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Its shares rose 18 percent on Wednesday, reaching their highest point since the fall of 2008. Analysts saw the move as clearing the way for its water and industrial control businesses to grow more quickly.

"Investors have become increasingly concerned about the earnings headwind from impending U.S. defense budget cuts, which was likely to have depressed ITT's earnings growth potential for the foreseeable future," Deutsche Bank analyst Nigel Coe wrote in a note to clients.

U.S. Defense Secretary Robert Gates last week said he plans to cut $78 billion from the nation's military budget over the next five years because of the government's growing budget deficit.

Shareholders will own stock in all three companies, which likely will be traded on the New York Stock Exchange.

"We believe that each of these future companies will be strategically well positioned for growth," Chief Executive Steve Loranger said on a conference call.

ITT Corp will continue as an aerospace, transportation, energy and industrial engineering company. Another company will make water pumps for cities and other users. A third will make military equipment.

DE-CONGLOMERATION

The White Plains, New York-based company joins a list of U.S. conglomerates that have streamlined themselves in recent years.

Tyco International Ltd (TYC.N) in 2007 spun off its healthcare and electronics divisions into separately traded companies, Tyco Electronics Ltd (TEL.N) and Covidien (COV.N).

Last year, industrial conglomerate Danaher Corp (DHR.N) and electrical products maker Cooper Industries (CBE.N) married parts of their tool businesses in a joint venture that Cooper's chief financial officer has said could lead to an initial public offering.

In coming months, analysts have said bearings maker Timken Co (TKR.N) may move to spin off its steel division.

General Electric Co (GE.N) this month expects to close its sale of a majority stake in NBC Universal media to Comcast Corp (CMCSA.O), marking its exit from a business that investors long said fit poorly among its industrial franchises.

And Chief Executive Jeff Immelt has trimmed back the company's GE Capital unit in the past two years, focusing the company more on manufacturing.

Pro forma 2011 revenue for the future ITT Corp is estimated at $2.1 billion, the company said in a statement.

European shares rallied, led by banks, on hopes euro-zone finance ministers would beef up the region's rescue fund and after Portugal sold 1.25 billion euros ($1.62 billion) to strong demand. Lisbon's borrowing costs fell on the 10-year issue but rose in the five-year.

"Portugal is clearly the biggest factor as the market's latest concern has been a revival of the sovereign debt issue in Europe," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

"Having (the latest auction) pass is taking some pressure off sellers."

U.S. bank shares will also be in focus after JPMorgan Chase & Co's (JPM.N) Chief Executive Jamie Dimon said the lender could pay an annual dividend of 75 cents to a dollar once the Federal Reserve completes stress tests of the largest U.S. banks and gives its approval.

JPMorgan shares rose 1.2 percent premarket to $44.11.

"The trend for bank stocks has been of significant improvement," said Meckler, adding JPMorgan's move is a sign lenders may have left behind their credit weakness.

Adding to the positive sentiment, Wells Fargo raised the U.S. bank sector to an "overweight" rating.

S&P 500 futures rose 6.7 points and were above 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 gained 59 points and Nasdaq 100 futures added 13 points.

Investors will eye U.S. data from the Labor Department as it releases import-export prices for December at 8:30 a.m. (1330 GMT). Economists in a Reuters survey forecast a 1.2 percent rise in import prices and a 0.7 percent increase in export prices. In November, import prices rose 1.3 percent and export prices rose 1.5 percent.

The Fed will release its Beige Book of regional economic conditions at 2 p.m..

Shares on Wall Street closed higher on Tuesday as energy shares helped the Dow and S&P 500 end a three-day losing streak, even as investors worried rising fuel costs will undercut economic growth.

American International Group Inc (AIG.N) accepted a $2.16 billion cash offer for its Taiwan Nan Shan Life from a group led by local conglomerate Ruentex, after 15 months of trying to sell the unit.

No S&P 500 companies are expected to report results Wednesday. Later in the week, Intel Corp (INTC.O) and JPMorgan Chase results could provide further evidence the economic recovery remains on track.

Alaska's main oil pipeline has been allowed to resume limited operations after a leak idled 12 percent of U.S. crude output. Crude prices were unchanged in early trading.

(Editing by Padraic Cassidy)

AIG has been trying to sell the unit for some 15 months as part of its plans to help pay back the U.S. government for its $180 billion bailout, but regulatory issues have dogged the sale process and might yet delay it further.

The buyer group, called Ruen Chen Investment and comprising Ruentex Industries Ltd and shoe maker Pou Chen Corp, signed a deal on Wednesday for the 97.57 percent of Nan Shan that is for sale, Ruentex said in a statement to the Taiwan stock exchange.

"Ruen Chen offers strong operational and funding capabilities and possesses a clear ability to satisfy the strict criteria that governed AIG's bid review process," said Robert Benmosche, AIG President and Chief Executive Officer, in a separate statement.

AIG had a deal worth $2.15 billion last year blocked by the regulator, citing concerns about the previous bidders' industry experience. That forced AIG to put the asset back on sale and prompted Benmosche to personally visit the regulators in December to discuss the sale.

HYPERMARKETS, SHOES AND INSURANCE

Sources have previously told Reuters that Ruentex, a major player in the hypermarket business in China and Taiwan, may not meet all of the five criteria the regulator has laid down for a buyer.

Those criteria are that any buyer needs to show fund-raising ability for future operations, a long-term commitment to run Nan Shan, experience in running an insurance business, and must promise to take care of employees and policy holders. It must have funding sources that meet Taiwan regulations. Ruentex Chairman Samuel Yin has owned and run insurance and asset management businesses in the past, but has since sold them at a profit. The regulator, seeking a long-term stable owner, in general does not approve of buying assets just for resale.

