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News Corp (NWSA.O) will be in the spotlight after the company's shares traded in Australia (NWS.AX) sank to a two-year low on Monday as the UK phone hacking scandal fallout worsened. Rebekah Brooks, the former head of the company's UK paper business, was arrested on Sunday and top policeman Paul Stephenson quit over the scandal.

With five days remaining before President Barack Obama's deadline for a deal to raise the U.S. debt ceiling, Republicans and Democrats have yet to agree on a big plan to cut the nation's deficit and raise its debt limit in time to avoid an unprecedented U.S. default. Efforts to reach a comprehensive deficit-reduction deal are at an impasse over tax breaks as lawmakers -- with an eye on 2012 elections -- hold on to entrenched positions.

The euro fell while gold hit record highs on Monday as disappointment over financial health checks on European banks and escalating U.S. and euro zone debt problems sent investors scrambling for safe haven assets.

European stocks were down around 0.6 percent in morning trade, adding to last week's sharp losses, as banking stocks dropped after the region's stress test results published late on Friday failed to dispel investors' concerns over the potential impact from the region's sovereign debt crisis. .EU

On the earnings front, investors awaited results from Gannett Co, Halliburton, Hasbro (HAS.O), IBM, Charles Schwab, Stanley Black and Decker, Wynn Resorts (WYNN.O) and Zions BanCorp. (ZION.O).

Google's blowout quarter led the Nasdaq higher on Friday but mounting uncertainty about the government's ability to reach a debt-reduction deal may keep investors at bay in the coming week.

The Dow Jones industrial average .DJI rose 42.61 points, or 0.34 percent, to end at 12,479.73. The Standard & Poor's 500 Index .SPX gained 7.27 points, or 0.56 percent, to finish at 1,316.14. The Nasdaq Composite Index .IXIC advanced 27.13 points, or 0.98 percent, to close at 2,789.80.

(Reporting by Blaise Robinson; Editing by Jon Loades-Carter)

Investors sent News Corp shares down as much as 7 percent in heavy volume after Rebekah Brooks, the former head of the company's UK paper business, was arrested on Sunday and top policeman Paul Stephenson quit over the scandal.

"I think people would rather be cautious and mark it down rather than find a reason to defend it," said Invesco senior investment manager Jackson Leung in Melbourne. Invesco is News Corp's second-largest institutional shareholder with a 1.68 percent stake, according to Thomson Reuters data.

News Corp shares ended down 4.1 percent at A$14.16 after touching a low of A$13.65.

Shares in a News Corp takeover target, pay-tv firm Austar (AUN.AX), also fell on worries the deal may not proceed after the furor in Britain forced News to drop a $12 billion plan to buy all of highly profitable broadcaster BSkyB (BSY.L).

Austar has agreed to a $2 billion-plus takeover offer from its bigger rival Foxtel, which is owned by News Corp's (NWSA.O) News Ltd division, billionaire James Packer's Consolidated Media Holdings (CMJ.AX), and telecoms firm Telstra (TLS.AX).

The Australian government last week said it may review media laws and ownership, following pressure from the influential Greens party.

Rupert Murdoch's News Ltd dominates the Australian newspaper industry, commanding nearly three-quarters of daily metropolitan newspaper circulation, and the UK scandal has riveted attention in his homeland.

Murdoch, who now has U.S. citizenship, started his global media empire in Adelaide when he inherited the now defunct Adelaide News from his father, Sir Keith Murdoch.

He owns 150 national, capital city and suburban news brands in Australia, which include mass circulation daily tabloids in Sydney (Daily Telegraph) and Melbourne (Sun Herald) and the national daily The Australian.

Austar closed down 3.8 percent while Consolidated Media fell 2.9 percent, against a flat broader market, reflecting investor concerns on the future of the deal.

Still, the Austar and Foxtel camps and banking sources familiar with the deal said the offer was on track and did not expect it to be derailed because Foxtel is only 25 percent owned by News Corp.

"This has long been a transaction with a compelling logic to it and is in the best interests of shareholders. We will continue to keep the market informed as and when appropriate," a spokeswoman for Austar told Reuters in an e-mailed message.

