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The U.S. central bank said it would sell $400 billion of short-term Treasury bonds to buy the same amount of longer-term U.S. government debt, its latest attempt to kickstart growth that slowed to a crawl over the first half of the year.

Apparently spooked by the central bank's dismal outlook for the economy, U.S. stocks sold off. The Standard & Poor's 500 index closed down nearly 3 percent.

Prices for long-term government debt rose, pushing yields lower -- a sign the measures were more aggressive than some investors had expected. The yield on the benchmark 10-year note dropped as low as 1.856 percent, the lowest in more than 60 years.

"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated," the Fed said in a statement after a two-day meeting. "There are significant downside risks to the economic outlook, including strains in global financial markets."

In offering a fresh approach to spur the economy and lower unemployment, the Fed ignored top Republicans on Capitol Hill who had pressed the central bank to refrain from action.

In addition to rebalancing its portfolio, the Fed intensified its efforts to shore up the housing market by pledging to reinvest proceeds from maturing housing-related debt it holds back into the mortgage market.

Analysts said the Fed's actions might not have a great impact, even if they did lower long-term interest rates.

"The cost of borrowing simply isn't the problem," said Paul Ashworth, an economist at Capital Economics in Toronto. "Businesses don't have the confidence to invest and half of all mortgage borrowers don't have the home equity needed to refinance at lower rates."

Still, faced with a lofty 9.1 percent jobless rate and an escalating sovereign debt crisis in Europe, Fed officials felt they needed to do what they could to try to breathe more life into the sluggish U.S. recovery.

The economy grew at less than a 1 percent annual rate over the first half of the year and analysts have warned of a heightened risk of recession.

With Fed Chairman Ben Bernanke reluctant to stay on the sidelines, his activism has become a punching bag for politicians as an election year nears. Top Republican lawmakers wrote to Bernanke this week urging the central bank to resist further economic interventions, echoing criticism voiced by Republican presidential candidates.

The portfolio retooling plan stops short of an outright expansion of the Fed's holdings -- sometimes referred to as quantitative easing -- of the type that has drawn harsh criticism domestically and internationally for sowing the seeds of inflation and debasing the dollar.

Some analysts however expect the move will be one in a series of steps the Fed takes to help the economy. The Fed could cut the rate it pays banks for reserves parked at the central bank, which might free up lending, or promise not to raise rates until unemployment drops to a certain level.

By shifting its bond holdings into longer maturities, the Fed is trying to push long-term interest rates lower, which hopefully will spur mortgage refinancing and borrowing by businesses and consumers.

Not all policymakers were on board with the Fed's latest move. The same three officials that had dissented against a decision in August to bolster a low interest rate pledge also opposed Wednesday's move.

Mohamed El-Erian, co-chief investment officer at PIMCO, the world's biggest bond fund, said the combination of dissents and a gloomier outlook pointed to a growing policy divide.

IN GOOD COMPANY

The central bank said it will buy $400 billion in securities with maturities of six to 30 years by the end of June 2012, selling an equal amount of debt maturing in three years or less.

The Fed is not alone in its concerns. The Bank of England on Wednesday indicated it was ready to pump more money into the weakening British economy. Norway's central bank signaled it might refrain from rate increases for longer than previously expected.

The Fed had already embarked far down one of the most aggressive monetary easing paths on record. It cut overnight interest rates to near zero in December 2008 and then moved to more than triple its balance sheet through a series of bond purchases.

After its last meeting on August 9, the Fed said it expected to hold rates at rock-bottom levels at least until the middle of 2013, drawing the trio of dissents.

Critics claim the monetary easing campaign has failed to produce results and warn it could actually cause damage by fueling inflation and debasing the dollar.

"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy," Republican congressional leaders said in their letter to Bernanke, which they released on Tuesday.

The central bank's policies have also become a topic on the presidential campaign trail. Texas Governor Rick Perry, a leading Republican candidate, said any further Fed money printing would be almost "treasonous."

(Additional reporting by Jason Lange and David Lawder in Washington; Editing by Tim Ahmann; Editing by Andrew Hay)

The dollar rose on the prospect of higher short-term interest rates after the Fed said it would sell $400 billion of short-term Treasury bonds to buy longer-dated debt in a widely predicted move known as "Operation Twist", aimed at stimulating the economy by forcing down long-term borrowing costs.

