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At 0939 GMT, futures for the S&P 500, the Dow Jones and the Nasdaq 100 were up 0.9 to 1 percent, after U.S. stocks had ended the worst week in a year on Friday on a stalemate in debt talks. Analysts said the oversold conditions had also primed the market for a bounce.

The lawmakers were expected to vote on Monday on the White House-backed agreement. The Democratic-led Senate may pass the deal, but it may face tougher opposition in the House of Representatives where both conservative Tea Party supporters and liberal lawmakers have criticized it.

The dollar received a lift against the yen and Swiss franc as the debt deal prompted traders to unwind safe haven plays. Gold, which generally gains in difficult economic and political situations and had hit record highs last month, fell more than 1 percent.

"This morning's bounce is a classic relief rally, but investors remain concerned about the U.S. because they went so close to the wire in a game of what looked increasingly like reckless political brinkmanship," said Darren Sinden, senior sales trader at Silverwind Securities in London.

"And if the U.S. were to be downgraded, then higher borrowing costs would be a further obstacle to a continued recovery."

Rating agencies have said the United States could face downgrades to its gold-plated AAA sovereign debt rating, if the world's biggest economy failed to agree on a viable long-term deficit reduction program.

"Even if the debt ceiling is raised, all of the heavy lifting will be in front of us," said Peter Kenny, managing director in institutional sales at Knight Capital Group in Jersey City, New Jersey.

"I think it's an almost foregone conclusion that there is going to be a downgrade at some point."

Some analysts said any relief rally could be short-lived, with other big risks present. A report on Friday showed U.S. economic growth in the first half was much slower than anticipated.

Investors will continue to focus on company earnings and macroeconomic indicators. Both July ISM data and June construction spending numbers are due at 1400 GMT, while widely-watched non-farm payrolls data for July will be released on Friday.

Allstate (ALL.N), the largest publicly traded U.S. home and auto insurer, will report second-quarter results, having already warned of one of the worst quarters in its history because of U.S. tornado losses.

Other companies announcing results on Monday included health insurer Humana (HUM.N) and Vornado (VNO.N), whose core business focuses on U.S. office and retail properties.

Resource-related stocks were expected to be in demand as key base metals prices jumped and crude oil prices climbed more than 1.4 percent.

In Europe, the FTSEurofirst 300 index .FTEU3 of top shares rose 0.6 percent, while In Asia, Japan's Nikkei average .N225 surged 1.3 percent.

(Editing by Jane Merriman)

There remained a widespread assumption, however, that credit ratings agencies could downgrade U.S. Treasuries from their vaunted triple-A status, a move that would impact the valuation of numerous other assets.

After a tense weekend spent in search of a compromise to allow the U.S. borrowing limit to be lifted, U.S. President Barack Obama said leaders from both parties reached a deal to cut the budget deficit by $1 trillion over 10 years, with additional savings of $1.4 trillion possible.

The plan must be passed by both houses of Congress and will still face some opposition. But it is expected to allow the debt ceiling to be raised, avoiding the prospect of Washington not being able to pay its bills and defaulting.

World stocks as measured by MSCI .MIWD00000PUS climbed 0.6 percent with emerging market shares .MSCIEF up 1.2 percent.

There were large gains in Japan, where the Nikkei .N225 rose 1.3 percent. In Europe, the FTSEurofirst 300 .FTEU3 rose 0.7 percent with banking shares enjoying a big boost.

But there remained a degree of skepticism about how long the rise in risk sentiment would last, given the likely U.S. downgrade, which some believed could come this week.

"It is a relief rally on the back of the parties coming together, but it could only last for a couple of days as the United States could now face a ratings downgrade," Manoj Ladwa, senior trader at ETX Capital, said.

"That would impact every part of the United States."

It would also raise issues for assets elsewhere. Some large pension funds, for example, will only hold triple-A debt, meaning they may have to sell Treasuries and buy elsewhere, crowding trades into German Bunds, for example.

The relative valuations of a number of assets, meanwhile, are based on their difference from supposedly risk-free Treasuries.

