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Fresh from a rare success over agreement on the outlines of a regional trade deal, the 21 nations at the Asia-Pacific Economic Cooperation summit looked to the immediate challenge of safeguarding themselves against the fallout from Europe.

President Barack Obama, seeking to reassert U.S. leadership to counter China's expanding influence around the Pacific Rim, opened talks with APEC leaders declaring the region was "absolutely critical" to America's prosperity.

But he insisted Asia-Pacific economies must address "imbalances" and promote "balanced and sustainable growth," a clear reference to U.S. concerns about a huge trade deficit with China's export-driven economy.

"It's time to get down to work," Obama told leaders gathered in his native city of Honolulu. "Nearly 3 billion citizens (are) looking to us to bring our economies closer, to increase exports, to expand trade and opportunities that creates jobs and economic growth."

By harnessing the potential for expanded trade with Asia-Pacific countries -- the world's fastest-growing region -- Obama hopes he can create U.S. jobs to help him through a tough reelection fight in 2012.

"We are not going to be able to put our folks back to work and grow our economy and expand opportunity unless the Asia-Pacific region is also successful," he said.

Obama's drive for a pan-Pacific free trade zone got a boost when Prime Minister Stephen Harper said Canada wants to join the talks. Japan has also expressed interest and Mexico is weighing the idea.

Obama is seeking to assure allies of U.S. reengagement as China flexes economic and military muscle in the region. But leaders may doubt whether Washington can avoid being distracted by economic woes at home and foreign policy priorities like Afghanistan, Pakistan and Iran.

The outlook for the Asia-Pacific region, which accounts for more than half of the world's economic output, also remains clouded by the threat of Europe's fiscal contagion.

After talks on Sunday, leaders were expected to release a statement expressing concern that Europe's unresolved debt troubles will spill over into the Asia-Pacific region and committing themselves to bolster their defenses.

International Monetary Fund chief Christine Lagarde, who has warned that strains from the euro zone could hurt Asia, attended the Honolulu summit to consult with the leaders.

ASIAN ENGINE SLOWING

Unlike the United States, where the Federal Reserve has already cut interest rates to near zero, many Asian economies have room to reduce benchmark borrowing costs to try to spur faster growth. Most of them also boast healthy public finances, giving them more leeway to boost government spending.

Obama has predicted that Asia-Pacific countries could be an "extraordinary engine for growth" if the European crisis can at least be contained.

But that engine is slowing down and inflation-wary Asian leaders do not necessarily want to rev it back up. China is reluctant to unleash another huge stimulus package like the one in 2009 because of concern over wasteful spending.

China's economic growth will likely dip below 9 percent next year for the first time in a decade. That would still be four times faster than the U.S. economy is likely to grow.

Although leaders will put on a show of unity, the APEC summit revealed some growing rifts, particularly between the two biggest players -- the United States and China.

An aide said Obama cautioned Chinese President Hu Jintao that Americans are growing increasingly impatient and frustrated with the pace of change in China's economic policy.

The two met on Saturday and the White House said Obama was "very direct" with Hu about currency and trade issues.

The United States has long complained China keeps its currency, the yuan, artificially weak to give its exporters an advantage. China counters the yuan should rise only gradually to avoid harming the economy and driving up unemployment, which would hurt global growth.

Hu was quoted by Chinanews.com in Beijing on Sunday as saying a big appreciation in the yuan against the dollar would not help solve U.S. woes.

"The trade deficit and unemployment problems are not caused by the yuan exchange rate. Even a major appreciation of the yuan would not resolve the problems facing the United States," Hu said in comments echoed by China's foreign ministry.

(Reporting by Reuters APEC team; Additional reporting by Chris Buckley and Judy Hua in BEIJING; Writing by Matt Spetalnick and Emily Kaiser; Editing by John O'Callaghan)

Italy's president asked former European Commissioner Mario Monti on Sunday to form a government to restore market confidence in an economy whose debt burden is too big for the euro bloc to bail out.

