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AMR had been the only major U.S. carrier to avoid bankruptcy in the past decade. Its rivals used bankruptcy to restructure their labor agreements and cut costs.

That left AMR, the third-largest U.S. airline behind United Continental Holdings Inc and Delta Air Lines Inc, with the highest labor costs in the industry and the only major airline still funding worker pensions.

"It completes the cycle," said Helane Becker, an analyst with Dahlman Rose & Co. "Every major airline in the united States has filed for Chapter 11."

AMR's move comes as U.S. airlines brace for an economic downturn that could see travel demand sag this year. Some top airlines, including AMR, have announced service reductions to offset weak demand.

In its bankruptcy filing, AMR said its cost-cutting in recent years had been insufficient and that it could not continue without changing its "uncompetitive cost structure."

"Without addressing the realities of the marketplace, AMR cannot be competitive with its peers," it said.

Shares of AMR, whose passenger planes average 3,000 daily U.S. departures, have tumbled 45 percent since the end of September.

Last week the shares hit their lowest level since 2003, when AMR skirted bankruptcy by winning wage concessions from its unions.

The airline said last month it was also suffering from soaring fuel prices that sent its costs up 40 percent in the third quarter compared with a year earlier.

AMR on Tuesday named Thomas Horton as chairman and chief executive, replacing Gerard Arpey, who retired.

Under its Chapter 11 bankruptcy filing in a New York court, the company listed assets of $24.72 billion and liabilities of $29.55 billion. The company said it has $4.1 billion in cash.

AMR said both American Airlines and its regional carrier American Eagle were expected to fly normal schedules throughout the Chapter 11 process.

"We plan to initiate further negotiations with all of our unions to reduce our labor costs to competitive levels," Horton said.

The union representing AMR's pilots called the bankruptcy filing a "solemn occasion."

"While today's news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way," David Bates, president of the Allied Pilots Association, said in a statement.

"The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline's business plan and to our contract," he said.

Dahlman's Becker said the bankruptcy proceedings would not solve AMR's problems and that the airline needed to rework its operations and boost revenue.

"Bankruptcy is not necessarily the be-all, end-all," she said. "They've got more problems to address in addition to the cost problem."

AMR's top rivals, UAL Corp and Delta Air Lines, used bankruptcy protection to slash costs and have since found merger partners: Delta bought Northwest Airlines and UAL bought Continental Airlines to form United Continental Holdings.

US Airways and United Airlines sough relief under Chapter 11 bankruptcy in 2002. Delta and Northwest filed in September 2005.

AMR has been in labor talks with its pilots for five years, and a wave of pilot retirements in October prompted speculation the airline was nearing a bankruptcy filing.

Some industry watchers believed the pilots chose to retire to lock in pension values that may now be in jeopardy as the company moves through bankruptcy court.

AMR said the bankruptcy has no direct legal impact on operations outside the United States. It also said it was not considering debtor-in-possession financing.

In addition to its passenger service, AMR carriers provide over 90 million pounds of weekly cargo lift around the globe.

AMR said Weil, Gotshal & Manges LLP is lead counsel on the bankruptcy case.

The case is in Re: AMR Corp, Southern District Of New York; No:11-15463.

(Reporting by Tanya Agrawal in Bangalore, Caroline Humer in New York, Tom Hals in Wilmington and Kyle Peterson in Chicago; Writing by Matt Daily; Editing by Gopakumar Warrier, Maureen Bavdek and John Wallace)

The yield on a new three-year Italian government bond soared to almost 8 percent, a level seen driving its financing costs to unaffordable levels if sustained for a long time.

The new three-year paper was trading at yields around 8 percent in the gray market before the auction, over 40 basis points more than the July 2014 bond, according to prices on Reuters.

Analysts said the huge rise in the yield on the three-year maturity -- last sold at the end of October at 4.93 percent -- supported demand and helped the Treasury place the target range of 2.5 billion to 3.5 billion euros planned for the first tranche.

In total, it sold 7.5 billion euros of bonds, close to the upper end of its target range.

"These are good auctions in terms of the amount of bids, size issued ... but the ever higher yields remain the concern," said Peter Chatwell, interest rate strategist at Credit Agricole.

"In an ideal world these yields, and the fact that the three-year was above 8 percent in the gray market this morning, would serve to give the EcoFin/Eurogroup a sense of added urgency, but this is a far from ideal world."

The Italian auction is the latest in a barrage of closely watched euro zone debt auctions as the crisis spreads beyond the bloc's weaker economies. An estimated 19 billion euros worth of debt is being auctioned this week, with Spain and France due to tap the market on Thursday.