But it was the central bank's bleak assessment of the world's biggest economy that preoccupied markets, with oil and copper falling alongside stocks on fears of weakening demand, while some were disappointed that there were no bolder stimulus moves, given the extent of the Fed's pessimism.

"To be honest, I'm surprised to see so much risk aversion after the Fed," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

"I didn't think that many people had expected the Fed to expand its balance sheet, but it seems like some had been wishing for a bolder easing move."

Japan's Nikkei .N225 fell 1.6 percent, while MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS dropped more than 3 percent to a 14-month low, putting it 23.7 percent below its 2011 high in April. .T

The twin fears of U.S. recession and a banking crisis brought on by Europe's sovereign debt woes have haunted equity markets in recent months and fueled a sharp sell-off in early August and renewed weakness this month.

"TWIST" FAILS TO STIR

"Operation Twist" is the latest in a series of steps aimed at reviving an economy that has struggled to rebound from the 2008 financial crisis.

But investors worry that the Fed's latest plan will have little effect on lending in an economy that appears to be stagnating, which the Fed also noted.

U.S. stocks suffered their worst one-day drop in a month after the central bank wrapped up its two-day policy meeting on Wednesday, with the S&P 500 index .SPX falling nearly 3 percent. .N

The dollar rose broadly, with the dollar index .DXY, which measures the greenback against a basket of major currencies, gaining 0.7 percent to a seven-month high.

The euro was steady around $1.3575 after falling in the previous session, and hit a 10-year trough versus the yen -- another benefactor of dampened risk sentiment -- at 103.67 before recovering to trade around 104.20.

The Australian dollar, sensitive to expected demand for commodities, moved down toward parity with the U.S. dollar to trade around $1.0050, its lowest since August 9.

Oil and copper, both influenced by expectations of industrial demand, slipped further.

Brent crude was down 1.2 percent at $109 a barrel and U.S. crude lost 1.3 percent to $84.84. Copper fell more than 3 percent to $8,050 a tonne, its lowest level since November.

(Additional reporting by Antoni Slodkowski in Tokyo)

Warning of "significant" downside economic risks, the U.S. central bank said it would launch a $400 billion program to twist its $2.85 trillion balance sheet more heavily toward longer-term securities by selling short-term government debt to purchase longer-dated Treasuries.

It also said would reinvest proceeds from maturing mortgage and housing agency bonds it holds back into the mortgage market, an acknowledgment of just how weak housing remains.

"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated," the Fed said in a statement after a two-day meeting. "There are significant downside risks to the economic outlook, including strains in global financial markets."

The action by the policy-setting Federal Open Market Committee met with a mixed reception in financial markets. U.S. stocks sold off, apparently spooked by the Fed's dismal outlook, but prices for long-term government debt rose, pushing yields lower in a sign the Fed's action was more aggressive than some investors had expected.

The yield on the benchmark 10-year Treasury note fell to 1.871 percent, its lowest in more than 60 years.

Faced with a lofty 9.1 percent jobless rate and an escalating sovereign debt crisis in Europe, Fed officials had signaled they would seek to prevent already sluggish U.S. growth from weakening further.

But even as Fed Chairman Ben Bernanke indicated the central bank's reluctance to stay on the sidelines, his activism has become a punching bag for politicians as an election year nears. Top Republican congressional leaders wrote to Bernanke this week urging the central bank to resist further economic interventions, echoing criticism voiced by Republican presidential candidates.

Most Fed officials, however, believe that by shifting their bond holdings, they can encourage mortgage refinancing and push investors into riskier assets, such as corporate bonds and stocks, without stoking a run-up in consumer prices.

However, not all policymakers were on board with the Fed's latest action. The same three officials that had dissented against a decision in August to bolster a low interest rate pledge also opposed Wednesday's move.

Mohamed El-Erian, co-chief investment officer at bond fund PIMCO, said the dissents diluted the Fed's message about economic weakness. "The outcome points to an even more divided FOMC," he said.

DOING THE TWIST

In its statement, the central bank said it will buy $400 billion in securities with maturities of six to 30 years by the end of June 2012, selling an equal amount of debt maturing in three years or less.

The Fed is not alone in its concerns. The Bank of England on Wednesday signaled it was ready to pump more money into the weakening British economy, potentially as soon as October.

Similarly, the Norwegian central bank held its main interest rate steady and signaled it might refrain from rate increases for longer than previously expected.

