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Just 24 hours before European Union leaders are due to adopt a plan to reduce Greece's debt burden, fortify European banks to withstand bond losses, and scale up the euro zone rescue fund to prevent market contagion, all eyes were on Rome.

Prime Minister Silvio Berlusconi's faction-ridden cabinet failed to agree at an emergency session late Monday on raising the retirement age, one of the key economic reforms demanded by Italy's EU partners as a condition for supporting its bonds.

Berlusconi responded defiantly to public pressure from French President Nicolas Sarkozy and German Chancellor Angela Merkel at an EU meeting on Sunday, saying in a statement that no one could teach Italy lessons.

With his populist Northern League coalition partners opposed to raising the retirement age to 67 from 65, there was growing talk that a government crisis could lead to an early general election. Northern League leader Umberto Bossi told reporters the center-right cabinet was at risk over the EU reform demands and the alternative was new elections.

"The situation is difficult, very dangerous. This is a dramatic moment," Bossi said.

As the coalition parties held separate meetings, President Giorgio Napolitano said in a statement Italy must do everything to reduce the risk to government bonds by making its commitment to cut public debt more credible and boosting growth.

The euro zone's number three economy is at the center of the storm, despite European Central Bank intervention to buy its bonds, because it needs to issue some 600 billion euros in bonds in the next three years to refinance maturing debt.

Italy was not the only unresolved item on the summit agenda and Bank of England governor Mervyn King voiced skepticism from outside the euro zone as to whether the currency area's leaders would be able to find solutions.

"Even on July 21 there was a package which they held out as being the solution to it. The underlying problems hadn't changed at all and they won't change," King told the House of Commons treasury committee.

"The aim of the measures to be introduced over the next few days is to create a year or possibly two years' breathing space. The underlying problems still have to be resolved."

GAME OF CHICKEN

Tough negotiations were continuing between euro zone governments and Greece's private bondholders over the scale of a write-down they will have to accept on Greek debt holdings.

Governments are demanding that banks and insurers accept a 60 percent "haircut" as part of a second rescue package to make Athens' debt mountain, set to reach 160 percent of economic output this year, more sustainable.

Bank negotiators have offered a 40 percent write-down and warned that forcing them into deeper losses would amount to a forced default with devastating consequences for the European financial system.

EU diplomats said the outcome of the game of chicken between governments and banks was uncertain, but some forecast a last-minute deal on a 50 percent write-down.

Greek Prime Minister George Papandreou said: "I hope that tomorrow we will come to decisions, this is our partners' will.

"Tomorrow we want to put an end, turn a page, in order for the country to move forward."

UNCERTAINTIES

Many uncertainties remain also over complex options to increase the firepower of the 440-billion-euro ($600 billion) European Financial Stability Facility so it can prevent contagion spreading from Greece to Italy and Spain.

A working paper circulated to German lawmakers on Monday set out two options that might be used separately or in tandem to provide partial insurance on new Italian and Spanish bonds and to attract foreign sovereign and private investors via a special purpose investment vehicle (SPIV).

The German parliament has insisted on holding a vote on Wednesday to give Merkel a mandate just before she leaves for the euro zone summit.

Her Free Democratic junior coalition partners, who have dabbled in Euroskepticism, said the plan, which could leverage the EFSF up to more than 1 trillion euros, was acceptable. Finance Minister Wolfgang Schaeuble was to present the plan to parliament's budget committee on Tuesday.

Financial markets held their breath with trading volatile pending the outcome of Wednesday night's summit, due to start with a short meeting of the full 27-nation European Union at 1600 GMT (12 p.m. EDT), followed by a lengthier session of the 17 euro zone members.

The euro and European shares were steady, but in a sign of bond market nerves, Spain's short-term borrowing costs jumped to their highest since 2008 at an auction of three- and six-month bills on Tuesday.

Even if the leaders agree on the leverage plan for the EFSF, the arrangements could take several weeks to put in place and euro zone leaders are counting heavily on the European Central Bank to go on buying Italian and Spanish bonds.

Outgoing ECB President Jean-Claude Trichet, who retires next week, had signaled that the central bank was looking to exit from the deeply controversial bond-buying policy once the EFSF gained its new powers to intervene on bond markets.

However, EU officials say they are counting on his successor, Mario Draghi of Italy, to continue the purchases as long as is necessary to stabilize the bond markets.

