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The Congressional Oversight Panel said in its latest monthly report that the public "stigma" surrounding the Troubled Asset Relief Program has constrained policy choices and may make it politically impossible to take similar rescue actions in the future.

"Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high," the panel said in its September report.

"The program's unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future."

The report, issued on the second anniversary of the crisis that drove Congress to approve the $700 billion bailout effort, consulted several prominent economists to evaluate TARP's performance. They concluded that TARP provided critical support at a time when the financial system was in "freefall," but created significant moral hazard in the financial system.

"As long as huge banks can count on taxpayer-funded rescues, we should not be surprised if banks take on enormous risks, knowing they can keep the profits if the banks win and shift the losses onto the taxpayers if he banks lose," said Damon Silvers, the panel's deputy chairman, told reporters.

Panel Chairwoman Elizabeth Warren recused herself from approval of the report, Silvers said. Warren is expected to be soon named by President Barack Obama to an advisory role to set up a new consumer financial watchdog agency, Democratic sources have told Reuters.

The panel under the leadership of Warren, a Harvard Law School professor, has been critical of Treasury's handling of the bailout program, arguing that its housing rescue efforts have been ineffective and taxpayers weren't adequately protected in some bailout decisions.

The latest report also concluded that Treasury Secretary Timothy Geithner's decision to extend TARP until October 3 of this year did little other than to keep alive the government's implicit guarantee of the financial system.

A plan to extend more capital to small and community banks on easier terms met with resistance from bank executives and no new funds were added to address foreclosures or aid securitization markets.

Treasury spokesman Mark Paustenbach, responding to the report, said the need for new bailout programs has been largely negated by landmark financial reform legislation, which "have clear mechanisms for shutting down large financial institutions at no cost to the taxpayer."

Harvard University economist Kenneth Rogoff, consulted for the report, said in written remarks that the government's bailout policy must be given credit for "averting the second great depression that might have happened in its absence. It has not, however, succeeded so far in giving a measurably better trajectory for the economy than has been typical after other postwar deep financial crises."

(Editing by Kim Coghill)

The hearing is the first major gathering of attorneys involved in the sprawling spill-related litigation since hundreds of civil lawsuits were combined before a judge in New Orleans federal court last month.

The lawsuits, brought by shrimpers, injured rig workers, property owners and others, will get an initial airing at the hearing with an expected fight over the pace of the case.

The stakes are huge. Some legal consultants have estimated the total cost to BP and its co-defendants from the biggest oil spill in U.S. history to BP could run to $100 billion if maximum fines and punitive damages are assessed.

BP has taken a one-time charge of about $32 billion to reflect the estimated costs of lawsuits, claims and fines from the spill.

The lawsuits against BP, as well as Transocean Ltd (RIG.N) and Halliburton Co (HAL.N), are expected to drag on for years. The defendants are expected to argue at Thursday's hearing that most individuals and businesses who are suing do not have a right to be in court, based on the briefs they filed.

The defendants will argue that they should not turn over large volumes of potential evidence until next year after the court determines who can sue.

If the judge, Carl Barbier, opts for an accelerated schedule, it would allow plaintiffs' attorneys to quickly build their case before their clients feel pressed to settle.

For the defense, a slower pace will give time for claims to be paid from a $20 billion fund set up by BP, which is being overseen by the Obama administration's former executive pay czar, Kenneth Feinberg.

Each individual or business who accepts a final payment on their claim gives up the right to sue BP, and presumably the strongest legal cases will fall away as the payments flow.

"Defendants want to delay substantive progress for six to eight months, see what has occurred in the BP Claims Facility, and then, perhaps, commence the litigation," the plaintiffs' attorneys wrote in a court filing.

If the judge accepts the plaintiffs proposed schedule, they expect by March to have a list of cases to try. The defendants preferred to take up the issue of the "appropriateness" of test trials next year, without offering a time frame.

LOST PIZZA SALES

The hearing will attract some of the Gulf region's best-known plaintiff's firms and lawyers who have racked up billions in settlements with drug companies and tobacco firms.

Lawsuits have been filed by heavyweights of the plaintiffs' bar, including Texas attorney Mark Lanier and Elizabeth Cabraser, a California lawyer.

The cases have ranged from commercial fisherman who lost an entire season of catches to Post Corner Pizza in faraway Clearwater, Florida, which said sales were "eviscerated" by the spill. The local tourism board says the city was unaffected.

Many restaurants such as the famed Bayona in New Orleans argued they were indirectly harmed by the lack of fresh seafood from the Gulf. Feinberg will have determine who gets a payout.