The U.S. economy grew at less than a 1 percent annual rate over the first half of the year and analysts have warned of a heightened risk of recession.

The Fed had already embarked far down one of the most aggressive monetary easing paths on record. It cut overnight interest rates to near zero in December 2008 and then moved to more than triple its balance sheet to $2.8 trillion through a series of bond purchases.

After its last meeting on August 9, the Fed said it expected to hold rates at rock-bottom levels at least through the middle of 2013, drawing the trio of dissents.

Critics claim the monetary easing campaign has failed to produce results and warn it could actually cause damage by fueling inflation and debasing the dollar.

"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy," Republican congressional leaders said in their letter to Bernanke, which they released on Tuesday.

The central bank's policies have also become a topic on the presidential campaign trail. Texas Governor Rick Perry, a leading Republican candidate, said any further Fed money printing would be "almost treacherous, treasonous."

(Editing by Tim Ahmann)

Sales climbed 7.7 percent month over month to an annual rate of 5.03 million units, the NAR said on Wednesday. The median price was 5.1 percent lower than a year earlier.

Rising rents are also helping Americans decide to buy homes, the NAR said.

"Favorable affordability conditions and rising rents are underlying motivations," Lawrence Yun, chief NAR economist, said in a statement.

Yun said the increase in sales came despite some disruptions from Hurricane Irene, which battered much of the East Coast at the end of the month.

Economists polled by Reuters had expected sales to rise 1.4 percent to a 4.71-million-unit pace. Compared to August 2010, sales were 18.6 percent higher.

The Federal Reserve is expected to hold interest rates near zero following a two-day policy review that concludes on Wednesday, and many expect policymakers will unveil new measures to ease credit further. The Fed's policy has helped keep mortgage rates historically low.

The NAR's estimate for the pace of existing home sales during July was unchanged.

(Reporting by Jason Lange; Editing by James Dalgleish)

Greece is the front line in a euro zone sovereign debt crisis that also engulfed Ireland and Portugal and now threatens Italy, Spain and some of Europe's biggest banks, risking plunging the West back into recession.

Officials said European governments are looking seriously at steps to recapitalize banks most exposed to sovereign risk after initially rejecting an IMF call last month for urgent action.

Fears of another credit crunch or recession due to Europe's inability to overcome the debt crisis have dominated the run-up to this week's IMF/World Bank and Group of 20 meetings of finance chiefs in Washington.

A Greek government spokesman said austerity measures negotiated in tough talks with European Union and International Monetary Fund officials would be announced in the afternoon after a special cabinet session.

Finance Minister Evangelos Venizelos acknowledged before the meeting that Greece's public finances would have gone off the rails without checks by the so-called troika of EU/IMF inspectors, who walked out of Athens on September 3 after uncovering a new deficit shortfall.

But he also said the EU had failed to manage the debt crisis as decisively and fast as required, and Greece was being blackmailed by the financial markets.

"Do we need to take additional measures? Yes, we need to take additional measures," Venizelos told lawmakers, adding that the country needed the help of its international lenders, who have imposed a string of unpopular tax rises, pension cuts and economic reforms since they rescued the country in May 2010.

"If it weren't for the troika's control... unfortunately we would have derailed fiscally," he said.

Venizelos had a two-hour conference call late on Tuesday with senior troika officials, who pushed Greece to accelerate its austerity and reform drive to release an 8 billion euro loan disbursement next month, without which Athens will not be able to pay salaries, pensions and bills.

BUYING TIME

In a sign that a deal may be close, the European Commission announced after the call that troika mission chiefs would return to Athens early next week to complete their quarterly review of progress on Greece's adjustment program.

Diplomats, economists and market analysts say Greece is likely to get the aid tranche, if only to buy time for European governments to recapitalize wobbly banks and strengthen the euro zone's rescue fund to cope with a default perhaps early next year.

A Finance Ministry official said Venizelos had agreed to bring forward measures from the so-called "mid-term plan," in which it has committed to slash its budget deficit through 2014 and sell some 50 billion euros in state assets.

Greek media reported the measures were likely to include accelerated sackings of state workers, pension and wage cuts for civil servants, increases in heating fuel tax and extension of a one-off property tax announced.

The government has so far said it will immediately put up to 3,000 public employees into a so-called labor reserve, in which they draw 60 percent of salary for a year while looking for another state job. Another 20,000 would follow in a second wave.

