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Tsuyoshi Kikukawa, who quit as company president on October 26, and two others face voluntary questioning as early as this weekend, Kyodo news agency reported.

Olympus, a world leader in diagnostic endoscopes, has admitted hiding losses for decades through improper accounting, but has yet to say how far this concealment went and what writedowns it will now need to take.

The company's new president, Shuichi Takayama, has blamed Kikukawa, Vice-President Hisashi Mori and internal auditor Hideo Yamada for the cover-up, and said he would consider criminal complaints against them. Mori has been fired and Yamada has offered to resign.

The New York Times reported that Japanese officials are investigating an apparent $4.9 billion hole in the accounts of Olympus as well as possible involvement of organized crime.

"Olympus made payouts amounting to many times the losses it sought to hide, and investigators suspect much of the additional money went to crime groups," the newspaper said, citing a memo prepared by investigators.

That memo says authorities want to find out if Olympus worked with crime syndicates to obscure the losses, and paid them huge sums of money for their help, the paper said, noting the memo was circulated at a recent meeting of officials from Japan's Securities and Exchange Surveillance Commission (SESC), the Tokyo Prosecutors Office and Tokyo Metropolitan Police.

A Tokyo police spokeswoman confirmed that a probe of Olympus was under way, but declined to give details. The Tokyo Prosecutors Office and SESC declined comment.

Olympus declined comment on the media reports.

Links between companies, "yakuza" gangsters and politicians have a long tradition in Japan, and authorities have been trying to crack down for decades, most recently with laws targetting not only crime syndicates but firms that do business with them.

targeting The New York Times quoted the memo as saying Olympus had paid a total of 481 billion yen ($6.25 billion) through questionable acquisition payments, investments and advisory fees stretching between 2000 and 2009, but only 105 billion yen ($1.36 billion) had been booked in its financial statements.

FUNDS HARD TO TRACE

So far, Olympus has admitted to improperly accounting for only part of $1.3 billion in payments linked to mergers and acquisitions going back to 2006 , though an independent panel commissioned by the firm to investigate the matter was still trying to get to the bottom of the issue.

A large share of these payments went to obscure Cayman Islands firms, making it difficult to trace the money.

Olympus said on Thursday that Mori had told the company none of the funds involved in the cover-up scheme had gone to "anti-social forces" -- a Japanese euphemism for gangsters -- but the firm was waiting for the independent panel's report, which is due early next month.

Olympus has lost more than 70 percent of its market value since the scandal broke last month, with major shareholders Nippon Life and Mitsubishi UFJ Financial Group (MUFG) sharply reducing their shareholdings in the company.

Four MUFG units cut their collective Olympus stake to 7.61 percent from 10 percent, a regulatory filing showed on Friday.

Olympus shares were down around 14 percent in afternoon trade, threatening to snuff out a rally this week on investor hopes that the company would avoid being delisted.

Delisting would effectively cut Olympus off from equity capital markets, constraining its funding and making it harder for its lenders to keep supporting the firm in its battle to avoid having to sell off its core businesses.

The Asian Corporate Governance Association, an advocacy group whose members include institutional investors managing more than $10 trillion worth of assets, urged the stock exchange on Friday not to delist Olympus -- a move that could damage Japan's reputation among global investors.

"We believe shareholders have already suffered enough due to the actions of Olympus executives ... and a delisting would also harm Japan's reputation among international investors," the group wrote in a letter dated November 17.

Proof that organized crime was involved could force the Tokyo exchange to delist Olympus shares, and could make it hard, if not impossible, for banks to make fresh loans to the firm.

"If a company is found to have problems, like the involvement of anti-social forces, banks are not able to give support," Katsunori Nagayasu, chairman of the Japanese Bankers Association and MUFG president, said on Thursday.

Lawyer Shin Ushijima, a former prosecutor, said organized crime involvement at first blush appeared unlikely, but could not be ruled out, if gangsters had gotten wind of the loss cover-ups and sought payments to stay silent.

"I don't think it's likely, but we cannot deny it (the possibility)," he said. "If the yakuza got some information, it means that someone spoke about it and that is very unlikely."

Other experts say gangsters often begin by blackmailing an executive or company over one scandal, and then push for more money to keep that original payoff a secret.

(Writing by Linda Sieg; Editing by Mark Bendeich and Ian Geoghegan)

In a sign that global funding strains may spread to Asia, benchmark three-month euroyen interest rates futures fell to an eight-month low on Friday on concerns that tightness in dollar money markets may prompt non-Japanese banks to raise yen at a higher rate.