Investors will pass initial judgment on his leadership when Italy's Treasury asks investors on Monday to bid for up to 3 billion euros ($4.1 billion) in five-year government bonds. At an auction last week, the government's borrowing costs surged above 6 percent and kept rising to levels well beyond what the country could afford to pay over the longer term.

Outgoing Prime Minister Silvio Berlusconi made a parting call on Sunday for the European Central Bank to become a lender of last resort to prop up the euro.

"This has become a crisis for our common currency, the euro,

which does not have the support that every currency should have," he said in a video message.

But ECB policymakers have made plain they want to keep the onus on governments to bring their debt burdens under control and have rebuffed world leaders who want the bank to ramp up its intervention on bond markets to defend Italy and other vulnerable debtors.

"Monetary financing (of government debt) will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the credibility and trust in institutions," ECB governing council member Jens Weidmann told the Financial Times, adding he was confident "Italy will be able to deliver."

PAPADEMOS TO FACE IMF, PROTESTERS

While Italy's problems and the long-drawn-out departure of the flamboyant Berlusconi have pushed the collapse of the much smaller Greek economy backstage, the IMF and European leaders will keep Greece's new prime minister, Lucas Papademos, under pressure to implement radical reform aimed at staving off bankruptcy.

Papademos succeeds George Papandreou, whose proposal to hold a referendum on the country's bailout terms prompted EU leaders to raise the threat of a Greek exit from the currency bloc.

The new Greek leader -- a former central banker who oversaw his country's entry to the euro zone in 2002 -- must win a Wednesday confidence vote in his cabinet before meeting euro zone finance ministers in Brussels on Thursday, state television reported, where he will be expected to outline next year's draft budget before putting it to parliament.

Polls published in Sunday's newspapers show Papademos has the support of three in four Greeks. But he will face his first protest in front of parliament on Monday afternoon from left-wing demonstrators who accuse the new government of working in the interests of bankers.

Meanwhile inspectors from the "troika" -- the International Monetary Fund, European Central Bank and European Union -- are due to start arriving in Athens on Monday, piling the pressure on Greece to qualify for a second bailout worth 130 billion euros ($180 billion) and an 8 billion tranche from the earlier bailout, needed to finance bond payments due at the end of the year, according to Reuters data.

MERKEL SEEKS 'MORE EUROPE'

EU monetary affairs chief Olli Rehn has said the EU and IMF will not release the tranche without written assurances from all Greek parties that they will back the measures, but New Democracy leader Antonis Samaras, who has given only tepid backing to the unity government, has said he will sign no pledge under external pressure.

In Rome, people sang, danced and opened bottles of champagne, and an impromptu orchestra near the palace played the Hallelujah chorus from Handel's Messiah when news spread on Saturday that the scandal-plagued Berlusconi, one of Italy's richest men, had resigned.

German Chancellor Angela Merkel welcomed signs of an end to the weeks of uncertainty in Italy, saying the approval of a reform package in parliament on Saturday was "heartening."

She also urged euro zone states on Sunday to give more powers to Brussels and push toward closer fiscal union.

She told Germany's ZDF television: "We want to keep the euro, along with all the other states that have it. But that requires a fundamental change of our policy and 'more Europe'."

(Reporting by Philip Pullella and James Mackenzie in Rome, Ben Harding and Harry Papachristou in Athens, Eva Kuehnen in Frankfurt, and Alexandra Hudson in Berlin; Writing by Ruth Pitchford; Editing by Tim Pearce)

Data on Tuesday is seen showing the euro zone economy grew a modest 0.2 percent in the third quarter, although European policymakers warn the region could soon slip into recession.

Credit is tightening for parts of the region as it struggles to contain a sovereign debt crisis that has already forced Greece, Portugal and Ireland into bailouts. Now, even relatively strong economies like France are pushing new measures to rein in spending.

"Fiscal austerity winds are blowing," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. "This is going to act to slow down growth."

Global economic expansion will likely cool to 3.2 percent in 2012 from 3.9 percent this year, according to a recent projection by the Conference Board, a private U.S. firm.

