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Just hours before the Treasury's authority to borrow funds runs out -- risking a damaging U.S. debt default -- the Senate was expected to approve the deal to cut the country's bulging deficit and lift the $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.

The bill cleared its biggest hurdle on Monday evening when the Republican-led House of Representatives passed the measure despite noisy opposition from both conservative Tea Party members, who wanted more spending cuts, and liberal Democrats angered by potential hits to programs for the poor.

The vote in the Democratic-controlled Senate, due to take place at noon EDT (1600 GMT), is expected to be less dramatic. If approved, Obama would sign the bill into law shortly afterward.

That would mark the end of a fierce partisan battle that has paralyzed Washington for weeks and spooked investors already nervous about the weak U.S. economy and sovereign debt woes in Europe.

But it would by no means signal an end to uncertainty over the sustainability of U.S. tax-and-spending policies and the deep political divide that the deficit debate has exposed.

Relief in financial markets over an end to the gridlock on Monday quickly turned to concern about the struggling U.S. economy and the risk that the deal is not enough to avoid a possibly damaging downgrade of the top-notch U.S. debt rating.

The plan approved by the House on Monday would raise the existing $14.3 trillion borrowing limit by enough to last into 2013. It calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.

Two major ratings agencies have said that $4 trillion in deficit cuts would allow them to confirm America's AAA rating.

A ratings cut would probably push up U.S. borrowing costs, further hampering the economy.

"The resolution to the debt ceiling does remove one cloud of uncertainty but it does not change the economic reality," said Greg McBride, senior financial analyst at Bankrate.com.

"It's going to take years to come out of this. We're sitting in the terminal waiting for the economy to take flight and instead it's just being delayed month after month after month."

MORE STRIFE AHEAD

The compromise deal was agreed after weeks of angry debate and brinkmanship between Democrats and Republicans.

With unemployment above 9 percent and the economy barely growing so far this year, Americans have become increasingly angry over the partisan attacks and refusals to compromise.

They may soon face the next round of noisy sparring over ideologically fraught tax and spending policies.

The new debt committee's work is likely to launch sharp political rhetoric as the November 2012 presidential and congressional elections near and arguments break out over the expiration at the end of 2012 of tax cuts pushed through by former President George W. Bush.

The deal in Congress is a far cry from a $4 trillion deficit-reduction pact including revenue increases that Obama and House Speaker John Boehner, the top Republican in Congress, appeared close to clinching just over a week ago.

Although all sides conceded some ground to secure a deal, the final bill represented a triumph for the Tea Party camp in the Republican Party, which dug in its heels against any tax hikes and pushed for spending cuts.

Many congressional Democrats were dismayed that Obama and their party leadership did not do more to include some tax increases and provide more protection for social programs.

"I understand that this train is leaving the station, but it is going in the wrong direction," said Representative Jim Moran, a Democrat from Virginia.

(Additional reporting by Jeff Mason, Thomas Ferraro, Lauren LaCapra; Writing by Stuart Grudgings; Editing by Doina Chiacu)

An 11th-hour deal to raise the U.S. debt ceiling cleared its biggest hurdle in the House of Representatives, staving off the prospect of a possibly calamitous default but failing to allay fears Washington could still lose its coveted triple-A credit rating.

U.S. manufacturing grew at its slowest pace in two years in July as new orders contracted, and the economic concerns coupled with uncertainty over the U.S. debt deal boosted demand for safe-haven currencies such as the Swiss franc and weighed on riskier assets such as oil and stocks.

European stock markets were expected to extend a week-long slide, with financial bookmakers calling London's FTSE .FTSE to open flat and France's CAC-40 .FCHI and Germany's DAX .GDAXI down 0.2 percent. .EU .L

S&P 500 index futures fell 0.4 percent, pointing to a weaker start on Wall Street. .N

Japan's Nikkei .N225 fell 1.3 percent, while MSCI's broadest measure of Asian shares outside Japan .MIAPJ0000PUS slipped 1.6 percent.

"While in the short term they've avoided global financial crisis mark two, they're likely to need more budget cuts," Joseph Capurso, strategist at Commonwealth Bank in Sydney, said about the U.S. debt deal.

"When you put that together with very soft U.S. economic data, that raises the odds that the Fed will need to introduce more quantitative easing. I can see the U.S. dollar becoming weaker."

U.S. stocks eased on Monday, with the S&P 500 .SPX closing down 0.4 percent as the weak manufacturing report offset relief that a debt default had been averted. .N

Compounding pessimism about the anemic state of the economy were concerns about the fiscal drag on growth as a result of spending cuts in the U.S. debt deal, which calls for a special Congressional panel to find $1.5 trillion in budget savings by late November.

"While the political cloud of uncertainty may lift somewhat, the economic storm clouds are darkening," Yelena Shulyatyeva, an economist at BNP Paribas wrote in a client note.