Worries over the European debt crisis prompted investors to shed riskier commodities, extending their slide from Thursday when prices took their steepest tumble since September.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 1.7 percent with the materials sector .MIAPJMT00PUS leading the decline, as a slide in commodities prices hit the stock market in resource-dependant Australia.

The index, which fell the past two weeks, was set for its biggest weekly loss in about two months. It was down about 3.6 percent for the week and about 16 percent this year.

Japan's Nikkei stock average .N225 fell 1.3 percent and also headed for a third weekly loss. It is down about 18 percent so far in 2011. .T

"The euro zone debt crisis is turning into a global liquidity crisis, and leading to a vicious cycle of intensifying funding tightness spurring dumping of risk assets," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ.

New Italian Prime Minister Mario Monti on Thursday pledged his country would embark on radical fiscal reforms to pull itself out of the debt crisis. But investor jitters remained firmly in place as euro zone governments struggle to raise funds and banks refrain from lending, seizing up market liquidity.

Euro/dollar three-month cross-currency basis swaps, the cost of swapping euros for dollars, widened by around 6 basis points to -136 basis points on Thursday, the most since the 2008 financial crisis.

"Focus right now is on short-term dollar funding, but longer-term funding from six months out to a year is also getting tighter. Major central banks must take a coordinated action to ensure all these funding needs are met," Uchida said.

RISK AVERSION

U.S. stocks fell on Thursday, as fears over euro zone debt woes overtook more encouraging signs for the U.S. economy after data showed a drop in new claims for jobless benefits to a seven-month low last week and a rebound in permits for future home construction in October. .N

"Despite positive economic data from the U.S., the market is still focused on Europe and its contagion risk," said Hiroichi Nishi, equity general manager at SMBC Nikko Securities.

The U.S. dollar steadied on Friday, hovering near a six-week high of 78.467 .DXY hit the day before, while the euro stayed above five-week lows of $1.3421 touched on Thursday, with European banks seen repatriating funds as signs of funding stress grew. <FRX/>

But commodities currencies fell, with the Australian dollar piercing through parity.

Oil prices fell 0.1 percent and copper eased 1.2 percent on Friday while silver slipped more than 2 percent to a one-month low on Friday, following to a 7-percent slump the day before.

Risk aversion dampened sentiment in Asian credit markets, with the spreads on the iTraxx Asia ex-Japan investment grade index widening by 5 basis points on Friday.

"We are seeing risk aversion that is spreading across asset classes, with concerns about euro zone fiscal debt crisis, weak auction results in Europe, and worries ahead of this week's Spanish election all leading to deterioration in sentiment," said Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.

Investor commitment to a crucial bailout fund, the European Financial Stability Facility (EFSF), is conditional on improved market sentiment which can only be obtained through troubled countries such as Italy and Greece demonstrating progress in their fiscal reforms.

Euro zone policymakers are aiming to boost the firepower of the EFSF and are working to finalize the legal and technical details on November 29 and to have the leveraged EFSF ready for operation before Christmas.

The yield premium of Spanish 10-year government bonds over German Bunds hit its highest level since the launch of the euro above 500 basis points after Spain paid an average yield of 6.975 percent on Thursday to sell its bonds, the highest rate since 1997 and just shy of the 7 percent level seen as unsustainable.

Spain faces a parliamentary election on Sunday, putting the country under pressure to quickly reassure markets.

(Additional reporting by Mari Saito; Editing by Richard Borsuk)

Italy's new technocrat prime minister, Mario Monti, unveiled sweeping reforms to dig the country out of crisis and said Italians were confronting a "serious emergency."

Monti, who enjoys 75 percent support according to opinion polls, comfortably won a vote of confidence in his new government in the Senate on Thursday, by 281 votes to 25.

He faces another confidence vote in the Chamber of Deputies, the lower house, on Friday, which he also expected to win comfortably.

"Only if we can avoid being seen as the weak link of Europe can we contribute to European reforms," said Monti, who was sworn in on Wednesday as head of a government of experts after a rushed transition from the discredited Silvio Berlusconi.

In Athens, at least 50,000 Greeks joined a protest rally presenting the first public test for a new national unity government, also headed by an unelected figure, that must impose spending cuts and tax rises if Greece is to escape bankruptcy.

Police fired tear gas at black-clad youths as protest marchers beat drums, waved red flags and shouted: "EU, IMF out!"