UNWINDING

The flip side of Monday's stock rally was the unwinding of investors positions taken to protect against U.S. default.

Gold fell more than 1 percent before recovering slightly. It was at $1,614 an ounce after hitting all-time nominal highs last week.

The dollar rose against the Swiss franc, which has seen intense interest from investors as the dual euro zone and U.S. debt crises have stirred markets this year.

Commodity currencies -- those tied to the prospect of large developing market growth -- climbed, with the Australian dollar nearing a 29-year peak against the greenback hit last week.

"In the short term, there will be relief in market sentiment today and maybe this week, as the U.S. will avoid a default, but the problems are not fully solved so I think we will see a muted reaction," said Richard Falkenhall, currency strategist at SEB in Stockholm.

"You have the risk of ratings agency downgrades, and no further fiscal stimulus in this deal," he said.

On bond markets, yields on U.S. Treasuries and core euro zone debt rose, reflecting some selling to release money parked in fixed income in the runup to the U.S. deal.

The premium investors demand to hold Italian and Spanish government bonds rather than benchmark German Bunds fell in line with the outperformance of riskier assets.

(Additional reporting by Naomi Tajitsu and Joanne Frearson; Editing by John Stonestreet)

But assessments as to how close lawmakers were to a deal varied somewhat on Sunday afternoon.

U.S. Senate Majority Leader Harry Reid said on Sunday that despite progress, there was still "a ways to go" to get a deal to raise the $14.3 trillion U.S. debt ceiling.

Earlier, Senate Minority Leader Mitch McConnell, the top Senate Republican playing a key role in the negotiations to cut the deficit and permit a vote to raise the debt ceiling, said lawmakers were "very close" to a deal.

The possibility of an agreement raised hopes that a bitter, weeks-long partisan battle over cutting the U.S. deficit might be near a close.

"If we can put this to bed, we can go back to a normalized market -- one that trades on fundamentals and not fear," said Steven Wolf, managing director of investments at Source Capital Group in Westport, Connecticut.

David Plouffe, a senior adviser to President Barack Obama, cited general agreement on a plan to cut the U.S. deficit over 10 years in two stages: $1 trillion up front and the rest based on the recommendation of joint bipartisan committee.

Anxiety over the debt crisis and the U.S. economic outlook sent the S&P 500 lower last week, resulting in the worst week and month for the benchmark index since last August.

The CBOE Volatility index, Wall Street's "fear index," rose more than 40 percent, its biggest jump since May.

U.S. Treasury prices rallied last week as investors clung to relatively safe U.S. government debt and concluded that a weak economy meant the Federal Reserve would keep monetary policy accommodative for the foreseeable future.

A stock market rally prompted by a debt ceiling deal could be limited, however, by the U.S. economy's uncertain outlook, prospects that would not be helped by a debt ceiling plan based on fiscal austerity.

"Once the euphoria of having a deal is over, we will get back to the economy and that picture is not a pretty one," said Kevin Giddis, president of fixed income capital markets in Morgan Keegan in Memphis, Tennessee.

Government data released on Friday showed the U.S. economy stumbled badly in the first half of 2011 and came close to contracting in the January-March period.

Those data offered little hope that this week's data -- including July's employment report -- could turn the tide.

"Put it this way: putting all the debt deal concerns aside, the (stock) market would probably be here anyway," said Michael Marrale, managing director and head of sales trading at RBC Capital Markets in New York.

Any relief enjoyed by the stock market would probably come at the expense of the U.S. Treasury market which benefited from its safe-haven status during the debt ceiling conflict. That would lead to higher U.S. yields.

Still, any rise in U.S. Treasury yields resulting from diminished anxiety about the debt ceiling would be limited by the troubled outlook for the U.S. economy, circumstances that appear to ensure that the Federal Reserve's monetary policy will remain accommodative for a long time.

The recent retreat in stocks has put them in a precarious position from a technical perspective as the S&P 500 index moves closer to its 200-day moving average, a level which could bring about additional selling if the index breaks below it.

The benchmark index successfully bounced off the level on Friday after the early morning decline.

