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European policymakers neared a deal over the weekend on bank recapitalization, and euro zone officials said France and Germany were close to agreement on how to use the European Financial Stability Facility to stave off contagion in the bond market.

But deep divisions over the extent of losses that private holders of Greek bonds would have to accept remain a huge risk and final decisions were deferred until a second summit scheduled for Wednesday, putting a cap on markets.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rise 0.1 percent, while Japan's Nikkei stock average .N225 opened up 0.25 percent. .T

The euro steadied but off the previous day's peak when it hit its highest since September 8 of $1.39570 against the dollar. <FRX/>

Oil kept its gains after U.S. crude jumped more than 4 percent to its highest level in more than two months on Monday. In heavy trading, the front month contract trade was higher than later months, flipping the curve structure into a bullish backwardation for the first time since 2008.

U.S. crude futures were up 0.3 percent to $91.50 a barrel on Tuesday. <O/R>

On Monday, global stocks .MIWD00000PUS hit a seven-week high and commodities rallied on hopes Europe was moving closer to resolving the debt crisis.

Investor sentiment also improved, with Caterpillar Inc (CAT.N) gaining 5 percent after reporting a 44 percent jump in quarterly profit on record revenues. Demand for its heavy equipment is seen as a gauge of global economic health.

Gains on Wall Street weighed on safe-haven U.S. Treasuries. Benchmark 10-year Treasury notes fell 4/32 in price for a yield of 2.23 percent on Monday.

But lingering worries about the extent of progress made over the euro zone sovereign debt problems pushed the spread between the yield on the 10-year Italian BTP benchmark bond and the equivalent German Bund wider on Monday to 388 basis points.

Still, the general improvement in sentiment about the European problems spread to Asian credit markets. The spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, narrowed by a couple of basis points early on Tuesday.

(Editing by Yoko Nishikawa.)

The top video rental company reported a better-than-expected 49 percent surge in third-quarter revenue to $822 million, surpassing Wall Street's target of about $812 million.

But investors -- mindful of how the company led by CEO Reed Hastings had driven away customers in recent months and damaged its credibility with a price hike and other high-profile stumbles -- focused on the fourth-quarter warning.

Netflix shares plummeted almost 20 percent to $95.50 in after-hours trading.

"They missed slightly on subscribers for this quarter, and their guidance is not very good at all. Those are the two data points that are driving the stock lower," said Gabelli & Co analyst Brett Harriss.

The company also forecast a loss for the first quarter of 2012 as it expands into Europe.

"We expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and technology and development," Hastings said in a letter to shareholders accompanying its quarterly report.

Hastings added that subscriber defections because of the price-hike should slow in coming quarters "as the price effect washes through."

The company reported earnings per share of $1.16 on net income of $62 million. Analysts had expected earnings per share of 94 cents, according to Thomson Reuters I/B/E/S. But it was not immediately clear if those earnings numbers were comparable.

Netflix also said it had lost more than 800,000 U.S. subscribers in the third quarter, more than the approximately 600,000 it had forecast in September.

"The subscriber numbers were disappointing. It looks like they see very weak subscriber numbers in the fourth quarter," said Lazard Capital Markets analyst Barton Crockett.

The company that shook up Hollywood with its DVD-by-mail service is trying to recover from the roughest patch in its nearly 15-year history as it moves to emphasize online streaming of television and movies.

Shares of the one-time Wall Street darling have plummeted by more than 60 percent since July, when Hastings announced a price hike for subscribers who wanted both DVDs and streaming. A wave of cancellations hit the company that had been famous for red-hot growth and loyal customers.

Hastings apologized for not explaining his decision well and admitted to "arrogance," but instead of soothing concerns he set off a new wave of complaints with a plan to put the DVD service on a separate website called Qwikster. He quickly dropped the widely panned idea.

As Netflix stumbles, rivals such as Dish Network Corp's Blockbuster, Amazon.com Inc and Wal-Mart Stores Inc's Vudu are ramping up their online entertainment offerings to better compete with Netflix.

(Reporting by Lisa Richwine, editing by Bernard Orr)

The Peoria, Illinois, company said it expects full-year 2011 profit and revenue to be at the top end of its previous outlook range due to strong demand. In 2012, the company expects revenue to increase 10 percent to 20 percent above the $58 billion in sales it expects this year.

Caterpillar is one of a slate of industrial companies outpacing analyst expectations during the current earnings reporting season. Like some of its peers, the company is encouraged by the strong results but remaining cautious about the wider economy.

"Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point," Caterpillar Chief Executive Doug Oberhelman said in a press release. "We believe continued economic recovery, albeit a slow recovery, is the most likely scenario as we move forward."

The world's largest heavy machinery manufacturer reported third-quarter net income attributable to common shareholders of $1.14 billion, or $1.71 per share, compared with $792 million, or $1.22 per share, a year earlier.

Analysts on average had expected Caterpillar to earn $1.54 per share in the third quarter.

Sales rose 41 percent to $15.7 billion, which is a record, according to the company.

Caterpillar said full-year 2011 results would come in at the highest end of its previous outlook.

The company now expects annual revenue of $58 billion, including its recent acquisition of Bucyrus. Its previous forecast had been a range of $56 billion and $58 billion.

Profit is now expected to be $6.75 per share for the year, compared with a prior forecast of $6.25 to $6.75. Including the impact of Bucyrus, Caterpillar expects 2011 profit to reach $7.25 per share.

Caterpillar said 2011 will be a record year if the company hits its earnings and revenue expectations.