The Spanish government was forced to pay the highest borrowing costs since 1997 at a sale of 10-year bonds, with yields a steep 1.5 points above the average paid at similar tenders this year.

MAELSTROM

The euro fell in response. France fared a little better, but again had to pay markedly more to shift nearly 7 billion euros of government paper. Fears that the euro zone's second largest economy is getting sucked into the debt maelstrom have taken the two-year-old crisis to a new level this week.

"The euro zone has got to deliver something which is going to calm markets down, and at the moment markets feel like they are being given no comfort whatsoever," said Marc Ostwald, strategist at Monument Securities.

In Rome, Monti outlined a raft of policies including pension and labor market reform, a crackdown on tax evasion and changes to the tax system in his maiden speech to parliament.

He later spoke to French President Nicolas Sarkozy and German Chancellor Angela Merkel, who all agreed on the need to accelerate reforms, the three leaders said in a joint statement.

With Italy's borrowing costs now at unsustainable levels, Monti will have to work fast to calm financial markets, given that Italy needs to refinance some 200 billion euros ($273 billion) of bonds by the end of April.

Ireland, which has been bailed out and gained plaudits for its austerity drive, will also have to do more. Dublin will increase its top rate of sales tax by 2 percentage points in next month's budget, documents obtained by Reuters showed.

ECB IN SPOTLIGHT

But no amount of austerity in Greece, Italy, Spain, Ireland and France is likely to convince the markets without some dramatic action in the shorter term, probably involving the European Central Bank.

Many analysts believe the only way to stem the contagion for now is for the ECB to buy up large quantities of bonds, effectively the sort of 'quantitative easing' undertaken by the U.S. and British central banks.

France and Germany have argued over whether the ECB should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets.

Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France has urged stronger ECB action. Berlin continues to resist, saying EU rules prohibit such action.

"If politicians think the ECB can solve the euro crisis, then they are mistaken," Merkel said. Even if the ECB assumed a role as lender of last resort, it would not solve the crisis, she said.

Euro zone officials hope that if Merkel and others find themselves staring into the abyss, the unthinkable will rapidly become thinkable.

"The Germans have made some remarkable changes to their position over the past few months, you have to give them credit for that, it just takes rather a long time. It's Chinese torture," one euro zone central banker told Reuters. "They are not drawing lines in the sand as clearly as they were."

BANKS UNDER THE COSH

With turmoil reaching a crescendo, euro zone banks are finding it harder to obtain funding. While the stresses are not yet at the levels during the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.

Fitch Ratings warned it might lower its "stable" rating outlook for U.S. banks because of contagion from problems in troubled European markets.

Fellow ratings agency Moody's cut the ratings of 12 German public-sector banks, believing they were likely to receive less federal government support if needed.

German Finance Minister Wolfgang Schaeuble said on Thursday the debt crisis was beginning to hit the real economy and urged vigilance to prevent it infecting banks and insurance firms.

European officials are in the meantime looking at leveraging to boost the firepower of the euro zone bailout fund, the 440 billion euro European Financial Stability Facility (EFSF), which can offer bailouts to euro zone sovereigns in trouble.

A senior euro zone official with knowledge of market consultations said a majority of investors would be ready to invest in euro zone debt through one or other of the leveraging options, but needed an improvement in market confidence to commit big money.

(Additional reporting by Matthias Sobolewski in Berlin and Marius Zaharia in London, writing by Mike Peacock and Giles Elgood, editing by Myra MacDonald)

Initial claims for state unemployment benefits fell 5,000 to a seasonally adjusted 388,000, the Labor Department said, from an upwardly revised 393,000 the prior week.

Economists polled by Reuters had forecast claims rising to 395,000 from the previously reported 390,000.

The claims data covered the survey period for November's nonfarm payrolls. Claims dropped 16,000 between the October and November survey weeks, implying an improvement in nonfarm employment.

After wobbling in the second quarter, the labor market is regaining momentum, but not enough to cut into a 9 percent unemployment rate and promote faster economic growth.

The unexpected decline in claims last week was the latest sign that the economy maintained speed in the fourth quarter, further reducing the risk of a new recession.

But the crisis in Europe, which has caused bond market turmoil across the region, could derail the recovery.

A Labor Department official described the report as straightforward.

Initial claims have now held below the 400,000 mark that is normally associated with some healing in the jobs market for a second straight week.

The four-week moving average of claims, considered a better measure of labor market trends, fell 4,000 to 396,750 -- the lowest since April.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 57,000 to 3.61 million in the week ended November 5

Economists forecast so-called continuing claims rising to 3.64 million from a previously reported 3.62 million.

