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Neither a monetary penalty nor an admission fraud would be included in the settlement under the proposed agreement with the Securities and Exchange Commission, the Times reported, citing several people briefed on the case.

The SEC abandoned hopes of assessing a fine because of the precarious financial positions of the two companies, the newspaper said, citing sources who spoke on condition of anonymity because the deal was not yet final.

The two companies did not view the government's case as particularly strong, but they said they moved to settle to spare time and resources, the Times said, citing one person close to the talks.

The negotiations have been going on since at least early summer, and a deal may not come until later this year, the newspaper said, citing its sources.

Fannie Mae, Freddie Mac and the SEC all declined to comment, the report said.

A settlement would represent the most significant acknowledgment yet by the mortgage finance giants that they played a central role in the housing boom and bust, the New York Times said.

(Reporting by JoAnne Allen; editing by Ramya Venugopal)

"The Federal Reserve will do all it can to help restore high rates of growth and employment in a context of price stability," Bernanke said in comments prepared for delivery to the Economic Club of Minnesota.

In what could be taken as a bid to quell concerns among some of his colleagues that further monetary easing could spark inflation, the Fed chairman said a rise in prices this year is likely to be transitory.

"We see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy," he said.

Other than offering a bit more detail on the outlook for inflation and emphasizing that sluggish growth is not enough to satisfy the Fed, Bernanke offered few fresh insights into thinking at the central bank on measures to aid the recovery.

He largely reiterated remarks he made two weeks ago, repeating that the Fed has a range of tools to provide additional stimulus and is prepared to use them.

Unusually weak household spending and persistent financial strains spurred by worry over Europe's sovereign debt crisis and the loss of Washington's top-tier credit rating continue to hold back the recovery, Bernanke said.

The Fed chairman warned that overzealous belt-tightening by the U.S. government in the near term could also slow down the "erratic" recovery.

"Substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring," he said.

(Reporting by Mark Felsenthal and Pedro Nicolaci da Costa; Editing by James Dalgleish)

Applications for unemployment benefits rose to 414,000 in the week ended September 3 from an upwardly revised 412,000 in the prior week, the Labor Department said.

A separate report showed the trade deficit narrowed considerably in July, a positive signal for growth in the third quarter after a sluggish first half.

"The trade balance was better than expected despite worse jobless claims, so that could move up (gross domestic product) estimates, and that is why we probably didn't go down more than what we should have on the number," said Sam Ginzburg, head of capital markets at First New York in New York.

The Dow Jones industrial average .DJI dropped 27.81 points, or 0.24 percent, to 11,387.05. The Standard & Poor's 500 Index .SPX fell 5.46 points, or 0.46 percent, to 1,193.16. The Nasdaq Composite Index .IXIC shed 8.18 points, or 0.32 percent, to 2,540.76.

On the heels of the jobless data and last Friday's payrolls report showing no jobs were created in August, Obama is expected to propose tax cuts for the middle class and businesses and new spending to repair roads, bridges and other infrastructure.

Federal Reserve Chairman Ben Bernanke will deliver a speech on the U.S. economic outlook to the Economic Club of Minnesota at 1:30 p.m. EDT (1730 GMT), but he is unlikely to outline new measures to boost the economy.

"I want to hear what Bernanke has to say, I want to hear what Obama has to say, which in turn is going to make Friday, for our market, a very interesting day," said Ginzburg.

The European Central Bank signaled that its interest rate rise cycle had been halted, saying euro zone inflation risks were no longer skewed to the upside and economic growth would be slow at best. European stocks were little changed.

Caliper Life Sciences Inc (CALP.O) surged 41.4 percent to $10.43 after a deal to be bought by PerkinElmer Inc (PKI.N). PerkinElmer fell 3.2 percent to $21.35.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

A separate report showed a considerably narrower trade deficit for July, a positive signal for growth in the third quarter after a sluggish first half of the year.

Applications for unemployment benefits rose to 414,000 in the week ending September 3 from an upwardly revised 412,000 the prior week, the Labor Department said on Thursday. Wall Street analysts had been looking for a dip to 405,000.

"Jobless claims numbers have been stabilizing in recent weeks. We're probably seeing an economy that's just growing slowly," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis.

U.S. stock index futures extended losses after the data, while Treasury debt prices held gains.

Excluding one week in early August, claims have held above 400,000 since early April. The Labor Department said there was no discernible effect from recent hurricanes and storms on the national figures this week.

The four-week moving average of claims, which smooths out volatility, rose to 414,750 from 411,000 the prior week.

Continuing claims eased to 3.72 million from 3.75 million in the week ended August 27, the latest available data. The number of total recipients on benefit rolls was 7.17 million in the August 20 week.