Those who do not find a job within 12 months would be dismissed. According to government estimates, putting people in the labor reserve saves about 12,000 euros per year per worker.

The measure is part of Greece's overall commitment to cut the civil service payroll by having 150,000 fewer civil servants less in 2015 than now -- about 20 percent of the total. The troika wants the layoffs speeded up.

BANK RECAPITALISATION

IMF chief economist Olivier Blanchard said European countries were warming to the idea that banks in the region need to boost their capital to withstand potential losses from the sovereign debt crisis.

If banks needing more capital are unable to raise more on financial markets then public authorities might need to step in, although outright nationalizations are not necessary, Blanchard said in a French television interview late on Tuesday.

The IMF called for widespread bank recapitalizations in Europe in late August but met with stiff resistance from European governments.

However, Blanchard said he noted a clear change at a weekend meeting of EU finance ministers and central bankers in Poland.

"The position of most European countries is, yes, we have a problem, capital needs to be put into the banks," he told news channel France24. "It seems to me there's been a 180-degree change in a lot of countries."

EU finance ministers agreed on Saturday that European banks must be strengthened in the follow-up to July stress tests as an EU report said a "systemic" crisis in sovereign debt now threatened a new credit crunch.

A Barclays Capital note said European banks could need some 230 billion euros to preserve a 6 percent core Tier 1 ratio in the extreme case of 50 percent haircuts on all sovereign debt of Greece, Ireland, Portugal, Italy and Spain, and the likely deep recession that would follow. The figure would be far smaller if only Greece were provisioned.

European banking shares have suffered steep falls in recent weeks over concerns about the sector's exposure to debt issued by Greece, with French banks suffering some of the biggest losses.

The head of Germany's number two lender, Commerzbank said the debt crisis was casting doubt on his bank's profit targets for this year, already softened last month.

"August was certainly not a happy month for a lot of banks," Commerzbank CEU Martin Blessing told Frankfurt business journalists.

Blessing said euro zone leaders had bought time by setting up the EFSF rescue fund but they had so far failed to find a path out of the crisis. Investors were awaiting reliable answers, he said.

"I believe we have reached a crossroads," Blessing said. If Europe wants to save the single currency, it must move toward a fiscal union.

"A monetary union without a fiscal union, this construct has failed," he said.

(Additional reporting by Dina Kyriakidou in Athens, Leigh Thomas in Paris, Jonathan Gould in Frankfurt,; Writing by Paul Taylor; editing by Janet McBride)

* The Federal Reserve on Wednesday looks set to launch a fresh effort to invigorate the faltering U.S. recovery, embarking on what could be the first in a series of incremental steps to foster stronger growth. The central bank appears likely to try to push long-term borrowing costs lower by rebalancing its $2.8 trillion portfolio of bond holdings to weight it more heavily to longer-term securities.

* General Motors Co's (GM.N) chief executive on Wednesday expressed concern about the risk of a recession in the United States, but said pent-up demand was likely because of the need to replace aging cars in the world's biggest economy.

* Oracle Corp (ORCL.O) forecast earnings for the current quarter that are higher than expected, as well as robust software sales, offering some reassurance to investors hoping that global technology spending is holding up. Shares of the company traded in Frankfurt (ORCL.F) were up 0.9 percent.

* Design software maker Adobe Systems Inc's (ADBE.O) sales outlook for the fourth quarter was buoyed by new customer additions, allaying investor fears of a slowdown in its growth. Shares of the company traded in Frankfurt (ADBE.F) were up 4.7 percent.

* PepsiCo Inc (PEP.N) said it is forming a council to bring together its food and beverage units to take advantage of the combined scale of the company's businesses.

* European shares were down 0.8 percent on Wednesday morning after strong gains in the previous day, with investors taking some money off the table ahead of the conclusion of the Fed meeting.

* U.S. stocks ended little changed on Tuesday as investors waited to see if the U.S. Federal Reserve would offer more economic stimulus and if Greece made progress in talks to avoid a default.

* The Dow Jones industrial average .DJI gained 7.65 points, or 0.07 percent, to 11,408.66 at the close. The Standard & Poor's 500 Index .SPX fell 2.00 points, or 0.17 percent, to 1,202.09. The Nasdaq Composite Index .IXIC lost 22.59 points, or 0.86 percent, to 2,590.24.

(Reporting by Blaise Robinson; Editing by Hans-Juergen Peters)