"How far down the chain do you go? That's the toughest of the tough issues here," said Scott Giordano, the corporate technology counsel for Mitratech Inc, which provides legal consulting and technology.

Alleged victims have three years to submit a claim to Feinberg, and BP and its defendants said this week only those who have had a claim rejected by Feinberg's fund have a right to sue.

The more claims Feinberg settles, the fewer lawsuits that are brought, and less likely that the defendants are hit with punitive damages, which are trickier and more time-consuming to prove but would open the door to massive payouts.

"I doubt (claimants) would hold out for punitive damages. That's the ace in the hole that Feinberg has," said Ed Sherman, a law professor with Tulane University Law School in New Orleans.

James Roy, a Louisiana attorney who is co-liaison counsel for the plaintiffs, said he doubts BP will be able to cover all the claims with its Feinberg fund, but doesn't expect it to run as high as $100 billion.

"It will be expensive to litigate and time-consuming," he said. "Will it take as long as the Exxon Valdez (spill case)? No. Will it last 10 years? No. Will it be in the three- to five-year time frame? I hope so."

The case is In re Oil Spill by the Oil Rig "Deepwater Horizon" in the Gulf of Mexico April 20, 2010, U.S. District Court, Eastern District of Louisiana, No. 10-MDL-2179.

(Reporting by Tom Hals. Editing by Robert MacMillan)

Naoto Kan said he would take decisive steps if needed to stem rises in the yen, Jiji News Agency reported, a day after Japan intervened for the first time in six years, triggering a sharp fall in the yen from 15-year highs on the dollar.

Japan unleashed a wave of yen selling on Wednesday estimated at more than 2 trillion yen ($23.3 billion). The dollar has strengthened to 85.4 yen from around 83 before the intervention, which started in Tokyo and carried through to New York trading.

Analysts say Kan wants to appear proactive on tackling yen strength after winning a ruling party leadership race on Tuesday, and that the government may pressure the central bank to ease policy further to complement currency intervention.

"He (Kan) is trying to send a message of his party's solidarity. He is showing the strong intention of Japan to take decisive action through intervention," said Ayako Sera, market strategist at Sumitomo Trust & Banking.

"But he and the finance minister may find if difficult to explain Japan's stance to the international community," given that China is also under pressure to make its currency more flexible to help rectify global imbalances, she added.

FURTHER EASING?

The Bank of Japan has no plan to support the government's intervention with an immediate easing of monetary policy, but it is ready to act in early October if the economic recovery remains under threat, sources have said.

But BOJ Governor Masaaki Shirakawa said on Thursday that quantitative easing policies had a limited effect on stimulating the economy and prices.

"We hardly observe the fact that massive expansions in central bank balance sheets result in an increase in inflation in advanced economies," Shirakawa said in a speech at a conference.

Yoshimasa Maruyama, an economist at Itochu Corp, said further monetary easing by the central bank will depend on the size of currency intervention, given that they work in tandem.

"The greater the intervention, the greater the chance of further BOJ easing," he said.

A Reuters poll published on Thursday showed that Japanese manufacturing confidence worsened in September from the previous month for the first time in nearly a year as companies struggle with a strong yen and sluggish overseas growth.

The monthly poll, which has a 95 percent correlation with the BOJ's closely-watched tankan survey of business sentiment, showed the manufacturers' sentiment index fell 5 points from August to plus 17, down for the first time since October 2009.

Service-sector sentiment improved 6 points to minus 4 but has remained in negative territory since June 2008.

Compared with three months ago, however, manufacturers' mood was moderately better, pointing to continued improvement in the BOJ's next quarterly tankan, which is due out on September 29.

The pace of quarterly gains in the Reuters Tankan has nevertheless slowed somewhat from earlier this year and is seen declining further in the next three months, boding ill for the overall trend in the BOJ's key survey and potentially adding to pressure on the central bank to act.

The BOJ eased policy at an emergency meeting on August 30 and will hold its next rate review on October 4-5.

"The BOJ tankan will likely show manufacturing sentiment improving further but only slightly given that companies are growing more cautious about the outlook after the Reuters poll was taken," Maruyama said.

Sentiment is seen deteriorating further to plus 2 in manufacturing and minus 9 in the service sector in the three months to December, according to the August 27-September 13 poll of 400 big firms, of which 229 responded.

The indexes in the Reuters Tankan are derived by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure means pessimists outnumber optimists.

(Additional reporting by Kaori Kaneko, Tetsushi Kajimoto and Yoko Kubota; Writing by Tetsushi Kajimoto; Editing by Edmund Klamann and Nathan Layne)