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The German economy slowed between April and June to its weakest quarterly growth rate since 2009, fueling concerns about an European economy already weakened by a fiscal crisis. German stocks .GDAXI fell 2.6 percent.

"German GDP data is the catalyst this morning that got us off to a bad start," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"Europe slowing down is not a good sign because if you are going to be cutting spending, raising revenue ... that makes the potential problem worse."

German Chancellor Angela Merkel and French President Nicolas Sarkozy were to meet later Tuesday to discuss measures to contain Europe's fiscal crisis. A joint news conference was scheduled at noon EDT.

S&P 500 futures fell 17.3 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures lost 113 points, and Nasdaq 100 futures dropped 27.5 points.

On the earnings front, Home Depot Inc (HD.N) reported better-than-expected quarterly profit and raised its earnings forecast for the year.

Wal-Mart Stores Inc's (WMT.N) U.S. same-store sales fell 0.9 percent in the second quarter, marking its ninth straight quarterly decline, but profit topped estimates. Its shares rose 2.4 percent to $51.25 in premarket trading.

Dell Inc (DELL.O) was also due to report results.

Resource-related shares might come under pressure as U.S. crude oil prices fell 1.6 percent, while copper was also down 1.5 percent.

U.S. data coming later includes the Commerce Department's release of housing starts and permits for July and the Labor Department's report on import-export prices for the same month, both at 8:30 a.m. EDT.

Economists in a Reuters survey forecast an annualized rate of 600,000 housing starts versus 629,000 in June. Imports are seen falling 0.1 percent, and exports are expected to rise 0.1 percent.

The U.S. Federal Reserve releases industrial production and capacity utilization data for July at 9:15 a.m. EDT. Economists expect a 0.5 percent rise in July production and a reading of 76.9 percent for capacity utilization.

Wall Street stocks rose for a third day on Monday as investors used Google Inc's (GOOG.O) offer to buy phone maker Motorola Mobility Holdings Inc (MMI.N) as an excuse to jump back into the market after weeks of sharp selling.

(Reporting by Rodrigo Campos; editing by Jeffrey Benkoe)

President Nicolas Sarkozy and German Chancellor Angela Merkel are under pressure to show financial markets they are in agreement on doing more to shore up the embattled currency union -- or risk watching the euro zone unravel.

The two leaders could discuss obliging all euro zone countries to pass national laws on deficit limits and the idea of a permanent euro zone spokesperson or coordinator, a source close to the talks told Reuters.

Many experts believe the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint euro bonds.

But officials in Paris and Berlin have tried to play down expectations over the 10 a.m. EDT talks and 12 p.m. EDT news conference, saying euro bonds are not on the agenda, and many analysts cautioned against expecting too much.

"(Sarkozy) is not going to pull out of a hat three wonderful rabbits that will reassure the world's markets," French political economist Alain Minc told Europe 1 radio.

Ordinary Germans have opposed more help for their weaker neighbours even while their economy has been roaring along. Data on Tuesday showing German GDP barely grew in the second quarter suggests a slowdown is starting to grip there, making underwriting of euro zone debt an even harder sell politically.

"While German politicians are currently racking their brains on the pros and cons of common Euro bonds, the luxury of having an economy running at "wonder" speed is fading away," said Carsten Brzeski at ING.

The German economy grew by just 0.1 percent in the second quarter, while the French economy stagnated.

Sarkozy and Merkel had already planned to meet this week to push ahead on their July 21 pledge to come up with new proposals on euro zone economic governance, but the stakes were raised when France was slammed in last week's global market rout.

Fearing that the euro zone debt crisis is spreading to the continent's core, investors dumped shares in French banks, which are exposed to Italian debt, as rumors circulated -- denied by rating agencies -- that France's AAA-rating could be at risk.

The sell-off was evidence markets were not convinced by a July 21 deal to give new powers to the euro zone's EFSF rescue fund and for Paris and Berlin to come up with proposals on coordinating economic governance by the end of August.