"That is the line in the sand that really divides things going maybe bad -- to things really turning bad," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

Even if a deal is struck, a possibility remains the United States could lose its triple-A credit rating if the terms are not draconinan enough to satisfy credit rating agencies.

Investors can still find some solace in corporate earnings. According to Thomson Reuters data through Friday, of the 327 S&P 500 companies that have posted earnings, 73 percent have reported results higher than analysts' expectations.

Companies due to report earnings this week include Kraft Foods Inc, Clorox Co, Pfizer Inc and Prudential Financial Inc.

But a weak economy combined with a debt ceiling bill that involves more fiscal restraint could hurt stocks later on.

"Companies have been able to offset a lack of demand by refinancing their balance sheets, but longer term, the sledding will be much tougher for equities and corporations," Giddis said. "We have to improve job growth for businesses to do well or for the equity market to do well."

In addition to weak economic data, corporate earnings, and U.S. debt ceiling developments, investors must remain prepared for any developments from the simmering debt crisis in the euro zone, which could further heighten investor angst.

"There are two things I keep my eye on -- one on Washington and one on Brussels, because between the two of them you never know which headline risk is going to hit you over the head next," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

(Editing by Bernard Orr)

Anxiety over the debt crisis sent the S&P 500 lower for five straight days, resulting in the worst week and month for the benchmark index since August. The CBOE Volatility index, Wall Street's "fear index," rose more than 40 percent for the week, its biggest jump since early May.

With four days before the United States loses its ability to borrow, U.S. President Barack Obama on Friday told Republicans and Democrats to stop bickering and find a way "out of this mess.

"Right now, overall the market is being totally driven by the debt situation, whether it is in Europe or the U.S.," said Rick Bensignor, chief market strategist at Dahlman Rose in New York.

The deadline for raising the U.S. debt ceiling has investors on edge. Volatility, currently at its highest since the earthquake in Japan, can be expected to increase as time runs out.

"You've got individual stocks that can make significant moves but the market itself collectively is being pushed and pulled by every headline and how the wind is blowing out of Washington at any given moment."

The recent slide has also put stocks in a precarious position from a technical perspective as the S&P 500 index moves closer to its 200-day moving average, a level which could bring about additional selling if the index breaks below it.

The benchmark index successfully bounced off the level on Friday after the early morning decline.

"That is the line in the sand that really divides things going maybe bad -- to things really turning bad," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"If we take that out next week -- man, I'm not neutral, I'm short."

Even if a deal is struck, the possibility remains the United States could lose its prized triple-A credit rating if the terms are not stringent enough to satisfy credit rating agencies.

"You are definitely going to get the downgrade by S&P," said Ken Polcari, managing director at ICAP Equities in New York.

"You are still waiting on what the ultimate deal is going to be and it's just not going to be what everybody expects, so you are going to see disappointment in the markets."

Investors can still find some solace in corporate earnings. According to Thomson Reuters data through Friday, of the 327 S&P 500 companies that have posted earnings, 73 percent have reported results higher than analysts' expectations.

Companies expected to report earnings next week include Kraft Foods Inc, Clorox Co, Pfizer Inc and Prudential Financial Inc.

"Individual stocks, especially after earnings are trading on their own accord and you are seeing moves of 5 to 10 percent sometimes after earnings come out," said Bensignor.

But added pressure is coming from economic data, with the latest revision of gross domestic product showing the U.S. economy stumbled badly in the first half of 2011 and came close to contracting in the January-March period.

The flagging data offers little hope next week's data -- including July's employment report -- can turn the tide of the pressure.

"I don't think the market is pricing in very much for the possibility we don't get a debt deal done, given how bad the economic data has been," said Michael Marrale, managing director and head of sales trading at RBC Capital Markets in New York.

"Put it this way, putting all the debt deal concerns aside, the market would probably be here anyway."

As investors asses the debt ceiling debate, slowing economic data and corporate earnings, they must remain prepared for any developments from the simmering debt crisis in the euro zone, which could further heighten investor angst.

"There are two things I keep my eye on -- one on Washington and one on Brussels, because between the two of them you never know which headline risk is going to hit you over the head next," said Mendelsohn.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)