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Sri Lankan born Rajaratnam, 53, is the former head of the Galleon Group hedge fund that once managed $7 billion. He could face a 20-year jail sentence if convicted on the most serious charge of securities fraud.

Since arresting Rajaratnam in October 2009 and announcing charges against 26 former traders, executives and lawyers, the U.S. government has pressed ahead with what it calls the biggest probe of insider trading in the $1.9 trillion hedge fund industry.

Prosecutors allege Rajaratnam made $45 million in illicit profits through tips from former friends and associates. Nineteen people have pleaded guilty in the case, which stands apart from past insider trading probes because of the government's wide-scale use of phone taps.

The selection of a 12-member jury in Manhattan federal court is the first opportunity for prosecutors and defense lawyers to score points at trial after 16 months of jousting over wiretaps and other evidence. Opening statements will start once the panel is in place for a trial expected to last up to two months.

Rajaratnam is free on bail but fighting to stay out of prison in a saga involving leaked company secrets, phone taps and former friends, who will testify against him for the government.

It is not known whether Rajaratnam will testify in his own defense after the jury has heard hours of tapes and testimony from as many as six cooperating witnesses. Prosecutors say they could present up to 173 recordings of telephone conversations.

Among those who could be called by the government to testify is Lloyd Blankfein, chief of Goldman Sachs Group Inc.

Prosecutors and regulators have accused former Goldman board member Rajat Gupta of leaking information about the bank to his friend Rajaratnam, but Gupta has not been criminally charged.

Rajaratnam's chief defense lawyer, John Dowd, has fought hard for his wealthy client, arguing prosecutors have broadened the definition of insider trading. A money manager's liberty should not be at risk because he trades on a stock while knowing something about the company, Dowd argues.

He also fought, unsuccessfully, to suppress the FBI's secretly recorded phone conversations from trial.

"In some ways it sounds like a classic insider trading case," said Sam Buell, law professor at Duke University in Durham, North Carolina, who is not involved in the case. "But we can expect some kind of twist here in the nature of defense arguments about this is a different realm of trading and information sharing."

For the jury to convict Rajaratnam, the government must convince all 12 panel members that its evidence shows Rajaratnam knew he was receiving secret corporate information from someone who had a fiduciary duty not to disclose it.

The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.

(Reporting by Grant McCool, editing by Matthew Lewis and Neil Fullick)

U.S. crude eased almost 50 cents, or 0.5 percent, to just under $105 a barrel, as traders assessed efforts to stem fighting in Libya that threatens to spiral into civil war.

A rally in the euro ran out of steam as investors who had been betting against the dollar took profits.

Market players have been focused on the prospect of a European Central Bank interest rate rise as early as next month, but the euro zone debt crisis returned to the fore on Monday, when Moody's slashed Greece's sovereign rating by three notches.

The euro struggled to make much headway in Asia after its rally stalled just above $1.40 overnight, helping an oversold dollar edge off four-month lows against a basket of major currencies.

The euro traded around $1.3965, down from a high of around $1.4036 on Monday, while the dollar index .DXY was steady around 76.517.

"We are still USD bears, but the scale of speculative market net shorts in the USD is significant," said Peter Frank, strategist at Societe Generale.

"With the aggregate net short at $39.5 billion, surpassing even the pre-Lehman 2007 peak, the USD could benefit from profit-taking in the near-term."

Japan's Nikkei benchmark edged higher as investors covered short positions after selling heavily on Monday, but analysts said gains may be limited as concerns about turmoil in the Middle East and oil prices persist.

"The market's fundamentals are recovering on corporate earnings so sentiment for the longer term is good. But for the short-term, the market may see some correction due to continuing worries about developments in the Middle East," said Hajime Nakajima, deputy general manager at Cosmo Securities.

Japan's Nikkei .N255 rose 0.38 percent and Hong Kong's Hang Seng Index .HSI was up 0.24 percent helped by a broadly stronger energy sector and gains in Chinese large caps.

Seoul shares .KSII were up 0.96 percent after sharp falls in the previous session, lifted by shipbuilders and technology plays.

After an early fall, MSCI's index of Asia Pacific shares outside Japan .MIAPJ0000PUS was up 0.28 percent helped by gains in energy and industrials.

"It will be difficult for risk markets such as equities and industrial commodities to push into higher ranges whilst the threat to oil supplies remains elevated," said Ric Spooner, chief market analyst at CMC Markets in Australia.

U.S. stocks fell on Monday, with the S&P 500 .SPX down 0.8 percent and the Nasdaq .IXIC off 1.4 percent.

The prospects of further unrest in oil-rich Middle Eastern countries has driven investors to seek safe-haven assets. Spot gold traded around $1,432.30 an ounce, down a little from a record $1,444.40 scaled on Monday.