The two leaders are expected to discuss holding regular euro zone summits, as France has long sought, ways to improve peer monitoring of fiscal policies or even fiscal harmonization.

Jean-Pierre Pollin, a member of France's Circle of Economists think tank, told the daily Le Parisien it was now unavoidable that euro zone states give up some sovereignty. "The monetary union inevitably implies a political union," he said.

DEBT SINNERS

Issuing euro bonds remains one of the most obvious ways to ensure affordable financing for high-debt members and many experts believe Germany may be forced to eventually back the idea, despite the upward impact on its borrowing costs.

Italian Economy Minister Giulio Tremonti said on Saturday that euro bonds would be the best solution to Europe's debt crisis, and Germany's export association said on Monday that all other means of fighting the crisis had run out.

Germany's mass-circulation Bild newspaper warned Merkel on Tuesday not to cede on the issue of euro bonds, which some backbenchers in her Christian Democrats (CDU) party say should at least be debated.

"Euro bonds would ultimately make Germany the paymaster of Europe," wrote Bild on Tuesday. "The government must stick to its NO on euro bonds. All the debt sinners must clearly sort themselves out once and for all."

Austria's finance minister said it was to early to imagine joint euro bond issuance and a Dutch government coalition party said it opposed the idea.

Sarkozy, who faces the tough choice of whether to close tax loopholes or trim spending eight months before a presidential election, has interrupted his summer holiday to meet Merkel and key French government ministers this week.

He has ordered his budget and finance ministers to find ways to plump up the 2012 budget by several billion euros as France strives to convince investors it will meet its deficit-cutting targets despite disappointing growth.

His and Merkel's proposals for tighter euro zone governance will be evaluated by European Council President Herman Van Rompuy, who has been charged with putting together a package on economic coordination for an EU summit in October.

French economist Jacques Delpla, who co-authored a paper proposing how euro bonds could work, said the euro zone faced collapse unless leaders go beyond their July 21 pledges.

"If we just stick to the July 21 agreement then, before the end of the year, there will be no euro zone, unless the ECB buys everything."

Economist Frederic Bonnevay at French think-tank Institut Montaigne also said more radical measures were needed, suggesting the EFSF rescue fund's firepower should be raised to as much as one trillion euros from 440 billion euros currently.

(Additional reporting by Marc Angrand, Nicholas Vinocur and Patrick Vignal in Paris and Andreas Rinke and Stephen Brown in Berlin; Writing by Mike Peacock and Catherine Bremer)

European stock markets also looked set to rise, with Britain's FTSE 100 seen up 0.2 percent and Germany's DAX called 0.3 percent higher.

But weakness in U.S. S&P futures could blunt any gains. The September contract was down 0.5 percent by 1:45 a.m. EDT.

Most in the market do not expect the meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel at 10 a.m. EDT on Tuesday to lead to substantial progress in solving the euro zone's debt troubles.

The German government sees no major breakthrough at the Paris talks, a spokesman said on Monday, while the French president's office said the creation of common euro zone bonds will not be on the agenda.

"Sovereign debt concerns remain a persistent negative for the (euro), as the EU's latest attempt at delivering a comprehensive solution to the region's vulnerabilities has disappointed investors," analysts at Standard Chartered said in a research note.

The euro slipped slightly to $1.4414, after holding just below a three-week high against the dollar earlier in the morning and after rising 1.4 percent on Monday ahead of the summit.

Traders were also awaiting German and euro zone second-quarter GDP data at 2 a.m. EDT and 5 a.m. EDT, respectively.

Japan's Nikkei was little changed, giving up earlier gains, while MSCI's index of Asia ex-Japan stocks rose 1 percent, largely as Korean shares caught up to regional gains on Monday, when Seoul markets were closed for a holiday.

