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Prime Minister Silvio Berlusconi, hit by a renewed bout of scandal this week, has caused growing alarm over the failure of his divided government to pass clear measures to cut back Italy's 1.9 trillion euro ($2,726 billion) debt mountain.

Speaking after a week of steadily rising market pressure on Italian bonds, Trichet repeated that the government had to meet last month's pledge of a clear plan to balance the budget by 2013 and pass reforms to boost Italy's stagnant economy.

"This is absolutely decisive to consolidate and reinforce the quality and the credibility of the Italian strategy and its creditworthiness," he told a conference in the northern Italian town of Cernobbio.

The European Central Bank, which has been buying Italy's bonds in the market to try to hold down yields and stop its borrowing costs spiralling out of control, has been stepping up warnings that Rome must act quickly.

There has been some speculation that it might reduce its purchases to put pressure on Rome to act more quickly to pass a much disputed 45.5 billion euro package of austerity measures now going through parliament.

However, any sign of the ECB cutting back its bond-buying programme would risk triggering a market selloff that could tip the euro zone's third economy into a Greek-style emergency.

According to participants at a closed-door session in Cernobbio, Trichet declined to speak about the programme.

"I'm not going to tell you what we're doing on bond buying but we have a meeting next week," Trichet told the conference, according to three different witnesses, apparently referring to next week's regular Governing Council meeting.

Underlining the growing urgency of the situation, the premium investors demand to hold Italian debt rather than benchmark German bonds rose on Friday to 331 basis points, the highest since the ECB started buying Italian paper in August.

Yields on 10-year Italian bonds ended the week at 5.29 percent, creeping back up toward the 7 percent level generally regarded as unmanageable.

POLITICAL DIVISIONS

Italian President Giorgio Napolitano said successive governments had failed to prevent a mountainous public debt from getting out of control, and swift action was essential.

"We have hesitated from resolutely and coherently addressing constraints that should have been loosened and broken from the heavy weight of accumulated public debt," he told the meeting.

Napolitano has played a prominent role in the crisis, using his authority as head of state to cut through political rivalries and broker a series of agreements on budget measures.

But cabinet divisions have hampered efforts to finalize the package. Economy Minister Giulio Tremonti appears increasingly at odds with Berlusconi and the rest of the government.

Speculation persists that the government may fall before the end of its term in 2013, perhaps to be replaced for a limited time by a government of technocrats.

Napolitano declined to comment when asked if the current government was in a position to tackle the situation.

"Should there one day be a government crisis ... I will take my responsibility, as per my mandate, of proposing a solution," he told a question-and-answer session.

On Saturday, Berlusconi's office denied a report in the daily Corriere della Sera that he had attacked Tremonti's insistence on budget rigour even at the expense of economic growth, the latest in a long series of such reports.

Disagreements over taxes and pensions have led to a series of U-turns over the past week. A tax on high earners and a rise in the pension age have been proposed, then dropped within days.

Doubts about Berlusconi's focus on the austerity plan were heightened this week when magistrates arrested a businessman linked to a 2009 prostitution scandal on suspicion of trying to extort as much as half a million euros from the premier.

Berlusconi has denied making any illicit payments, accusing what he calls politically motivated magistrates of trying to bring him down and dismissing the case as absurd.

He has survived dozens of scandals over issues ranging from tax fraud to underage prostitution and the impact of the latest affair is unclear but newspapers have printed extensive extracts of wiretapped conversations which could prove damaging.

(Writing by James Mackenzie; Editing by Kevin Liffey)

"If you think of the market as small cars, medium cars, large cars, SUVs, performance vehicles, all of those different pieces, we compete in about 22 percent of that market today," Will Periam, strategy director for Ford's Asia Pacific and Africa operations, told Reuters on the sidelines of an industry forum in Tianjin.

"In the future, we expect to compete in about 50 percent of that market. And that will be by new versions of the products we have and all-new products which aren't here today."

Most of the new models will be made at Ford's manufacturing plant in China, including the new Focus sedan and Kuga, a small SUV, Periam said.

China's auto market sizzled in 2010 with 18 million units sold. But it has now reverted to a more subdued growth pattern after the government ended tax incentives for small car sales and subsidies for van buyers in rural areas.

Dong Yang, secretary general of China Association of Automobile Manufacturers, has cut his forecast for 2011 vehicle sales growth 5 percent from previous estimate of 10-15 percent.

Periam expects vehicle sales to reach 32 million units by 2020.

Ford currently makes the Focus, Mondeo, X-Max and Fiesta models in a three-party tie-up with Chongqing Changan Automobile Co 000625.47 and Mazda Motor (7261.T). Its Transit van model is also manufactured at Jiangling Motors 000550.SS in which the U.S. auto maker owns 30 percent.

Ford, Mazda and Changan have applied to Chinese regulators to split their three-way tie into two 50-50 ventures and are awaiting approval, Periam said.

In the first seven months, Ford sold 306,830 vehicles in China, up 13 percent from a year earlier.

Periam attributed Ford's recent growth to the launch of a new Mondeo, solid demand for the Focus and Fiesta models as well as aggressive dealership expansions -- adding two outlets per week on average.

(Reporting by Fang Yan, Li Ran and Ken Wills; Editing by Ed Lane)

The lawsuits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, surprised investors, dragging down bank shares and could add billions of dollars of legal costs at perhaps the worst possible time for the industry.

