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French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year.

But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings.

The uncertainty pushed the euro down against other currencies on Monday and the government bond yields of indebted euro zone states rose, with Italy's 10-year yield climbing more than 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.

"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said.

"We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work anymore; the opportunity has been lost."

"CANNOT RULE OUT ANYTHING"

Officials are wrestling with a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek debt that would be conducted at a discount to face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt.

But all of the schemes could face major technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone. Other proposals still appear to be on the table; Germany's Die Welt newspaper reported on Monday that governments were considering a levy on banks as a way to involve private creditors in rescuing Greece.

An official of a major euro zone government who is familiar with the talks said he had not heard of a proposal for a bank levy, but added: "There are at the moment so many proposals that you cannot rule out anything."

If a deal on private creditor participation is reached, it may cut Greece's debt by just 20 or 30 billion euros, not nearly enough by itself to solve the problem. Analysts have estimated the debt would have to be roughly halved, to 80 percent of gross domestic product, to make it manageable in the long run.

German Chancellor Angela Merkel said on Sunday that while this week's summit was "urgently necessary," she would only attend if lower-ranking officials had already prepared a clear rescue plan. "I will only go there if there is a result."

BAILOUT

As part of the second bailout, officials have also been looking at other measures to help Greece including up to 60 billion euros of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalize Greek and European banks; and ways to stimulate Greek economic growth.

Some official sources have said interest rates on bailout loans extended to Greece, Ireland and Portugal may be cut and maturities on those loans extended drastically, perhaps to 30 years.

There has also been talk of expanding the 750 billion euro bailout facility which the European Union and the IMF jointly created last year as the debt crisis erupted.

But de Grauwe said financial markets were now putting so much pressure on weak euro zone states that it was unclear whether cutting interest and extending maturities on their emergency loans would help them regain access to the markets.

"If that was to be a solution, it's a solution we should have implemented months ago, when it would have worked."

Another source of concern is signs that the IMF and other major governments around the world, which want to prevent the European crisis from poisoning debt markets globally, may lose patience with Europe's handling of the problem.

Die Welt quoted unnamed diplomatic sources as saying the IMF was angered by Europe's crisis management and that "influential parties" in the Fund wished not to take part in further bailouts of Greece. It did not elaborate.

Former U.S. Treasury Secretary and White House adviser Lawrence Summers, writing in a column contributed to Reuters on Sunday, said Europe needed to act much more aggressively than it had done so far to prevent the Greek crisis from damaging both the region's single currency and the global economic recovery.

He recommended steps including sharp cuts in interest paid on bailout loans, allowing countries to buy European Union guarantees for their issues of new debt, and a menu of options for private investors to become involved.

"It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown toward European policymakers over the last 15 months," Summers wrote.

Many private economists think some form of regional guarantee for countries' debt along the lines suggested by Summers -- or perhaps even the issuance of joint euro zone bonds -- may ultimately be the only way to emerge from the crisis without one or more weak states being forced out of the zone.

But Germany has shown no appetite for such a sweeping solution, which in any case would require a complex and time-consuming revision of the EU treaty.

"We are against euro bonds," German government spokesman Steffen Seibert said on Friday, repeating Berlin's concern that a common bond for the single currency area would provide no meaningful incentives for national governments to pursue prudent budget policies.

(Writing by Andrew Torchia)

At a news conference in Pretoria, where he began what will be a curtailed visit to Africa, Cameron defended hiring former tabloid editor Andy Coulson, a figure at the center of the scandal, as his spokesman.

He rejected veiled criticism from the police chief, who quit after coming under fire for appointing Coulson's former deputy as a media adviser to his force.

"The situation in the Metropolitan Police Service is really quite different to the situation in government," Cameron said in response to remarks by outgoing Metropolitan Police Commissioner Paul Stephenson, who contrasted the prime minister's response to hiring one ex-journalist to his own resignation over the other.

Having cut short a planned week in Africa as the scandal snowballed, Cameron also said parliament would delay its summer recess to let him address lawmakers again on Wednesday.

The prime minister came under further pressure on Sunday with the resignation of Stephenson and arrest of Rebekah Brooks, who ran British newspapers for Murdoch's News Corp.

Murdoch, the 80-year-old Australian-born magnate whose grip on Britain's media and politicians of all parties have been shaken by two weeks of outrage, faces a parliamentary committee on Tuesday. He and his son James, 38, as well as Brooks, can expect a fierce grilling over allegations the News of the World tabloid hacked thousands of people's voicemails and bribed policemen.

The scandal may be reshaping the British establishment, with the press, police and politicians all facing harsh questioning from the public over cozy relationships and a failure over many years to protect the vulnerable, including child crime victims and the nation's war dead, from intrusive tabloid journalism.

The affair has prompted Murdoch to shut down the 168-year-old News of the World, Britain's top-selling Sunday paper, and to drop a bid for pay-TV network BSkyB that was a key part of its global expansion in television. That in turn has raised questions from investors over the family's management.

News Corp shares plunged during Australian trading on Monday, hitting a two-year low of A$13.65 following global drama for the group during the weekend closure. On Friday, Brooks, a former News of the World editor, resigned, as did Les Hinton, head of Murdoch's Dow Jones & Co, publisher of the Wall Street Journal. Hinton used to run News International in Britain.