Caterpillar said it added 4,800 jobs during the quarter, including 2,000 in the United States.

Its shares were up about 5 percent in premarket trading.

(Reporting by John D. Stoll in Detroit; Editing by Lisa Von Ahn and Maureen Bavdek)

* The S&P index futures dipped as the euro fell to a session low versus the dollar. European stocks also turned negative, erasing gains on optimism that regional policymakers were closer to a deal. They meet again in Wednesday.

* The Federal Reserve Bank of Chicago releases its National Activity Index for September at 8:30 a.m. EDT. The index read -0.43 in August, indicating below-historical trend growth.

* S&P 500 futures fell 1.3 points and were slightly below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 2 points, while Nasdaq 100 futures rose 3.75 points.

* Texas Instruments Inc (TXN.N) will report third-quarter earnings later in the day. Investors want to see if there was any improvement in demand for its chips, used in everything from cars to cellphones, ahead of the holiday shopping season. Analysts expect a profit of about 57 cents per share, versus 71 cents a year ago.

* Diversified manufacturer Eaton Corp (ETN.N) and apparel maker VF Corp (VFC.N) reported results early Monday.

* Other companies due to report include Caterpillar Inc (CAT.N), Kimberly Clark Corp (KMB.N), Amgen Inc (AMGN.O), and Zions Bancorp (ZION.O).

* President Barack Obama will announce a series of actions this week to help the economy that will not require congressional approval, including a plan to make it easier for homeowners to refinance their mortgages, according to a White House official.

* U.S. companies do not plan to significantly increase payrolls over the next six months but neither will they aggressively fire workers, according to a survey suggesting lackluster job growth.

* Resource-related shares will be in focus, with key base metals prices jumping after data showed China's vast manufacturing sector picked up moderately in October, snapping a three-month contraction.

* Google Inc (GOOG.O) has spoken to at least two private equity firms about help in financing a deal to buy Yahoo Inc's (YHOO.O) core business, the Wall Street Journal reported over the weekend, citing a source.

* Netflix Inc (NFLX.O) said it will launch a subscription service in the United Kingdom and Ireland in early 2012.

(Reporting by Angela Moon; editing by Jeffrey Benkoe)

Futures for Euro STOXX 50, for Germany's DAX and for France's CAC were all us between 0.8 and 1 percent. Financial spreadbetters earlier predicted Britain's FTSE 100 .FTSE to open as much as 1.1 percent higher.

At a summit on Sunday, European Union leaders neared agreement on bank recapitalization and the use of European Financial Stability Facility (EFSF) to stave off a bond market contagion.

Sharp differences remain, however, over the size of losses that private holders of Greek government bonds will have to accept. Final decisions were deferred until a second summit on Wednesday.

But an indication of a modest pick-up in China's manufacturing sector, which snapped a three-month contraction, provided some relief to risky assets on Monday with Asian stocks outside Japan up 3.6 percent.

HSBC's flash Purchasing Managers' Index rose to 51.1 in October from September's final reading of 49.9, climbing above the 50-level that separates expansion from contraction for the first time since July.

Turnover remained light across Asian exchanges as traders await final details of a possible euro zone solution expected this week.

Asian credit spreads also tightened on hopes that European leaders will look beyond stop-gap measures and unveil a durable solution on Wednesday.

In Japan, the Nikkei .N225 closed up 1.9 percent with Olympus shares (7733.T) still dominating trading volumes as it plunged to its lowest level since 1998.

In the latest twist to the Olympus saga, which has now wiped off half of the company's market value, media reports suggest the U.S. Federal Bureau of Investigation was probing certain fees paid to advisors.

A strong yen, which rose to a record high against the dollar on Friday, is likely to cap gains and keep Japanese stocks trading in a range held since September, with last week's high of 8,911.7 as near-term resistance.

Japan's finance minister put traders on alert for possible currency intervention on Monday after the yen's rise to a record high threatened to further squeeze exporters' profits and hold back economic recovery.

Funds are still positioned defensively, strategists from Citigroup said in a note on Monday, with portfolio managers trimming positions in Southeast Asia and adding to defensive sectors such as telecoms.

If later this week there is better-than-expected GDP data from the U.S. as well as a credible solution to the euro zone's problems, funds could dip back into cyclicals and help sustain Monday's bounce in risky assets.

FIRMER EURO

The euro stayed supported, and reversed earlier losses against the dollar that came on the back of light profit-taking from macro players, as markets clung to hopes that European policymakers were moving closer to stemming the region's debt crisis.

The euro was trading at $1.3903 extending Friday's 0.8 percent move higher.

"It doesn't feel to me like we're going to see a big risk rally, but we could easily see this deal done, risk remains relatively well supported, especially if we start thinking of things like another Fed quantitative easing, that'll help keep market focused on a weaker U.S. dollar," said Greg Gibbs, strategist at RBS in Sydney.

Commodity currencies, usually sold off in times of market stress, also rose. The Australian dollar stood at $1.0411, up 0.8 percent versus New York's $1.0331 close on Friday.

In commodities markets, U.S. crude for December delivery rose 1 percent while spot gold rose 0.5 percent to $1649.29 an ounce.

Copper gained for a second straight session with the most active January copper contract on the Shanghai Futures exchange rising 5.1 percent to a high of 54,280 yuan ($8,502.51) a tonne shortly before its midday close.

(Additional reporting by Ian Chua in SYDNEY; Editing by Richard Borsuk)