TRADE HELPS

U.S. employment growth ground to a halt in August, with zero net job creation raising fears of a new recession and putting pressure on the Federal Reserve to ease monetary policy further at its meeting later this month.

But in a respite from the negative news, the trade gap shrank to $44.8 billion in July, Commerce Department data showed, down sharply from June's $53.1 billion deficit and much lower than forecasts around $51 billion.

The 13.1 percent decline was the biggest month-to-month percentage drop in the deficit since February 2009.

"The trade numbers are probably sufficiently better than expected to cause some upward revision in the GDP forecast," said Pierre Ellis, senior economist at Decision Economics in New York.

U.S. exports rose 3.6 percent to a record $178.0 billion, driven by record shipments to countries in South and Central America and higher demand from China and major oil producers. Records were also set for two large categories, goods and services, as well as for capital goods and autos.

U.S. imports slipped 0.2 percent in July to $222.8 billion, as the average price for imported oil declined for a second consecutive month to $104.27 per barrel and the volume of crude oil imports also fell. Imports from China, however, rose 2.1 percent.

(Additional reporting by Doug Palmer in Washington and Ellen Freilich in New York; Editing by Andrea Ricci)

With his poll numbers sliding to new lows amid voter frustration with 9.1 percent unemployment, Obama will make tax cuts for middle-class households and businesses the centerpiece of the plan and will press for new spending to repair roads, bridges and other deteriorating infrastructure.

He will use his televised speech before a joint session of the U.S. Congress, at 7 p.m. EDT, to urge passage of those measures by year-end.

If congressional Republicans reject his remedies, his strategy will be to paint them as obstructionists and blame them for the stagnating economy.

Stubbornly high unemployment has heightened fears that the economy could be headed for another recession. Net employment growth registered zero in August as a budget standoff in Washington and the European debt crisis spooked businesses and consumers.

Obama is under intense pressure to change perceptions that he has shown weak leadership. His economic stewardship has been criticized by both Republicans and fellow Democrats, casting a cloud over his prospects for re-election in November 2012.

"It's a major leadership moment for Obama," said Terry Madonna, a political scientist at Franklin and Marshall College in Lancaster, Pennsylvania. "He's running out of months before voters settle in on whether his presidency has failed."

A renewal of payroll tax cuts for workers passed last December is one of the biggest elements of Obama's plan. He will also propose tax cuts to encourage businesses to hire.

An NBC/Wall Street Journal poll this week showed Obama was no longer the favorite to win re-election. It was one of a series of polls this week that held gloomy news for Obama, whose popularity has dwindled to nearly 40 percent.

Democratic sources said Obama would discuss in stark terms the difficulties the economy faces and challenge Republicans to work with him. He will argue that Washington must do all it can to help the economy heal, a message he will press, not just in the speech, but in a series of other appearances this autumn.

JOBS LEGISLATION BY YEAR END?

The goal is to pass legislation by the end of this year, with the aim of making a dent in the unemployment rate by spring of 2012. Political analysts say that to bolster his chances for re-election, Obama needs to be able to point to economic improvement by the middle of next year.

If Congress, which controls the nation's purse strings, does not act, the White House is prepared to paint Republicans as obstructing his efforts to solving the jobless problem.

The bruising battle in July over the country's debt highlighted a wide philosophical chasm between Obama's Democrats and Republicans who control the House of Representatives.

Republicans have derided an $800 billion economic stimulus package that Obama pushed through Congress in 2009 as wasteful spending and have pushed for immediate cuts in the deficit.

Democrats say that while long-term deficits must be addressed, the economy needs a short-term fiscal boost.

Media reports have put the size of Obama's jobs package at upward of $300 billion. CNN quoted sources saying it could top $400 billion. The White House would not confirm the reports.

In a shift, the two top House Republicans, Speaker John Boehner and Majority Leader Eric Cantor, this week signaled openness to working with Obama. They said they were amenable to some infrastructure spending and to a program Obama plans to pitch to help train unemployed workers.

Many Democrats felt Obama was too deferential to Republicans during the fight over debt and have urged him to "go bold" in his economic speech.

House Democratic Leader Nancy Pelosi, asked about Obama's reported jobs package, said, "$300 billion is a lot of money, and if properly spent, can make a tremendous difference."

Republican Senator Lamar Alexander said Obama should take responsibility for making the economy worse.

"Unemployment is worse, housing is worse, the debt is worse, and he's done all that by throwing a big wet blanket over the economy with his regulatory, tax and healthcare policies," he said.

(Writing by Caren Bohan; editing by Christopher Wilson)