That outlook could darken considerably if Europe's travails worsen.

Italy, the latest country in the market's cross-hairs, faces a key test of investor confidence on Monday with a government bond auction, following austerity measures agreed by lawmakers.

But even if investor confidence in Italy improves, attention will merely shift to other rich nations that are up to their ears in debt.

CLOCK TICKING ON BUDGET

Lawmakers in the United States, which can still borrow cheaply in part because of fears that Europe is falling apart, are closing in on a deadline to identify $1.2 trillion in budget savings.

A deal cutting long-term spending by even more could give U.S. lawmakers room to extend unemployment benefits and some tax cuts to help keep the recovery on track. But with the 2012 presidential election looming, few on Wall Street expect much to come of the process.

Economists at Goldman Sachs reckon tighter fiscal policy will shave at least 1 percentage point off of U.S. economic growth in both 2012 and 2013.

Indeed, the pressure to cut spending deeply will only rise over the coming years, and investors could eventually balk at financing U.S. debt cheaply.

The International Monetary Fund estimates the U.S. government's gross debt will exceed the size of its economy this year, and will rise to 115 percent of GDP by 2016.

"The bill collector is coming," Senator Tom Coburn, a Republican active in the budget debate, told the Reuters Washington Summit last week.

For now, the United States is enjoying a reprieve because the world is focused on whether the 17 members of the euro zone will stick with the single currency.

Coburn thinks the United States has at most two more years before bond markets demand punitive interest rates on its debt. At that point, he said, "We will be Greece."

Putting off deep fiscal reform only raises pressure on rich countries' central banks to pick up the slack in order to stave off a deeper crisis.

If a new government and budget plan in Italy do not satisfy markets this week, the European Central Bank will come under heavy pressure to buy Italian bonds to keep the country -- the euro zone's third largest economy -- from needing a bailout that the region cannot afford.

The U.S. economy has been performing relatively more strongly, and retail sales data on Tuesday is expected to indicate that consumer spending held up at the start of the fourth quarter.

But with government spending possibly falling in the new year, the first months of 2012 could be crunch time.

U.S. inflation data on Wednesday is expected to show prices held steady in October, while the 12-month increase likely cooled to 3.6 percent from 3.9 percent.

With inflation expected to cool throughout next year, the Federal Reserve could have more room to stimulate growth.

However, it is far from clear that even the mighty Fed would be able to ward off the bond vigilantes should the market turn on the United States.

"The lesson we've had since the 1980s is that markets are bigger than governments," said Bryan Taylor, chief economist at Global Financial Data, a California firm that specializes in historical data going back to the Middle Ages.

"They used to try to manipulate the exchange rates and they gave up on that. Now they are trying to do the bonds, and inevitably they will lose."

(Editing by Leslie Adler)

For months, investors have been enthusing about valuations, earnings and, more recently, signs of an improving economy. Those may be good reasons why stocks should rally, but even the most ardent are starting to sound a bit glum.

The political intrigue in southern Europe has flummoxed investors stateside. Papademos has replaced Papandreou. Berlusconi is, well, Berlusconi. The headlines and the subsequent volatility seem relentless.

"It literally just changes consistently each and every night," said Jeremy Zirin, chief U.S. equity strategist at UBS Wealth Management in New York.

"Earlier this week, there were worries about a potential Italian default and now we've seen government and regime change in two of the periphery nations."

Again, events in Europe over the weekend could end up shaping the start of the trading week in U.S. markets.

Italy's Senate approved a new budget law, clearing the way for approval of the package in the lower house on Saturday and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.

In Athens, former European Central Bank policy-maker Lucas Papademos was sworn in as Greek prime minister, replacing predecessor George Papandreou after days of political wrangling. He is tasked with meeting the terms of a bailout plan to avert bankruptcy.

The net result was that the S&P 500 ended up almost 1 percent on the week after a drop of nearly 4 percent on Wednesday.