"The regulators' criteria are subject to interpretation. Hence, there is still some uncertainty about this deal going through," said Sally Yim, senior analyst at the financial institutions group at Moody's Investors Service, adding that AIG is likely to have reviewed the bid carefully so would feel confident about getting it past the regulators.

The Financial Supervisory Commission, the financial regulator, said in a separate statement that AIG had communicated its choice of buyer in advance and "should understand the FCS's position".

AIG moved to address concerns about the regulatory outlook, saying in its statement that the deal includes a number of commitments, including an agreement to maintain existing compensation and benefits packages for employees and the existing organisational and commission structure.

At a later media briefing it hinted at higher salaries in future and the possibility of employee share ownership.

Buyer group head Yin told the briefing that it would consider a public share offer for Nan Shan and promised not to sell the business for 10 years. Regulators have in the past suggested to AIG that it sell shares in Nan Shan.

QUICK REVIEW

Last week the regulators promised a quick review of any deal.

The euro zone's two main powers, Germany and France, praised Lisbon's austerity measures but said it needed to convince investors it was implementing reforms effectively to control its public finances and revive a stagnant economy.

EU Monetary Affairs Commissioner Olli Rehn, writing in the Financial Times, said finance ministers should look next week at reinforcing the effective lending capacity of the euro zone's rescue fund and making it more flexible to calm debt markets.

"The effective lending capacity of the current European Financial Stability Facility should be reinforced and the scope of its activity widened," he said.

"We need to review all options for the size and scope of our financial backstops -- not only for the current ones but also for the permanent European stability mechanism too."

The European Financial Stability Facility (EFSF), created last May for euro zone countries that get shut out of bond markets, has a theoretical capacity of 440 billion euros ($570.3 billion) but can effectively only lend 250 billion euros because of cash buffers agreed to obtain a top notch credit rating.

Portugal was expected to pay record high premiums to place its debt on Wednesday, analysts said, but recent bond-buying by the European Central Bank should avert a dramatic rise in yields to levels that prompt the country to seek a bailout.

In its first sale of 2011, the heavily indebted government was offering up to 1.25 billion euros in four- and 10-year bonds.

Credit Agricole rate strategist Peter Chatwell said growing yields would add to longer-term concerns about Portugal's debt and liquidity, "but it's not like it's going to be a make-or-break auction".

TRAUMATIC MEMORIES

Given traumatic memories of two IMF interventions since the 1974 revolution that overthrew Europe's longest-running dictatorship, Socialist Portuguese Prime Minister Jose Socrates is determined to avoid applying for aid if at all possible.

The issue has taken center-stage in Portugal's presidential election campaign with both of the main candidates for the January 23 ballot trying to use it to discredit the other.

Socrates, who heads a minority government dependent on opposition votes to pass legislation, has insisted his country is ahead of target in reducing its deficit and does not face the acute problems that drove Greece and Ireland to seek bailouts.

Optimism that a more effective EFSF may be in the works helped reduce the risk premium investors demand to hold Spanish and Italian government bonds rather than benchmark German debt, but the Portuguese yield spread was unchanged.

Euro zone sources told Reuters on Tuesday that the bloc's finance ministers were likely to consider next week the option of raising the effective lending capacity of the rescue fund as part of efforts to calm sovereign debt markets.

Eyes are on Lisbon's first debt auction of the year, when it is due to tap bond investors for around 1.5 billion euros, while Spain is seeking up to 3 billion euros on Thursday.

Markets are keen to see if they will be able to fund themselves at a sustainable cost or be forced to turn to the European Union and IMF for financial aid.

But the common currency still enjoyed some reprieve after euro zone sources said the region's finance ministers were likely next week to consider the option of raising the effective lending capacity of the currency bloc's rescue fund as part of efforts to calm jittery markets.

This followed Japan's promise to support an upcoming euro zone bond sale and talk that the European Central Bank bought debt to help stabilize markets.

The euro was trading around $1.2986 to the dollar. On Monday, the euro plumbed a four-month trough around $1.2871.

"The Portuguese (debt) auction will probably go quite well and that'll likely give the euro a bump up ... temporarily," said Joseph Capurso, a strategist at Commonwealth Bank, late on Tuesday.

"The bottom line is they're going to be paying something like 7 percent on their 10-year debt and that's probably more than they can afford. There is a very high chance they'll have

to seek some sort of assistance from European partners and that'll push the euro back down again."

Asian shares were flat to slightly higher on the back of gains on Wall Street and solid U.S. earnings reports, with Tokyo's benchmark Nikkei index .N225 up 0.15 percent. The MSCI index of Asia Pacific stocks ex-Japan .MIAPJ0000PUS was up 0.52 percent.

The Dow Jones industrial average .DJI rose 0.3 percent on Tuesday, and the Standard & Poor's 500 Index .SPX added 0.4 percent. The Nasdaq Composite Index .IXIC gained 0.3 percent.

Brent crude prices stayed near $98, the highest level since October 2008, as production shutdowns in Norway and Alaska raised expectations of an accelerated tightening of supplies in Atlantic basin, Middle East and Asia-Pacific oil markets.

Gold rose more than $4 to $1,384.80 an ounce, below its historical high of around $1,430 struck in December but still buoyed by high oil prices and the euro zone crisis, both of which help promote gold's image as a safe haven.

Dealers said gold could rise further as demand from jewelers and investors picks up in India and China, leading to tighter stocks for gold bars in Singapore and Hong Kong. Premiums for gold bars are at two-year highs.

Worries about inflation in China, the world's second-largest gold consumer after India, drove investors to gold, while purchases from jewelers are also rising ahead of the Lunar New Year in February, a traditional period for giving gifts.

(Editing by Kim Coghill)