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Despite a report last week showing only 36,000 jobs were created in January, Lacker said other measures were pointing to a firmer economic recovery and better employment prospects.

"An array of forward-looking indicators of employment trends point to continued labor market improvement," Lacker, a known inflation hawk, told a business gathering at the University of Delaware.

In November, the Fed launched a controversial bond-buying program to support a fragile recovery. Lacker noted the central bank had committed to regularly reviewing the pace and size of purchases.

"The distinct improvement in the economic outlook since the program was initiated suggests taking that reevaluation quite seriously," he said.

Lacker expects the U.S. economy, the world's largest, to expand by about 4 percent in 2011, a rate he said should be sufficient to boost hiring and lower unemployment.

The U.S. jobless rate fell to 9.0 percent in January.

Fed Chairman Ben Bernanke made clear in remarks last week that he does not consider the progress sufficient to declare victory and begin withdrawing monetary support.

While many Fed officials consider inflation to be too low at the moment, Lacker reiterated his case that prices are actually "low and stable."

Indeed, he said, it was still unclear whether recent spikes in commodities prices would have longer-lasting effects on U.S. consumer prices.

"The effect on overall inflation could be transitory, or could persist if firms, encouraged by accelerating demand growth, pass input prices on to their customers," Lacker said.

"Such pickups in inflation are common at this point in business cycle upturns, and would be consistent with the expected inflation rates implied by prices of inflation-indexed U.S. Treasury debt," he added.

Some analysts blame the Fed's ultra-loose monetary stance for boosting financial market liquidity and helping to fuel runaway gains in commodities that have pushed up the costs of basic goods like food and energy.

The timing was a surprise, coming on the final day of China's Lunar New Year holiday, but investors have long expected more monetary tightening as Beijing struggles to rein in price pressures and ward off a property bubble.

Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The rises take effect from February 9.

Although annual inflation slowed to 4.6 percent in December, it is expected to have picked up again in January with food prices soaring.

"It is the first interest rate rise in the Year of the Rabbit, but it will not be the last," said Xu Biao, an economist with China Merchants Bank in Shenzhen, referring to the Chinese New Year, which began last week.

Fearing tighter monetary policy will dampen China's demand, commodity markets fell after the central bank announcement. Three-month copper fell below $10,000 a metric ton and U.S. crude futures prices dropped.

The MSCI world equity index held on to gains, trading up 0.15 percent, but the FTSEurofirst 300 index was down 0.3 percent, turning negative after China's move.

TIGHTENING CYCLE

This is the third rate increase since China began a monetary tightening cycle in earnest in October.

"I didn't think it (China's rate hike) would happen today, but it doesn't matter whether you think it will happen today or tomorrow. You know that interest rates are going up," said Mike Lenhoff, chief strategist at Brewer Dolphin in London.

With inflation running near its fastest in over two years, Beijing hopes higher rates will encourage savers to keep more of their money in banks and also weigh on the demand for mortgage loans.

Anti-inflation talk from the central bank in recent months has primed investors for more policy tightening and, even with the latest move, many believe further tightening is on the cards.

A Reuters poll in December showed economists expect the one-year deposit rate to climb to 3.25 percent by June.

While tighter policy may put a lid on China's growth and has taken a toll on the country's share market, many analysts believe any economic slowdown will be moderate.

If anything, that China is tightening policy at a time when U.S. and euro zone interest rates are at record lows is a mark of confidence within the country that its economy, the world's second-largest, is on solid ground.

(Writing by Simon Rabinovitch; Editing by Neil Fullick)

The world's largest direct seller of cosmetics earned $229.5 million, or 53 cents per share, compared with a profit of $269.4 million, or 62 per share, a year earlier.

Avon said on February 1 that it would record restructuring charges of about $58 million, or 9 cents per share, in the fourth quarter.