Australia's competition watchdog is due to rule on the bid for Austar on July 21.

Murdoch, through BSkyB, also has an interest in 24-hour news channel Sky News Australia, which is 33 percent-owned by BSkyB. Sky News TV in Australia is in a battle with the government-owned Australian Broadcasting Corp to run the country's overseas TV network -- Australia Network.

On Sunday, detectives arrested Brooks, former head of News Corp's British newspaper arm, on suspicion of intercepting communications and corruption.

Stephenson, London's police commissioner, quit in the face of allegations that police officers had accepted money from the paper and had not done enough to investigate hacking charges that surfaced as far back as 2005.

SHARES OFF 18 PERCENT IN JULY

News Corp's Australian shares have dived 18 percent, or nearly A$3, this month as the News of the World hacking scandal engulfed News Corp executives.

On Monday, the shares fell 7.6 percent to an intraday low of A$13.65, the weakest since July 2009, and also a 7.4 percent discount to News Corp's (NWSA.O) last U.S. close, implying a $3 billion drop of market capitalization at that level.

Volume was 11.4 million shares, or 4.5 times the average daily volume over the past 90 days, according to Thomson Reuters data.

A News Ltd spokesman in Sydney declined to comment on the share move, saying any comment would have to come out of New York.

"There's a lot of sentiment and emotion driving the stock," said Simon Burge, chief investment officer at ATI Asset Management in Sydney, which holds News Corp shares.

"From an earnings point of view, News of the World was less than 1 percent of earnings but this has catapulted to something greater and it is hard to quantify."

In a report on its web site, Bloomberg News cited two unnamed sources as saying independent directors of New York-based News Corp have begun questioning the company's response to the crisis and whether a leadership change is needed.

On the board, venture capital executive Tom Perkins and Viet Dinh, a law professor at Georgetown University, were leading the efforts of independent directors, according to one of the people in the Bloomberg report.

However, in an emailed response to Reuters, Perkins denied the report.

"The Bloomberg reporter didn't talk to me. There is no substance to her speculations, as far as I know," Perkins said.

The News of the World, which published its final edition a week ago, is alleged to have hacked up to 4,000 phones including that of murdered 13-year-old Milly Dowler.

(Additional reporting by Michael Erman in New York and Sonali Paul in Melbourne; Editing by Balazs Koranyi and Lincoln Feast)

The benchmark S&P 500 index last week recorded its worst weekly loss in five weeks.

Investors, frustrated by the lack of progress in the debate between the Democrat-controlled White House and Senate and the Republican-majority House of Representatives, could move into what are perceived as safer assets, such as cash.

While the wrangling over the debt ceiling takes center stage, earnings season will continue to heat up after a solid first week. According to Thomson Reuters data, 39 companies in the benchmark S&P 500 index .SPX have posted results, with 74 percent reporting earnings that topped Wall Street estimates.

Companies in the index are forecast to show a 6.5 percent rise in profits over the second quarter of 2010 when all the reports are in.

For last week, the S&P 500 ended down 2.1 percent; the Dow fell 1.4 percent and the Nasdaq declined 2.5 percent.

The overhang from the debt ceiling issue could diminish the focus on earnings.

House Speaker John Boehner, the top Republican in Congress, said on Friday that President Barack Obama and Democrats still had not put a serious deficit plan on the table, underscoring the acrimony in negotiations to avert a government default.

"The news flow (this) week dealing with the deficit issues and the political posturing that is taking place is going to intensify and is really going to drive these markets," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"People are starting to get nervous about what they are seeing out there. For a portfolio manager -- let alone an average investor -- this is a treacherous market to be trying to position yourself in."

ECONOMY IS A "DISASTER"

Economic data on tap for the coming week includes several reports on the housing market -- June housing starts on Tuesday and existing-home sales on Wednesday. In addition, data is due on leading economic indicators for June and the Philadelphia Fed survey of manufacturing activity in the Mid-Atlantic region. Economic reports over the last month have raised questions about the health of the U.S. recovery.

"The bigger picture is the economy is still a disaster," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Saluzzi said people still are watching earnings for signs growth may be stagnating. "Eventually, companies are not going to keep cutting costs."