Friday's lawsuits reflects how different parties, including investors, banks and different government groups are fighting over who should bear losses from a housing crisis that in 2008 drove the economy into its worst recession in decades.

The FHFA accused Bank of America Corp and its Countrywide and Merrill Lynch units, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Royal Bank of Scotland Group Plc and others of misrepresenting the checks they had done on mortgages before bundling them into securities.

According to the lawsuits, the securities should have never been sold because the underlying mortgages did not meet investors' criteria. As more borrowers fell behind or went into foreclosure, the securities' value fell, causing losses.

Nearly all the banks that were sued declined to comment or were not immediately available for comment. Others called the charges unfounded.

"Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more," said Mayura Hooper, a spokeswoman for defendant Deutsche Bank AG, in a statement.

A Bank of America spokesman said Fannie Mae and Freddie Mac are trying to shift responsibility to banks after earlier blaming losses on other factors. A spokesman for Ally Financial Inc, once known as GMAC, called the FHFA claims "meritless."

Bank of America faces three FHFA lawsuits, covering losses on more than $57 billion of securities. JPMorgan faces claims related to $33 billion of securities and Royal Bank of Scotland was sued over $30.4 billion of securities.

Several large banks are also negotiating with all 50 U.S. state attorneys general on a comprehensive settlement to address mortgage abuses and limit future mortgage litigation.

"This new litigation could disrupt the AG settlement," said Anthony Sanders, finance professor at George Mason University and a former mortgage bond strategist.

Banks might resist settling if they knew litigation from other regulators could deplete capital, he said.

Before the FHFA lawsuits had even hit a court docket, financial experts offered blunt expectations for the outcome.

"The lawsuits will be settled," said Sean Egan, managing director of Egan-Jones Ratings Co, an independent credit ratings firm. "The end result will be a further outflow of cash from the banks, and more importantly an additional black eye."

A TWIST

FHFA director Edward DeMarco is looking to minimize future losses for Fannie Mae and Freddie Mac, which are owned by the government after being seized on September 7, 2008.

The FHFA filed the suits before a three-year statute of limitations expired. Fannie Mae and Freddie Mac are pillars of U.S. mortgage finance.

Wells Fargo & Co, the largest U.S. bank not sued by the FHFA, entered a "tolling" agreement waiving its right to claim the FHFA waited too long to sue, a person with knowledge of the matter said. The bank said Wells Fargo might have done this to give it time negotiate its own settlement, the person added.

FHFA spokeswoman Corinne Russell and Wells Fargo spokeswoman Mary Eshet declined to comment.

The KBW Bank Index closed down 4.5 percent on Friday, nearly doubling the losses of the broader market. Bank of America led the index lower, dropping 8.3 percent.

Bank shares also came under pressure from signs the Federal Reserve could start selling short-term debt on its books and buy long-dated bonds to push longer-term yields lower.

Such a move, known as "operation twist," would hurt banks whose profit margin is tied to the short-term rates at which they fund and the longer-term rates at which they invest.

Major banks already face potential payouts of tens of billions of dollars to settle regulatory charges of abusive mortgage lending and foreclosure practices, and other investor lawsuits over mortgage debt losses.

Such payouts would reduce earnings and weaken capital levels, perhaps harming the ability of banks to lend money and provide much-needed life to a stalled housing market and weakened economy.

Whether to take action for mortgage bond problems had been under discussion since Fannie Mae and Freddie Mac were placed in conservatorship, a person familiar with the matter said.

While the ultimate amount FHFA will seek is still unclear, that person said it could top the $20 billion settlement being discussed by the banks and the state attorneys general.

Arthur Wilmarth, a George Washington University law professor, said the banks might argue Fannie Mae and Freddie Mac knew how risky the securities they bought were.

If the companies had reason to know mortgages were "essentially being given to anyone with a pulse, then banks could argue they were at least partially at fault," he said.

A BLIZZARD

The blizzard of litigation against banks is hurting share prices because investors are unable to estimate the ultimate scope of a given bank's legal liabilities.

Bank of America, for example, had intended its proposed $8.5 billion settlement in June with investors in Countrywide mortgage securities to resolve most litigation tied to its disastrous 2008 takeover of that home loan provider.

But many parties are objecting, and that settlement did not stop insurer American International Group Inc from suing the bank for $10 billion over its own alleged losses.

Nor did it stop Nevada's attorney general from threatening to withdraw from an $8.4 billion nationwide settlement with the bank. The AG now wants to sue the bank, accusing it of reneging on promises to modify mortgages.

Meanwhile, the U.S. Justice Department in May sued Deutsche Bank, accusing it of misleading a U.S. housing agency into believing loans it made qualified for federal insurance.

The FHFA's lawsuits follow an initial lawsuit in July against UBS AG seeking to recover $900 million of losses incurred on $4.5 billion of debt.

One legislator praised the expected FHFA lawsuits.

Brad Miller, a Democratic congressman from North Carolina, said: "Not pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already."

Since Fannie Mae and Freddie Mac were seized, taxpayers have spent more than $140 billion to keep them afloat.

(Reporting by Margaret Chadbourn in Washington and Jonathan Stempel in New York; additional reporting by Clare Baldwin and Lauren Tara LaCapra in New York; Additional writing by Ben Berkowitz and Dan Wilchins; editing by Matthew Lewis, John Wallace and Andre Grenon)