"Today's fall is not a big surprise as the market has been concerned about the U.S. economy's long-term outlook, although the country was able to avoid a default," said Naoki Fujiwara, a fund manager at Shinkin Asset Management in Tokyo.

The world's manufacturing sector expanded at its weakest pace in two years last month, surveys showed, as factories reported shrinking orders for the first time since major economies emerged from the banking crisis and recession of 2008.

The dollar traded around 0.7805 Swiss francs on Tuesday, having plumbed a record low around 0.7730 on Monday.

Against the yen, the dollar stood near 77.40, recovering from a low of 76.29 on electronic trading platform EBS on Monday, its weakest since the coordinated intervention by major central banks in mid-March to slow the surging yen.

POSSIBLE INTERVENTION

Japanese officials said the yen, which has gained nearly 5 percent this month, was too strong and could hurt an economy struggling to recover from a massive earthquake in March -- putting markets on alert for possible intervention.

"Coupled with the Bank of Japan's monetary measures, Japan will be able to intervene to push up the dollar against the yen," said Masanari Takada, forex strategist at Nomura Securities.

"Still, it may be difficult to keep the dollar bolstered for long as it is under downward pressure because of caution toward the outlook for the U.S. economy and falling in U.S. Treasury yields."

Others were less convinced that Tokyo would act, however, given that past interventions have only really succeeded when the action has been co-ordinated with other central banks.

"I don't think Japan will intervene," Richard Yetsenga, global head of FX strategy at ANZ Research, told Reuters Insider TV.

"I think what's driving the yen are really global forces rather than domestic forces. It's really about the weakness of the U.S. dollar rather than the strength of the yen."

Gold edged up, supported by news that South Korea's central bank had bought 25 tonnes in recent months to diversify its foreign exchange reserves. Spot gold traded around $1,623.26 an ounce.

"This news reiterates the fundamental view that most investors, asset managers, and even central banks hold true -- that gold remains the quintessential currency hedge, a stabilizing asset for portfolios, and a safe haven in uncertain economic times," said David Meger, director of metals trading at Vision Financial Markets, a futures broker based in Chicago.

Oil slipped, with U.S. crude shedding around a quarter of a percent to $94.66 a barrel, after trading as low as $93.42 on Monday, its weakest since late June. <O/R>

The economic uncertainty boosted demand for government debt, with 10-year Japanese government bond futures rising 0.25 point to 142.02, while the benchmark 10-year yield slipped 3.5 basis points to 1.04 percent, its lowest in nearly 9 months.

(Additional reporting by Ian Chua in Sydney, Ayai Tomisawa in Tokyo and Reuters Insider TV in Hong Kong; Editing by Ramya Venugopal)

Even as the yen climbed down from Monday's peaks, verbal intervention by Japanese officials took on a new, more direct tone, suggesting they were increasingly convinced markets needed a nudge to keep the yen at levels the economy could live with.

The yen traded as high as 76.29 per dollar on the EBS platform on Monday, close to its record high in March of 76.25. The currency backed off to around 77.40 on Tuesday.

"It's hard to comment on current exchange-rate levels. But the yen is being valued stronger than we think ... I'd like to watch currency market conditions especially carefully today," Finance Minister Yoshihiko Noda told parliament.

The yen has soared nearly 5 percent in the past month, as investors dumped the U.S. dollar in favor of other liquid assets out of fear that the world's biggest economy may lose its coveted AAA credit rating because of its huge debt.

The yen fell from Monday's highs after the House of Representatives approved a last-gasp deal to raise the U.S. borrowing limit in a crucial step toward averting a catastrophic debt default.

But Noda made plain the yen was still too high for Tokyo's taste. He said he was in discussions with the Bank of Japan and international partners about the yen's strength, which if persistent would hurt several sectors of the Japanese economy.

A government official, speaking on condition of anonymity, told reporters that Tokyo had not yet decided whether to intervene. But markets players were increasingly convinced it was a matter of when, rather than whether, Tokyo would act.

"Japan could intervene in the currency market anytime," said Masamichi Adachi, senior economist at JPMorgan Securities Japan. "The authorities are likely waiting for a good time not in terms of yen's levels but such factors as market liquidity and changes in sentiment."

"Because Finance Minister Noda is the prominent candidate for the next prime minister, he cannot afford to do nothing or request nothing of the BOJ," Adachi added.

BOJ ON STANDBY

Reinforcing a sense of urgency, the central bank was likely to ease its already ultra-loose monetary policy if the finance ministry decided to intervene and sell yen, sources familiar with the central bank's thinking told Reuters.

The idea of loosening policy would be to amplify the impact of any intervention, they said. The BOJ is due to hold a regular policy review on Thursday and Friday this week.