The yield for the 10-year bonds was 7.56 percent, compared with 6.06 percent at a previous sale a month ago. Ten-year yields traded around 7.6 percent in the secondary market.

Italian government bond yields and German Bund futures fell, while European stocks and the euro rose after the auctions in a move strategists said was relief that the country managed to sell debt in volumes close to the upper end of its target range.

But concerns remain about the continuing rise in costs.

On Friday, Italy paid a euro lifetime high yield of 6.5 percent to sell new six-month paper at a poorly received auction, which sent two-year yields spiraling above 8 percent.

Pressure eased somewhat on Monday after a weekend report in Italian daily La Stampa that the International Monetary Fund was preparing a rescue plan worth up to 600 billion euros for Rome. An IMF spokesman denied the report.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rose 1.6 percent, adding to Monday's jump of more than 2 percent. The index hit a seven-week low last Friday. Japan's Nikkei .N225 closed up 2.3 percent, moving further away from two-and-a-half year lows also hit last week. .T

U.S. stocks snapped a seven-session losing streak on Monday, partly supported by robust holiday sales, helping to buoy some Asian markets with export exposures to the United States, such as Korea and Taiwan, while defensives and beaten-down energy and materials sectors pulled Hong Kong and Shanghai shares higher.

"Some positive sentiment hit the markets which, after a recent steep decline, were offering good valuations and encouraging temporary buy back," said Hirokazu Yuihama, senior strategist at Daiwa Capital Markets.

Asian markets largely shrugged off a French media report citing several sources as saying Standard & Poor's could change the outlook of France's top-notch rating to "negative" within the next 10 days, but European share markets were set to dip.

Financial spreadbetters expected Britain's FTSE 100 .FTSE and Germany's DAX .GDAXI to open down 0.1 percent, and France's CAC-40 .FCHI to open down 0.4 percent. .EU

Euro zone finance ministers will meet later on Tuesday to approve detailed operational rules for the region's bailout fund, the European Financial Stability Facility (EFSF), paving the way for the 440 billion euro facility to draw cash from investors.

But with a history of initiatives that fall short of market expectations, analysts at Barclays Capital warned it would be premature to be confident that Europe's leaders are close to a solution to the 2-year-old debt crisis.

"So far, European summits have delivered compromise solutions that have been deemed either less than credible or too complex by markets," they said in a note.

"The recent round of proposals does not seem any different and suggests that investors should exercise caution buying risky assets, especially after a rally that has been aided by light market positioning."

ITALY AUCTION IN FOCUS

The euro inched up 0.3 percent to $1.3364 on Tuesday, after rising more than 1 percent on Monday to a high of $1.3398. The dollar index .DXY measured against six key currencies slipped 0.3 percent.

Commodities, a gauge for investor risk appetite, were steady after Monday's rally, with gold inching up 0.1 percent above $1,700 an ounce and oil steadying after a rise of more than $1 on Monday.

"We are fairly cautious, given very few reasons to be optimistic, and I doubt if optimism can be sustained throughout the week, especially with many meetings and bond supplies," said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.

Germany and France are reportedly working on proposals for a more rapid fiscal integration in Europe ahead of a European Union summit on December 9, but the European Central Bank has defied calls for a stepped-up role in helping resolve fiscal problems within the 17-member euro zone.

Concerns about the ability of the highly-indebted euro zone countries to pay off their ballooning public debt have made their sovereign bonds a prime target for market attacks, pushing yields to levels widely seen as unsustainable.

Market players were closely watching the outcome of this week's auctions, with up to nearly 19 billion euros in new bonds

expected to be issued by Belgium, Italy, Spain and France.

Italy plans a 8 billion euros bond sale later on Tuesday. Ten-year bond yields were stuck above 7 percent, a level that forced Greece, Ireland and Portugal to seek international aid.

Tension in euro zone money market and banks' reluctance to lend to each other further intensified on Monday, with three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, rising to 1.477 percent from 1.475 percent.

Reflecting global market strains, the Bank of Japan supplied dollars in market operations for the fourth time this month on Tuesday, providing $100 million in an operation maturing in three months and $1 million maturing in a week.

(Editing by Alex Richardson)

President Barack Obama pressed European Union officials on Monday to act quickly and decisively to resolve their sovereign debt crisis, which the White House said was weighing on the American economy.

Underlining the threat to tottering European economies, ratings agency Moody's warned on Tuesday it could downgrade the subordinated debt of 87 banks across 15 countries on concerns that governments would be too cash-strapped to bail them out.

Rival Standard & Poor's could downgrade the outlook on France's top-level triple-A credit status within the next 10 days, signaling a possible ratings cut, a newspaper reported. The news briefly hit the euro.