That midweek plunge came after Italy's bond yields blew out to over 7 percent, raising fears that the country, which is also the world's third-largest bond market, could go bankrupt.

But with worries that the crisis could spread to other countries, investors are looking for either the European Central Bank or EU governments to commit more capital in order to backstop sovereign bond markets.

"For the markets to continue to rally, we would need to see market confidence that Italian, Spanish and French bonds are money good," Zirin said. "There is likely to be more volatility around the sovereign debt crisis until we get more capital committed to the solution."

HEDGING THEIR BETS

Many investors picked up put options heading into the weekend to hedge against a potential downdraft in equities next week.

Options traders exchanged about 1.48 million contracts on the Financial Select Sector SPDR fund (XLF.P) -- 3.6 times the average daily volume -- as puts outpaced calls by a factor of more than 13 to 1, according to Trade Alert.

Technical factors are taking on greater significance as the S&P 500 hovers at the top end of its trading range and traders watch for a break either up or down. When that happens, it could be swift if recent volatility is anything to go by.

Ari Wald, a technical analyst at Brown Brothers Harriman in New York, said evidence is building for a move to the downside after the index failed for a second time since late October to push above its 200-day moving average at around 1,272.

"If we keep failing at this, it looks like it's confirming another lower high from the May peak," he said. "This still looks like a downtrend to me."

The 200-day moving average, a closely followed level, has emerged as a key battleground for investors this year, with successive tests to the downside over the summer eventually leading to a 13 percent cascade during five fraught trading days in August.

On the downside, Wald sees support at the 50-day moving average at around 1,200. A breach of that could take the index back to around 1,100 in early 2012, he said.

But market technicians also say positive seasonalities could be in stocks' favor.

'TIS THE SEASON

November marks the start of the "six best months of the year" when the Dow has booked an average gain of 7.5 percent since 1950, compared with just 0.4 percent in the other half of the year, according to the Stock Trader's Almanac.

One reason cited for that seasonal lift, at least during the last few months of the year, is holiday spending.

Investors will look for more improvement in retail sales when data for October is released on Tuesday, especially after the Thomson Reuters/University of Michigan report on Friday showed consumer sentiment rose to a five-month high in November.

During the last major week of earnings season, some prominent retailers are set to report results and give an outlook through the end of the year. They include Wal-Mart Stores (WMT.N), often seen as a barometer of U.S. consumer spending, and a niche retailer such as Abercrombie & Fitch

(ANF.N).

"My guess is we are going to have a reasonably good consumer in the year-end," said Philip Dow, director of equity strategy at RBC Wealth Management in Minneapolis. "My target on the S&P is 1,380. I still think it could happen."

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be e-mailed to: edward.krudy(at)thomsonreuters.com)

(Reporting by Edward Krudy: Editing by Jan Paschal)

"A possible haircut of the Greek debt is unnecessary and it is harmful for Greece and for the euro area as a whole. I still hold this view," Orphanides, who is governor of Cyprus's Central Bank, told the island's Kathimerini newspaper in an interview.

He was responding to suggestions that his reassurances, in the past, that there would be no Greek debt haircut were misleading.

Euro zone leaders had on October 26 agreed private banks and insurers would voluntarily accept a 50 percent writedown to reduce Greece's debt load. Political leaders, Orphanides said, "imposed" the cut.

"In my view, imposing a haircut on Greek debt was neither the most effective nor the most efficient way of resolving the sovereign crisis in the euro area."

"Unfortunately, a deterioration is observed in the euro area which, I believe, was entirely predictable," the central banker said.

Forcing the private sector to accept impairment on Greek debt had generated concern about the possible impairment of sovereign bonds of other euro zone member states, he said.

"These concerns have already raised significantly the overall cost of borrowing in the euro area, a development we pay dearly for," Orphanides said.

"This is why President Trichet and other central bankers had been urging governments to avoid such moves," he said, referring to former European Central Bank (ECB) head Jean-Claude Trichet.

(Reporting By Michele Kambas; Editing by Robert Birsel)