EURO

Many experts say the only way to ensure affordable financing for the euro zone's most struggling, debt-laden countries would be for the bloc to issue joint eurobonds.

But even if a common euro zone bond were issued, it would not end the euro zone's debt woes at a stroke.

"There still hasn't been debate about just how much issuance would be possible and just how much issuance the German public would be okay with," said Makoto Noji, senior bond and currency strategist for SMBC Nikko Securities in Tokyo.

The dollar index against a basket of major currencies edge dup 0.2 percent.

Against the yen, the dollar traded around 76.84, down from more than 80 yen earlier in August.

EQUITIES

Asian shares drew succor on Tuesday from news that Google has offered to buy Motorola Mobility Holdings Inc for about $12.5 billion. The deal helped push up major Wall Street indexes by as much as 2.2 percent.

The MSCI Asia ex-Japan index had lost around 14 percent over the past two weeks, part of a global market rout in which billions of dollars were wiped off share indexes.

Pranay Gupta, chief investment officer Asia Pacific at ING Investment Management, said Asia's corporate sector is struggling despite the region's strong economic fundamentals, due to debt woes in the United States and Europe, and the appreciation of Asian currencies.

"The anomaly that we have today is that companies in Asia are facing a much more uphill struggle both on the sales front and on the margins front given that demand from the West is waning," he said.

He said that the ING Investors Dashboard Pan-Asia (ex-Japan) Sentiment Index, a measure of private investor confidence in the region, had dropped 11 percent in the second quarter compared to last year's third quarter.

The S&P 500 last week hit its lowest in nearly a year after the first-ever downgrade of U.S. sovereign credit ratings, but have since rebounded almost as sharply.

Gold, seen by many as a safe store of value in turbulent financial markets, is one of the best-performing assets this year. It traded at $1,765 per ounce on Tuesday, down a touch from Monday's close and around $50 off its peak.

U.S. crude oil futures slipped 58 cents to $87.30 per barrel after a $2 rise on Monday.

(Additional reporting by Masayuki Kitano, Frederik Richter and Kevin Plumberg; Editing by Kim Coghill)

French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Paris from 1400 GMT (10 a.m. EDT) to discuss what further measures they can take to contain Europe's debt crisis, which is now spreading to the continent's core. A joint news conference is due at 1600 GMT (12 p.m. EDT).

Italy has been forced to ramp up its austerity measures and financial market jitters hit France last week with French banks' shares subject to panic selling on rumors that the country could be next to lose its prized AAA debt rating.

Many experts say the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint eurobonds -- although officials in Paris and Berlin said Tuesday's talks would not address that possibility.

Although the German government has long opposed the idea, support is beginning to emerge, with the country's export association saying on Monday that all other means of fighting the crisis had run out.

Italian Economy Minister Giulio Tremonti said on Saturday that eurobonds would be the best solution to Europe's debt crisis , and some economists say that the euro zone will inevitably come around to accepting the idea.

"EURO ZONE COLLAPSE"

French economist Jacques Delpla, who co-authored a paper proposing how eurobonds could work, said the euro zone faced collapse unless leaders went beyond an agreement reached at a July 21 emergency summit on the debt crisis.

"If we just stick to the July 21 agreement then, before the end of the year, there will be no euro zone, unless the ECB buys everything that's problematic."

Eurobonds aside, Sarkozy and Merkel will focus on proposals to improve the euro zone's economic governance, which they told fellow leaders in the bloc at last month's summit that they would issue by the end of August.

In particular, they could discuss holding regular euro zone summits, as France has long sought, or ways of improving peer monitoring of fiscal policies.

At the July summit, euro zone leaders agreed to a second bailout package for Greece and to give their European Financial Stability Facility rescue fund broader powers, but the moves provided only a brief respite in the debt crisis.

Economist Frederic Bonnevay at French think-tank Institut Montaigne said more radical measures were needed even if they did not include eurobonds for now.