White House spokesman Jay Carney said Obama's message, delivered to top EU officials behind closed doors in Washington, was that: "Europe needs to take decisive action, conclusive action to handle this problem, and that it has the capacity to do so.

Poland's Foreign Minister Radoslaw Sikorski made a dramatic appeal in Berlin on Monday for Germany to show more leadership in the euro zone crisis.

"You know full well that nobody else can do it," he said in a speech in the German capital, referring to efforts to save Europe's monetary union.

"I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. You have become Europe's indispensable nation."

Tuesday's meeting of the Eurogroup, which brings together finance ministers from the 17 euro-zone members, was set to fix details of leveraging the European Financial Stability Fund (EFSF) so it can help Italy or Spain should they need aid.

They are also likely to approve the next tranche of emergency loans for Greece and Ireland.

Hopes that signs of concrete action could ease strains on the euro zone boosted markets, with Asian equities and the euro rising for a second day on Tuesday.

DETAILED PLANS

Documents obtained by Reuters on Sunday showed the detailed guidelines for the EFSF were ready for approval, opening the way for new operations and multiplying the fund's effective size.

The documents spell out rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies.

"I would expect we will be in a position to approve the guidelines at a political level," a euro-zone official involved in the preparations for the ministers' meeting said.

The EFSF guidelines will clear the way for the 440 billion euro facility to attract cash from private and public investors to its co-investment funds in coming weeks.

The European Central Bank (ECB), which is now buying bonds of Spain and Italy on the market to prevent their borrowing costs running out of control, has been urging euro zone ministers to finalize the technical work on the EFSF quickly.

Officials have told Reuters that the leveraging mechanisms could become operational in January, but that may be too late.

With Germany rigidly opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets, where yields on Spanish, Italian and French government benchmark bonds have all been pushed to euro lifetime highs.

ECB ROLE

The OECD rich nations' economic think-tank said on Monday the ECB should cut interest rates and abandon its reluctance to step up purchases of government bonds in order to restore confidence in the euro area.

The ECB shows no sign of doing so yet. It bought 8.5 billion euros of euro-zone government debt in the latest week, at a time of acute turmoil, in line with its previous activity but well short of what economists say is necessary to turn market sentiment around.

Sources have said the Obama administration has also urged Europe to allow the ECB to act as lender of last resort as the U.S. Federal Reserve does.

Germany and France stepped up a drive on Monday for coercive powers to reject euro zone members' budgets that breach EU rules, alarming some smaller nations who fear the plans by-pass mechanisms for ensuring equal treatment.

Berlin and Paris aim to outline proposals for a fiscal union before an EU summit on December 9 that is increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.

"We are working intensively for the creation of a Stability Union," the German Finance Ministry said in a statement. "That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits.

Rumors about the threat to France's credit rating, which have circulated for several months, illustrate how the crisis has moved inexorably from indebted peripheral nations such as Greece and Portugal to the heart of Europe.

Economic and Financial daily La Tribune reported on its website that S&P's was preparing to change its outlook on France's sovereign rating from "stable" to "negative".

"It could happen within a week, perhaps 10 days," La Tribune quoted a source as saying.

The news coincided with the warning on subordinated debt from Moody's, which said the greatest number of ratings to be reviewed were in Spain, Italy, Austria and France, and knocked the euro a third of a cent before the currency recovered.

"Moody's believes that systemic support for subordinated debt in Europe is becoming ever more unpredictable, due to a combination of anticipated changes in policy and financial constraints," the agency said in a report.

Holders of subordinated debt are further back in the queue than owners of senior debt when it comes to a claim on a bank's assets, thus making it a riskier class of debt.

Mario Monti, Italy's prime minister and finance minister, will attend Tuesday's Eurogroup meeting to explain the reforms Italy plans to undertake to regain the confidence of markets.

Saddled with debt equal to 120 percent of GDP and soaring borrowing costs, Italy has been battling to avoid financial disaster, which analysts say would endanger the whole euro zone.

Italy must balance its budget by 2013 and offer immediate fiscal measures worth 11 billion euros if it wants to regain its credibility, according to a document on Italy that will be presented to the Eurogroup, Italy's La Repubblica newspaper said.

In a sign of intense market stress, short-term Italian yields last week climbed above those of longer-dated issues. Both are higher than the 7 percent level widely seen as unsustainable for the country's public finances.

The funding pressure is set to be underlined on Tuesday, when investors are expected to demand more than 7 percent at auction to buy three- and 10-year Italian debt.

(Additional reporting by Erik Kirschbaum in Berlin; Writing by Alex Richardson; Editing by Neil Fullick)