The shares ended 4.1 percent lower at A$14.16.

CAMERON UNDER FIRE

In resigning on Sunday, police chief Stephenson said he had done nothing wrong but did not want distractions from the affair to hamper security preparations for next year's London Olympics. And he aimed unusually sharp, if veiled, barbs at Cameron.

Amid public anger at the police's refusal for several years to act on allegations of widespread phone hacking, Stephenson had faced questions over his senior officers' closeness to News International. He was particularly under fire over the appointment of Neil Wallis, a former deputy editor at the News of the World, as a public relations adviser to his force.

Stephenson noted that Wallis, who was arrested last week and is one of 10 journalists so far being questioned as suspects in the phone hacking and bribery case, had not been linked to the scandal when he was hired. He contrasted that to Cameron's hiring in 2007 of Coulson, Wallis's editor at the paper.

Coulson resigned as editor when his royalty correspondent was jailed for hacking the phones of royal aides, although he denied knowing of any wrongdoing. Coulson quit the prime minister's office in January this year as police reopened their investigation of the paper. He was arrested this month.

Asked about Stephenson's comments on his appointment of Coulson, Cameron said: "I don't believe the two situations are the same in any shape or form.

"There is a contrast with the situation at the Metropolitan Police, where clearly the issues have been around whether or not the investigation is being pursued properly.

"In terms of Andy Coulson, no one has argued that the work he did in government in any way was inappropriate or bad. He worked well in government, he then left government."

He reiterated the steps he has taken to tackle the scandal, notably funding the renewed police investigation and setting up an independent public inquiry in response to revelations that the hacking extended beyond the voicemails of the rich, famous and powerful to include those of abducted teenager Milly Dowler, later found murdered in 2002, and many other private citizens.

POLITICAL DAMAGE

Cameron, a 44-year-old former public relations executive, revived Conservative fortunes after taking the leadership in 2005, winning power 14 months ago after 13 years of Labour rule.

Many see the scandal as his biggest test to date, though few see anything other than a remote threat to his political future.

"This crisis has understandably shaken the Cameron circle. Some dared to hope the storm had passed," wrote Andrew Grice, political editor of the Independent newspaper. "Yesterday they realized the storm is still gathering pace. It could last for years. No one knows where it will end, least of all Mr Cameron."

Tim Bale, politics professor at the University of Sussex, said: "It has become almost a crisis of governance in the United Kingdom ... There is a sense of things sliding out of control.

"The actual text of (Stephenson's) statement pointing to parallels between himself and the prime minister is quite breathtaking. It won't make Mr Cameron do the same thing, but it reminds people once again of the Coulson problem."

Iain Dale, a prominent Conservative commentator, wrote on his blog: "I can't believe I am even writing this, but it is no longer an impossibility to imagine this scandal bringing down the prime minister, or even the government."

Yet, he said, that remained far-fetched, as did Toby Young, a commentator blogging at the Conservative-supporting Daily Telegraph, who cited Cameron's assured demeanor in public and efforts to highlight Labour's own long relationship with the Murdoch press as reasons for expecting the crisis to blow over.

"I don't rule out the prime minister being toppled by this scandal," Young wrote. "I just don't think any of the details that have emerged so far, or his handling of the crisis, put him in serious jeopardy."

As well as the issue of hiring Coulson, who edited the News of the World from 2003 to 2007, Cameron has come under fire for his friendship with Brooks, Coulson's predecessor as editor.

She will face parliament's media committee on Tuesday, though many believe her answers will be curtailed due to her having been arrested and bailed after 12 hours of questioning at a London police station on Sunday. Alongside her will be Murdoch himself and his son James, the chairman of News International.

Lawmakers, who gave senior police officers a fierce grilling last week, are expected to do so again on Tuesday in a separate committee hearing covering interior ministry affairs.

Labour, whose hitherto low-profile new leader Ed Miliband has capitalized on Cameron's discomfort, seized on Stephenson's reference to the Coulson appointment in his resignation speech.

"It is striking that Sir Paul Stephenson has taken responsibility and answered questions about the appointment of the deputy editor of the News of the World," Labour's home affairs spokeswoman Yvette Cooper said in a statement.

"The prime minister still refuses to recognize his misjudgment and answer questions on the appointment of the editor of the News of the World at the time of the initial phone hacking investigation."

With politicians from Australia to the United States demanding to know if similar abuses occurred elsewhere in Murdoch's global media business, Murdoch has been forced uncharacteristically onto the defensive and the position of his son James as heir-apparent has been called into question.

Labour leader Miliband called for new rules to curb how much of Britain's media could be controlled by one proprietor: "Concentrations of power damage our culture," he said.

Murdoch, who some media commentators say at first misjudged the strength of public anger, published apologies in several British newspapers at the weekend.

He also met and apologized to the family of murdered schoolgirl Milly Dowler in an acknowledgment of the likely truth of allegations that a News of the World investigator not only listened in to their missing daughter's voicemails but may have deleted some to make way for more -- misleading police who were hunting for her and giving her parents false hope she was alive.

($1 = 0.940 Australian Dollars)

(Additional reporting by Jodie Ginsberg in Pretoria and Stephen Mangan, Christina Fincher, Sven Egenter, Ralph Gowling and Michael Roddy in London; Writing by Alastair Macdonald, editing by Mark Trevelyan)

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)