Quarterly results are expected from a slew of companies this week, with more than 10 Dow components scheduled to report.

Major financial companies due to report include Goldman Sachs (GS.N), Morgan Stanley (MS.N), Bank of America Corp (BAC.N) and American Express (AXP.N). Also on the calendar are earnings news from technology companies Apple Inc (AAPL.O), Microsoft Corp (MSFT.O) and Intel Corp (INTC.O).

"Let's see what all the rest of these guys have. Let's see if it's still being driven by cost cuts or are they actually getting revenue gains. That is going to tell me a lot more than if they cut the debt deal," said Saluzzi.

After the S&P 500 weekly loss, the index was just below its 50-day moving average, a technical level that could indicate more selling. Some analysts believe the market could still come back if the U.S. debt issue is resolved soon.

"This area, as far as it pulling back, is balancing the threat of a default, but it would take an actual default to take us much lower than here," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

But the longer the debt ceiling question continues without a conclusion, the bigger the risk for further declines in stocks and for volatility to spike. The CBOE Volatility index .VIX rose nearly 30 percent last week

"The more it drags out into Tuesday, Wednesday, Thursday or whatever, then we've got some serious issues. That will be an overhang no matter how good the financials come in terms of earnings reports next week," said Tommy Huie, chief investment officer of BMO Asset Management U.S. in Milwaukee, Wisconsin.

"It could be a pretty volatile week, no doubt about it."

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

From Washington to Brussels, Moody's, Standard & Poor's and Fitch have added to the intense pressure on governments trying to deal with crushing sovereign debt.

Their warnings about the precarious finances of the world's top economies have also roiled investors more accustomed to seeing emerging market countries take the brunt of criticism.

Tension hit new highs on both sides of the Atlantic last week as Moody's and Standard & Poor's threatened to downgrade the United States' prized "triple-A" rating.

A few days earlier, Moody's slashed ratings in Ireland and Portugal to "junk" status, triggering an outcry from European officials.

"These opinions, they continue to give them in such a way that it worsens the crisis," Ewald Nowotny, a member of the European Central governing council, said on Tuesday, referring to the agencies. He said markets could live without them.

Now that the agencies are focusing their fire on the rich world, U.S. and European officials -- long proponents of seeing indebted nations "take their medicine" -- are crying foul.

Their complaints carry a strong sense of deja-vu.

In 1998, when Moody's pushed Brazil deeper into "junk" rating territory, the country's finance ministry called the decision a "mistake" that showed the agency needed to invest more in sovereign risk analysis.

In a sign of the turnaround of the fortunes of many emerging economies, 11 years later in its New York headquarters Moody's received a much friendlier Brazilian finance minister, Guido Mantega, to hand him Brazil's much-awaited "investment-grade" status.

The question now is whether the agencies will be able to withstand much stronger political pressures while the debt crisis rages in developed countries.

In Europe and the United States, policymakers have already promised tougher regulations for the agencies after they failed to spot the housing bubble in the middle of the last decade. and stand accused of contributing to it by giving generous ratings to subprime mortgage bonds.

Rating agencies came under fire from holders of subprime-related securities because raters are paid by the firms issuing the securities. Investors argued that kind of "economic incentive" blurred the analysis.

Sovereign nations, by contrast, do not shell out any money for their ratings.

That has not lessened the political anger. On Wednesday, U.S. Congressman Dennis Kucinich said: "No nation, agency or organization has the authority to dictate terms to the United States government. Moody's and its compatriot S&P were a direct cause of the near collapse of the economy of the United States."

EUROPEAN RATING AGENCY

In Europe, where the agencies poured cold water on a plan for Greece to extend debt maturities and avoid a default, sentiment is even worse. European Commission President Jose Manuel Barroso accused them of having an anti-European bias.

Barroso and other policymakers want the creation of an European rating agency which, they argue, would be better equipped to analyze euro zone issues. That argument overlooks the fact that Fitch is majority-owned by a French company.

The intensity of Europe's reaction to the latest sovereign downgrades is proportional to the power that ratings agencies retain over financial markets -- a clout that even the ratings agencies suggest is exaggerated.