"If there is intervention, there is a strong chance the BOJ will ease policy," said one source, who spoke on condition of anonymity due to the sensitivity of the matter.

BOJ hopes further easing, likely a move to expand its 10 trillion-yen asset buying program by 5 trillion yen, would also help shore up business confidence threatened by the currency gains, sources said.

The current yen level is still far above the average of 82.59 that Japanese manufacturers have used to make their current earnings forecasts and Japanese exporters, including leading carmakers such as Toyota Motor have become increasingly vocal in their call for action to tame the yen's rise.

The devastating magnitude 9.0 earthquake and tsunami in March, which killed more than 20,000, knocked Japan into its second recession in three years.

The latest yen rally comes just as manufacturers were getting close to restoring pre-disaster output levels.

The central bank and most private economists have been expecting the world's third-largest economy to return to moderate growth later this year, helped by a recovery in exports and reconstruction spending.

But Japanese officials are increasingly worried that a slowdown in global growth, combined with persistent yen gains, could stall Japan's upturn, even if some are skeptical of intervention given that the yen's rise is mainly a function of a broad weak dollar trend.

Japan last intervened to stem the yen in the aftermath of the March 11 earthquake, when speculation that Japanese investors would sell their overseas assets to fund recovery at home pushed the yen to an all-time high of 76.25.

Back in March, Tokyo acted in concert with its Group of Seven peers, but this time most market players believe Japan would have to go it alone given that the yen's gains were mainly driven by investors spooked by the threat of a U.S. credit downgrade.

Tokyo last acted solo in September 2010, when it returned to currency markets after a six-year hiatus and sold 2.1 trillion yen.

(Writing by Tomasz Janowski; Editing by Nathan Layne and Neil Fullick)

The market pared losses late in the day before Congress was expected to vote on Monday on a debt deal backed by the White House, which includes spending cuts of $2.4 trillion over 10 years.

The deadline for a deal, which includes raising the U.S. borrowing limit, is Tuesday at midnight.

"It's an on-again, off-again market, and it reflects the on-again, off-again nature of these debt ceiling deliberations," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.

"Investors now believe that the debt limit will be raised, that the vote will be positive in the Senate and positive in the House, but there's still a bit of skepticism or caution."

Stocks fell after the Institute for Supply Management said the U.S. manufacturing sector grew at the slowest pace in two years in July. The ISM report followed similarly weak reports from much of Asia and Europe.

The defense and health care sectors, which would be subject to U.S. budget cuts if a deal is not reached, were among the hardest hit. The iShares Dow Jones US aerospace and defense exchange traded fund fell 1.1 percent while S&P's healthcare index lost 1.7 percent.

Healthcare stocks also fell after the Centers for Medicare & Medicaid Services said Friday that it will cut payments to skilled nursing facilities by 11 percent. Kindred Healthcare fell 30 percent and Skilled Healthcare lost more than 43 percent.

The Dow Jones industrial average dropped 10.75 points, or 0.09 percent, to 12,132.49. The Standard & Poor's 500 Index fell 5.34 points, or 0.41 percent, to 1,286.94. The Nasdaq Composite Index lost 11.77 points, or 0.43 percent, to 2,744.61.

"Today's trading has exposed the market. It apparently was hiding behind the 'debt ceiling' curtain, but now that that has been pulled back, we find that there are other problems -- namely, the economy," said Larry McMillan, president of McMillan Analysis Corp.

The S&P 500 rallied back above its 200-day after dipping sharply below that. The level has acted as strong support over the last two months and the fact that S&P 500 was able to rally back above it was a comfort to investors.

"The S&P which sliced through the 200-day moving average at 1,285, has taken that back in the last half hour (of trading)," said Elliot Spar, market strategist at Stifel, Nicolaus & Co in Shrewsbury, New Jersey, noting that as a sign of underlying resilience.

Stocks traded in a wide range. A rally in equity markets that began in Asia last night on optimism over a debt agreement eroded as the outcome seemed to struggle throughout Monday to bring the deal to a close.

If lawmakers approve the debt deal before the Tuesday deadline, it may end months of debate over whether the United States can avoid a debt default.

Even though a default was considered unlikely by many investors, the threat of a credit rating downgrade continued to weigh on sentiment after Wall Street marked its worst week in a year last week.

Shares of United Health slid 3.2 percent to $48.02 while Humana Inc dropped 3 percent to $72.36, despite Humana reporting a higher-than-expected second-quarter profit.

Among other health-care stocks, shares of Pfizer shed 1.2 percent at $19.01.

Some 8.3 billion shares changed hands on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of around 7.48 billion.

Advancers outweighed decliners on the NYSE by about 9 to 8, while on Nasdaq losers outpaced winners by about 5 to 4.

(Reporting by Edward Krudy; Additional reporting by Caroline Valetkevitch; Editing by Kenneth Barry)