit from Bank of America's U.S. retail banking experience.

The U.S. bank increased its holdings in following years to 25.6 billion shares, including 23.6 billion that came out of lock-up on August 29. After the share sale, Bank of America will still have about 12.1 billion CCB shares, worth nearly $9 billion.

Last week, CCB President Zhang Jianguo told Reuters the two companies were in talks to extend their current cooperation agreement for another five years.

(Reporting by Joe Rauch in Charlotte and Elzio Barreto in Hong Kong, additional reporting by Saeed Azhar in Singapore; Lauren Tara LaCapra amd Clare Baldwin in New York; Editing by Derek Caney and Matthew Lewis)

With big-ticket data like U.S. job numbers due later this week, many investors remain uncertain about a recovery in the world's largest economy, leaving risk for a correction in markets still trading at low holiday volumes.

But European shares .FTEU3 rose 1.6 percent, tracking gains on Wall Street and in Asia, while London shares advanced 2 percent in early trade, catching up with the broader market after a holiday on Monday. .EU

World stock markets, as measured by MSCI .MIWD00000PUS, rose 0.5 percent to their highest since August 18. The index is still down nearly 15 percent from a May high, however, after taking a hammering at the start of August due to growing pessimism about the U.S. economy as well as worries over Europe's sovereign debt crisis and banks.

"With consumer confidence, the (U.S) ADP jobs report, ISM Manufacturing, jobless claims and nonfarm payrolls report all due in the coming days, there is going to be a lot of nervousness around," said Ben Potter, strategist at IG Markets.

"The market could also be seen as vulnerable given it has rallied ahead of these big economic reports. We think a lot of participants will be employing a 'wait and see' approach as we navigate through the next few days."

Investors would also await the minutes from the Federal Reserve's last committee meeting on Aug 9 which could offer more clues on divisions among board members over further stimulus measures.

Still, the latest gains in stock markets encouraged some investors to switch out of safe-haven assets like the Swiss franc and core government bonds into higher-yielding currencies such as the New Zealand dollar.

An Italian bond auction later in the day will serve as a barometer of investor demand -- and give more hints how much further the euro zone's debt crisis has to run -- after recent bond purchases by the European Central Bank.

CREDIT CRUNCH

The Italian tender is likely to sail through smoothly and could give a temporary boost to risk appetite, but it is unlikely to lift broader concerns that the risk of contagion could still engulf larger economies like Italy, Spain and France.

These concerns have made investors such as U.S. money market funds reduce exposure to European banks and pushed their credit default swap spreads higher.

The Itraxx European senior financials index has pushed beyond the peaks seen during the last crisis, and at 247 basis points the spread is starting to reflect credit ratings that are not in line with their current ones.

The euro was down 0.2 percent against the dollar at $1.4484, and also eased against the Swiss franc.

The franc, hit by Switzerland's efforts to weaken it in the past month, traded slightly down against the dollar, at 0.8160 francs, hovering near a five-week low touched on Monday.

Spot gold stabilized around $1,797 per ounce levels after falling by nearly seven percent in about a week. It hit a record $1,911 last week.

"In terms of fundamentals, (gold) still looks good. The only risk to the downside is if the CME raises margin requirements again," said Natalie Robertson, a commodities strategist at ANZ.

The CME Group (CME.O) raised margins on gold futures by about 27 percent last week.

German Bunds reversed early gains as European equity markets opened higher. German Bund futures briefly dipped into negative territory and were last 9 ticks higher at 134.48.

(Additional reporting by Atul Prakash in London)