Adjusted earnings from continuing operations fell to $259 million, or 59 cents per share, from $293 million, or 68 cents per share, a year earlier. Analysts had expected a profit of 67 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 1.3 percent to $3.18 billion, missing analysts' average target of $3.28 billion.

(Reporting by Jessica Wohl, editing by Maureen Bavdek)

Merger activity drove the Dow and S&P to 2-1/2 year highs on Monday, in a sign more gains could be in store for equities.

Corporate earnings will once again dictate near-term direction, with Walt Disney (DIS.N) and Sara Lee (SLE.N) among those scheduled to release results.

Exchange group NYSE Euronext (NYX.N) reported a smaller-than-expected 21 percent fall in quarterly profit, reflecting weaker trading activity amid growing competition.

UBS (UBS.N) said it expected to win back more client business in 2011 and had laid the foundations for a rebound in its investment bank.

Intel (INTC.O) resumed shipments of a flawed chipset for use with its new cutting-edge processors, responding to demands from PC makers who will use the chips selectively.

On the economic front, U.S. consumer credit surged in December as shoppers boosted their credit-card debt for the first time in more than two years, supporting views economic activity was gathering momentum.

U.S. Federal Reserve Chairman Ben Bernanke is to deliver semi-annual monetary policy testimony to Congress on March 1 and 2, aides said on Monday.

European shares were lower in early trade, in a broad sell-off from the previous session's 29-month closing high.

(Reporting by Harpreet Bhal; Editing by Dan Lalor)

Japan's No.2 Nissan Motor Co is also expected on Wednesday to report a drop in third-quarter profits due to the stronger yen and falling demand in Japan and smaller rival Honda Motor Co has already posted weaker results for the period. But the decline at Toyota is set to be the deepest given its heavier exposure to unprofitable exports from Japan.

"(The revised outlook) is slightly above the market consensus, but since the company had been widely expected to raise its forecast, it's no surprise," said Kazuyuki Terao, chief investment officer at RCM Japan in Tokyo. "Compared with other Japanese automakers, Toyota has greater exposure to the domestic market and therefore is more subject to the negative impact of the country's slow economic growth."

BIG EXPORTER

Toyota exported more than half of its Japan-made vehicles last year, making a loss on many of them with the dollar well below the rate of 90 yen that President Akio Toyoda has said is the minimum to keep Japan's manufacturing sector competitive.

For the full year to March 31, Toyota raised its forecast for annual operating profit to 550 billion yen ($6.68 billion) from a cautious 380 billion yen, after profits for the first nine months exceeded that figure.

Toyota improved profitability by paring costs, helped by better than expected sales in Japan, the rest of Asia and Russia, senior managing director Takahiko Ijichi told a briefing.

"We now expect to overcome rapid and acute yen appreciation," Ijichi said.

Still, analysts say, Toyota's disproportionately big Japanese operations -- it has 17 assembly plants across the group -- will remain the major drag on its earnings.

A survey of 23 analysts by Thomson Reuters I/B/E/S ahead of the results had forecast annual operating profit of 489 billion yen for Toyota.

Some industry watchers say Toyota could continue to suffer the lingering effects of last year's recall crisis, especially as consumers have more car models to choose from with the expansion of Volkswagen AG and Hyundai Motor Co in the United States.

The U.S. Department of Transportation is due later on Tuesday to release its long-awaited findings of the review of Toyota's electronic throttles over complaints of unintended acceleration -- the problem behind most of the recalls in the crisis.

"This year should be a consolidation year for Toyota as they recover from the recall," said Neo Chiu Yen Vice President, Equity Research Asia, at ABN AMRO Private bank in Singapore.

"I would like to see progress in rebalancing of their production footprint to mitigate eroding export margins. Toyota is quite dependent on the U.S. market."

Toyota nudged up its global sales forecast to 7.48 million vehicles from 7.41 million, with domestic sales expected to reach 2.02 million vehicles compared with an earlier prediction of 1.99 million. It kept its U.S. forecasts unchanged at 2.09 million units.