In a recent special report about proposed regulation changes, Moody's said the agencies should not be seen as "gatekeepers in the financial markets" and their ratings should not be used as substitutes for disclosure by issuers.

WRONG TIMING

Some say policy makers may have a point when they criticize the timing of the downgrades by ratings agencies.

Their failure to anticipate the severe deterioration of sovereign credit was an issue in emerging market debt crises in the past, said Claudio Loser, a former Western hemisphere director for the International Monetary Fund.

"My experience with the rating agencies in Latin America during the debt crisis of the 1980s and 1990s is that they were a destabilizing factor," said Loser, now president of the Centennial Latin America consulting firm.

"They did not warn the markets when they should have and they did actually create more noise when it was not the appropriate thing to do."

Loser believes policymakers will force the agencies to "adjust significantly," and that they will emerge stronger from this crisis.

(Reporting by Walter Brandimarte; Editing by David Gaffen, Jennifer Ablan and Maureen Bavdek)

The benchmark S&P 500 index this week recorded its worst weekly loss in five weeks.

Investors, frustrated by the lack of progress in the debate between the Democrat-controlled White House and Senate and the Republican-majority House, could move into what are perceived as safer assets, such as cash.

While the wrangling over the debt ceiling takes center stage, earnings season will continue to heat up after a solid first week. According to Thomson Reuters data, 39 companies in the benchmark S&P 500 index .SPX have posted results, with 74 percent reporting earnings that topped Wall Street estimates.

Companies in the index are forecast to show a 6.5 percent rise in profits over the second quarter of 2010 when all the reports are in.

For this week, the S&P 500 ended down 2.1 percent; the Dow fell 1.4 percent and the Nasdaq declined 2.5 percent.

The overhang from the debt ceiling issue could diminish the focus on earnings.

House Speaker John Boehner, the top Republican in Congress, said President Barack Obama and Democrats had still not put a serious deficit plan on the table, underscoring the acrimony in negotiations to avert a government default.

"The news flow next week dealing with the deficit issues and the political posturing that is taking place is going to intensify and is really going to drive these markets," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"People are starting to get nervous about what they are seeing out there. For a portfolio manager -- let alone an average investor -- this is a treacherous market to be trying to position yourself in."

ECONOMY IS A "DISASTER"

Economic data on tap for next week includes several reports on the housing market -- June housing starts on Tuesday and existing-home sales on Wednesday. In addition, data is due on leading economic indicators for June and the Philadelphia Fed survey of manufacturing activity in the Mid-Atlantic region. Economic reports over the last month have raised questions about the health of the U.S. recovery.

"The bigger picture is the economy is still a disaster," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Saluzzi said people still are watching earnings for signs growth may be stagnating. "Eventually, companies are not going to keep cutting costs."

Quarterly results are expected from a slew of companies next week, with more than 10 Dow components scheduled to report.

Major financial companies due to report include Goldman Sachs (GS.N), Morgan Stanley (MS.N), Bank of America Corp (BAC.N) and American Express (AXP.N). Also on the calendar are earnings news from technology companies Apple Inc (AAPL.O), Microsoft Corp (MSFT.O) and Intel Corp (INTC.O).

"Let's see what all the rest of these guys have. Let's see if it's still being driven by cost cuts or are they actually getting revenue gains. That is going to tell me a lot more than if they cut the debt deal," said Saluzzi.

After the S&P 500 weekly loss, the index was just below its 50-day moving average, a technical level which could indicate more selling. Some analysts believe the market could still come back if the U.S. debt issue is resolved soon.

"This area, as far as it pulling back, is balancing the threat of a default, but it would take an actual default to take us much lower than here," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

But the longer the debt ceiling question continues without a conclusion, the bigger the risk for further declines in stocks and for volatility to spike. The CBOE Volatility index .VIX rose nearly 30 percent for the week

"The more it drags out into Tuesday, Wednesday, Thursday or whatever, then we've got some serious issues. That will be an overhang no matter how good the financials come in terms of earnings reports next week," said Tommy Huie, chief investment officer of BMO Asset Management U.S. in Milwaukee, Wisconsin.

"It could be a pretty volatile week, no doubt about it."

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)