(Additional writing by Alex Richardson; Editing by Nick Macfie)

China, Brazil and other fast-growing nations have struggled to contain inflation and control heavy inflows of investment money. Although the IMF has been warning for months of the risks of price pressure, the comments by the Fund's first deputy managing director, John Lipsky, suggested the IMF is growing increasingly concerned.

"For the emerging economies, growing at 6.5 to 7 percent, their margins of excess capacity have been largely used up, and as a result we're starting to see incipient signs of overheating," Lipsky told Reuters Insider in an interview.

After the global economic slump of 2008 and 2009, the recovery took divergent paths, with emerging markets powering ahead while advanced economies merely trudged along.

With growth and interest rates remaining unusually low across the developed world, investors have flocked to emerging markets, bringing much-needed capital but also a risk of inflation.

Rising oil prices have compounded the inflation problem, but Lipsky said the IMF has not cut its growth forecast because it thinks the oil price spike will prove temporary.

He said until unrest spread to oil-producing Libya, much of the rise in oil prices in late 2010 and early 2011 reflected an improved economic outlook. However, the latest worries about supply disruptions created a "fear factor" that drove oil above $100 a barrel, which if sustained would pose a bigger threat to growth.

Rising food prices are also worrisome, particularly for poorer countries where food consumes a larger percentage of household budgets, he said. The cost of food was one of many reasons behind the recent upheaval in Egypt and Tunisia.

"We have to be concerned even in places where there is no political upheaval," Lipsky said. "The social strains and real difficulties for poor residents in many economies is something that has to be attended to."

WHAT TO DO?

For emerging markets, cooling growth without inflicting too much damage on the global economy will require some delicate maneuvering.

China has made curbing inflation its top policy priority this year. Its finance minister said earlier on Monday China will ensure that spending on social priorities does not fan inflationary fires.

Separately, Zhu Min, special adviser to the IMF's managing director, said China's loan growth was too strong and addressing that was key to safely slowing down the economy.

"It's a fundamental challenge," he said during a presentation to an economists' group meeting in Arlington, Virginia. "So that's a concern, overheating. In China, slowing down economic growth is important."

Brazil and some other emerging markets have increased taxes on foreign investors or raised banks' reserve requirements to try to slow inflows of investment money and ward off inflationary pressures.

The Nasdaq composite index .IXIC dropped 1.4 percent and closed just above its 50-day moving average, a widely followed technical level that if breached could signal more declines in the sector that has helped lead the market rally.

Wells Fargo downgraded the semiconductor sector, noting its strong upward moves. The PHLX semiconductor index .SOX has risen 130 percent since March 2009. The index also is up 45 percent since the start of September, while the broad S&P 500 has advanced about 25 percent in that period.

Also weighing on Nasdaq, communications equipment maker Ciena Corp (CIEN.O) forecast weaker-than-expected sales, sending its shares sliding 9.2 percent to $25.98.

Investors "are jumping on an opportune seasonal slowdown that typically happens between March and July for tech," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco. "It has been one of the leadership groups since August."

Brent crude has been on investors' radar as analysts and economists gauge how it might hurt economic demand if prices continue to rise. Crude edged lower on Monday after hitting its highest since September 2008 on conflict in the Middle East. Brent crude dipped 0.8 percent to $115.20 a barrel.

The Dow Jones industrial average .DJI dropped 79.85 points, or 0.66 percent, to 12,090.03. The Standard & Poor's 500 Index .SPX fell 11.02 points, or 0.83 percent, to 1,310.13. The Nasdaq Composite Index .IXIC lost 39.04 points, or 1.40 percent, to 2,745.63.

Wells Fargo said downgrading the semiconductor sector to "market weight" from "overweight" was "an indication of a moderate though still optimistic view."

Even though gains in semis have outpaced the broader market, the S&P 500 and the semiconductor index have been moving in the same direction, which could mean further declines in the sector and spell more of the same for the overall market.

A 20-day correlation between the S&P 500 and the semiconductor index .SOX was at 0.92, with a reading of 1 suggesting a perfect correlation.

Tech has been a favorite of analysts, along with other cyclical sectors.

The CBOE volatility index .VIX rose 8.2 percent to 20.63. Joe Kinahan, chief derivatives strategist at TD Ameritrade in Chicago said investors were insuring against a possible fall below 1,300 for the S&P 500.

"If we break this level the S&P could continue all the way down to 1,275. So many investors are trying to get ahead of this by paying up for portfolio protection in the form of index and equity options," he said.

Worries about the effects of recent higher oil prices on the economy have been a negative for stocks, but analysts recommend buying the energy sector.

"Industrials are ultimately affected by energy prices, so a sector that works as a hedge would be the energy sector," said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management in Champaign, Illinois.