"The size and powers of the EFSF need to be expanded dramatically -- that's a secret to no-one," he said, suggesting that its firepower should be raised to as much as one trillion euros from 440 billion euros ($635 billion) currently.

Sarkozy, who broke off his summer holiday last week to deal with the market meltdown in French stocks, is to meet with Prime Minister Francois Fillon over lunch to fine tune France's position before he meets Merkel.

(Additional reporting by Nicholas Vinocur and Patrick Vignal; Editing by Jon Boyle)

The acquisition of one of the mobile telecommunications industry's most storied names is Google co-founder Larry Page's boldest move since taking over as CEO in April, launching the Internet giant into a lower-margin manufacturing business and pitting it against many of the 38 other handset companies that now use its Android software.

Motorola Inc was split this year into two: Motorola Mobility, which got the faster-growing cellphone and TV set-top box businesses; and Motorola Solutions, which sells gear like walkie-talkies to corporate and government clients.

Google is paying a massive 63 percent premium to gain access to one of the mobile phone industry's largest patent libraries. The company had been under pressure to build a patent portfolio after losing out to Apple, Microsoft Corp and others in a recent auction of bankrupt Nortel's assets.

Unlike the Nortel deal and others, the fact that Google avoided having to compete in an auction for Motorola by engaging in exclusive negotiations for the company underscores the pressure it was under to bolster its patent portfolio. Paying such a rich premium even though it was the only buyer dovetails with analysts' view that the increasingly litigious posture its competitors have taken over intellectual property left the Internet search giant with no choice but to pay up.

"No matter how you think about this, you have to look at it through the spectrum of the Android ecosystem under incredible attack from an IP (intellectual property) perspective. And this is Google going out and trying to fix that," said W.P. Stewart Advisors Chief Investment Officer Jim Tierney. "The biggest implication here is that Google wants Android to be one of the dominant phone operating systems for years to come."

Wall Street quickly anointed Microsoft a winner in this deal, with Windows benefiting should the move spur current Android partners to explore other options.

The deal also stoked speculation that struggling Nokia and Research in Motion would become takeover targets themselves, sending Nokia's shares up 17.35 percent and RIM's up 10.3 percent.

Google made its first foray into hardware by co-developing the Nexus One phone with HTC in 2010 -- an effort that met mixed results. Monday's deal, however, could mark the start of a shift to an Apple-style model, integrating mobile hardware with underlying software.

"Google decided to cross the Rubicon on the device side," said Fred Huet, head of telecoms and media consultancy Greenwich Consulting. "There has been growing frustration (at Google) about the lack and speed of internet centric devices.

"With Nexus they tried to show the industry what they thought was the right evolution for handsets and it did not have an impact .... With the patents they make sure that Android stays strong."

THE MORE THINGS CHANGE ...

The acquisition is likely to draw even closer regulatory scrutiny than usual, with the search leader already the subject of antitrust inquiries. Experts will want to review how it affects mobile industry competition.

But the deal -- which took Wall Street by surprise -- appears to mark a shift in strategy from Google's traditional Internet search and advertising empire and forays into video and social networking.

"The danger is that other handset makers feel disenfranchised," said Nomura Securities global technology specialist Richard Windsor. "Motorola is the weaker player. This could actually collapse the entire community."

Page, who also launched the ambitious Google+ social network since taking over as CEO, reassured investors on Monday this would not happen, saying Motorola will be run as a separate company licensing Android software in the same way as rivals like HTC Corp and LG Electronics.

Phone makers including Samsung officially said they welcomed a deal that will aid their own legal battles, but some analysts questioned the sincerity of those claims, noting that rival companies would now be unlikely to heavily promote Android since it would benefit a direct competitor.

Andy Lees, president of the Windows Phone Division at Microsoft, said in a statement that, "Investing in a broad and truly open mobile ecosystem is important for the industry and consumers alike, and Windows Phone is now the only platform that does so with equal opportunity for all partners."