The number of Americans on emergency unemployment benefits slipped 18,358 to 2.94 million in the week ended October 29, the latest week for which data is available.

A total of 6.77 million people were claiming unemployment benefits during that period under all programs, down 62,278 from the prior week. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)

The focus of concern is shifting to difficulties in securing funds from money markets, where strains are intensifying due to rising government borrowing costs that have made financial institutions reluctant to buy sovereign bonds and lend to each other for fear of counterparty exposure to euro zone debts.

France and Spain will hold bond auctions later on Thursday, and the results are keenly awaited for clues over whether soaring yields can be capped.

"European leaders have failed to clear up doubts about the effectiveness of the region's bailout fund, as it has yet to collect funds, aggravating investor jitters," said Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyo.

"Unless the uncertainty over the European Financial Stability Facility is removed, anxiety will persist, weighing on riskier assets and pushing investors to hoard dollars."

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS steadied after falling as much as 1.1 percent led by financials .MIAPJFN00PUS. Japan's Nikkei stock average .N225 turned positive, closing up 0.2 percent. .T

But European stocks were set to fall, with spreadbetters seeing London's FTSE 100 .FTSE opening down 0.6 percent, Frankfurt's DAX .GDAXI down 1.3 percent, and Paris' CAC-40 .FCHI 1.2 percent lower. .EU .L

U.S. stocks fell more than 1.5 percent on Wednesday after a warning from ratings agency Fitch about the potential impact of the euro zone crisis on the banking system. .N

The euro hovered near five-week lows against the dollar of $1.3430 hit the day before. With technically bearish sentiment, traders eyed next support at $1.3145, hit on October 4 when markets across the board tanked on fears Greece would default.

The dollar .DXY as measured against six major currencies rose 0.1 percent, reflecting risk aversion and weighing on commodities. Spot gold fell as much as 0.3 percent while Brent crude futures slipped over $1 earlier on Thursday.

EURO ZONE SPLIT

Euro zone's second-largest economy France, which has become the bloc's latest member to face market scrutiny over its fiscal deficit despite a top-notch credit rating, called for more aggressive ECB bond purchases.

Germany, however, remains firmly opposed to using the central bank as the lender of last resort, saying it is up to individual governments to put their fiscal houses in order.

Banks have shed their euro zone debt holdings as uncertainty over fiscal reforms in highly indebted euro zone countries has raised the risk of huge losses on their portfolios as prices plunged, and the absence of such key buyers has driven up sovereign borrowing costs sharply.

On Wednesday, 10-year French government bond yields hit their highest level since April at around 3.7 percent while Italian bond yields rose back above 7 percent.

The yield premium of the French 10-year government bond over German Bunds rose to a euro-era high near 200 basis points. French banks are among the most exposed to Italy's 1.8 trillion euros ($2.4 trillion) public debt, holding $416 billion as of end-June.

Spanish 10-year bond yields rose to 6.48 percent on Wednesday, widening the spread over Bunds to 470 basis points.

TIGHT CONDITIONS PERSIST

Europe's trouble could hit credit outlook for U.S. banks, if the euro zone sovereign debt crisis was not resolved in an orderly manner soon, Fitch ratings warned. While the outlook is stable, risks of a negative shock were rising and could alter its outlook, Fitch said.

Tighter market borrowing conditions persisted on Wednesday, with the benchmark unsecured dollar London interbank offered rate hitting a high last seen during a flare-up in the euro zone's problems in the summer of 2010.

Euro/dollar three-month cross currency basis swaps, the cost of swapping euros for dollars, widened to -129.0 basis points, the most since the collapse of Lehman Brothers in 2008.

While spillover to Asia remained small, there were signs the yen market may be feeling the strains as three-month euro-yen interest rate futures eased and the spread between the 2-year swap rate and Japanese government bond yields hit its widest since January.

"It reflects a dwindling number of lenders in cash markets and there is a global trend for snapping up cash," said a bond trader at a Japanese bank.

The mood was subdued in Asian credit markets, with the spreads steady on the iTraxx Asia ex-Japan investment grade index.

"There is weakness but not too much conviction. The fund flows are positive, cash is building up on the sidelines and very little supplies," said a Hong Kong based trader with a European bank. "Cash bonds will outperform CDS which is tracking equities." ($1 = 0.739 Euros)

(Additional reporting by Akiko Takeda in Tokyo and Umesh Desai in Hong Kong; Editing by Richard Borsuk)