Some analysts also doubt that Google will continue manufacturing handsets in the long term.

"We don't think they necessarily want to be in the handset business. They want those patents first and foremost," said Brian Pitz, an analyst at UBS. "This is really a game of protection."

Analysts say that Google's rivals are likely to continue to enforce their patent rights on mobile devices through legal means. Microsoft, for instance, recently settled a lawsuit with HTC over the Taiwanese company's Android devices. Oracle is also seeking billions of dollars from Google for infringing on Java patents. Analysts expect Apple to continue its increasingly effective patent war against its rivals as well, which could hurt Google by potentially raising licensing costs that need to be paid to Apple.

While Apple's iPhone leads in market prestige and is considered more innovative, Android has managed to quietly surpass it in market share. Android held a 43.4 percent share of the smartphone market at the end of the second quarter, ahead of Nokia's 22 percent, according to Gartner data. Apple ranked third with 18 percent, the data showed.

Shares of Motorola Mobility jumped more than 55 percent on the news, while Google shares fell by roughly 1 percent.

The deal values Motorola Mobility at $40 per share in cash, a 63 percent premium to its Friday closing price. The terms of the deal also features an unusually rich reverse breakup fee of $2.5 billion, according to a source close to the situation.

"It's a deal that will take time to pay off, but they have a lot of cash and they want to chase after profit," BGC Partners analyst Colin Gillis said.

The deal delivers a windfall for investors including Carl Icahn, Motorola's top shareholder with a stake of just over 11 percent. The activist shareholder had been urging Motorola to look into splitting off its patent business -- one of the biggest in the industry -- from its handset business, ranked eighth in the world by Gartner in terms of unit sales. In late July, Icahn even went so far as to estimate that Motorola could be worth $44 per share, or $13 billion in a sale.

Despite cashing out for $4 less than what he estimated the company was worth, Icahn said he was "quite happy with this result."

It's unclear how much Icahn spent on his stake in Motorola since he started scooping up shares in 2007, but regulatory filings indicate it may have been about $3 billion. His stake in Motorola Mobility is worth about $1.34 billion at the deal price, up by $520 million since Friday. Including his stake in Motorola Solutions, Icahn's total stake is about about $2.9 billion in the two companies.

INTO THE LIVING ROOM

As part of the deal, Google also gets Motorola's set-top box businesses, giving its nascent TV operation a much-needed boost by providing it with a more direct route into the home.

Bernstein analyst Craig Moffett noted that Google, a frequent disrupter of the pay-television market via its ownership of YouTube and launching of over-the-top TV products that allow consumers to get streaming video in the home, will now be one of its largest suppliers.

"It will be fascinating to see whether this tempers their enthusiasm for disruptive business models as they have to face the practical realities of satisfying their cable customers," said Moffett. "I think the cable industry would be delighted to see Google inside the tent."

Google said it expects the deal to close by the end of 2011 or early in 2012, and that it was confident it would gain the regulatory approvals required in the United States and Europe and the blessing of Motorola Mobility's shareholders.

Others aren't so sure.

"The legal question here is would this deal give Google the incentive to make Android less open or somehow discriminate against the other smart phone and tablet makers," said Beau W. Buffier, a lawyer with Shearman & Sterling LLP. "That will be the key issues in any review both here in the U.S. or in Europe."

The fact that the deal has the support of other major mobile device players who have a stake in the matter should help Google in the regulatory process.

Lazard advised Google on the deal, while Motorola used Centerview Partners and Frank Quattrone's Qatalyst Partners, sources told Reuters.

(Additional reporting by Sayantani Ghosh in Bangalore, Nadia Damouni, Phil Wahba and Franklin Paul in New York, Lilly Kuo in Washington; Writing by Edwin Chan; Editing by Peter Lauria, Richard Chang, Phil Berlowitz)