Diplomats said France and the European Commission wanted a line in Wednesday's euro zone summit statement welcoming the ECB's willingness to continue supporting states in difficulty -- a formula that would respect the bank's cherished independence.

Net profit fell 39 percent to 1.018 billion francs, compared with average analyst forecasts for 276 million francs and steady from the 1.0 billion francs it posted in the second quarter, already hit by falling trading volumes.

It said a 1.765 billion franc gain on the value of its own debt helped make up for the trading loss and 387 million francs of restructuring costs it booked after announcing 3,500 job cuts in August.

This accounting gain -- which occurs because the bank could profit from buying back its own bonds at lower levels -- also gave a big boost this quarter to profits at most U.S. banks.

However, UBS results also mirrored their U.S. peers in showing declining bond and stock revenues as sovereign debt worries spiraled in the three months to September.

The investment bank posted a pre-tax loss of 650 million francs as revenues fell across all business areas due to the difficult market conditions and the strong Swiss franc.

"Market conditions and trading activity are unlikely to improve materially, potentially creating headwinds for growth in revenues and net new money," UBS said.

Interim Chief Executive Sergio Ermotti, appointed after Oswald Gruebel quit over the trading loss, said he was finalizing plans to restructure the investment bank ahead of an investor day on November 17.

"As we look to the future, our strategy centers on our leading global wealth management businesses in combination with a competitive and successful investment bank," Ermotti and Chairman Kaspar Villiger said in a letter to shareholders.

"We are committed to the implementation of the Investment Bank's client-centric strategy, concentrating on advisory, capital markets and client flow and solutions businesses."

The bank, which already said the trading scandal had not resulted in many clients withdrawing their money in the quarter, reported wealth management net inflows of 7.8 billion francs, down from 8.2 billion in the previous three months.

That included 4 billion francs of net inflows in its Americas wealth management business, up from 2.6 billion the previous quarter.

UBS announced in August it would cut 3,500 jobs from its around 66,000 staff to shave 2 billion Swiss francs off annual costs and the bank said on Tuesday that program was on track.

UBS said that its internal investigation into the unauthorized trading activities had determined that certain controls had not been effective.

The bank said it had identified two control deficiencies related to counterparties of trades and the inter-desk reconciliation process, and that it was taking measures to address them.

The bank said investigations were ongoing and it may broaden the scope of findings to take additional measures. It also confirmed the reliability of its financial statements in its 2010 annual report.

(Additional reporting by Caroline Copley; Editing by David Cowell)

European policymakers neared a deal over the weekend on bank recapitalization, and euro zone officials said France and Germany were close to agreement on how to use the European Financial Stability Facility to stave off contagion in the bond market.

But deep divisions over the extent of losses that private holders of Greek bonds would have to accept remain a huge risk and final decisions were deferred until a second summit scheduled for Wednesday, putting a cap on markets.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rise 0.1 percent, while Japan's Nikkei stock average .N225 opened up 0.25 percent. .T

The euro steadied but off the previous day's peak when it hit its highest since September 8 of $1.39570 against the dollar. <FRX/>

Oil kept its gains after U.S. crude jumped more than 4 percent to its highest level in more than two months on Monday. In heavy trading, the front month contract trade was higher than later months, flipping the curve structure into a bullish backwardation for the first time since 2008.

U.S. crude futures were up 0.3 percent to $91.50 a barrel on Tuesday. <O/R>

On Monday, global stocks .MIWD00000PUS hit a seven-week high and commodities rallied on hopes Europe was moving closer to resolving the debt crisis.

Investor sentiment also improved, with Caterpillar Inc (CAT.N) gaining 5 percent after reporting a 44 percent jump in quarterly profit on record revenues. Demand for its heavy equipment is seen as a gauge of global economic health.

Gains on Wall Street weighed on safe-haven U.S. Treasuries. Benchmark 10-year Treasury notes fell 4/32 in price for a yield of 2.23 percent on Monday.

But lingering worries about the extent of progress made over the euro zone sovereign debt problems pushed the spread between the yield on the 10-year Italian BTP benchmark bond and the equivalent German Bund wider on Monday to 388 basis points.

Still, the general improvement in sentiment about the European problems spread to Asian credit markets. The spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, narrowed by a couple of basis points early on Tuesday.

(Editing by Yoko Nishikawa.)

The top video rental company reported a better-than-expected 49 percent surge in third-quarter revenue to $822 million, surpassing Wall Street's target of about $812 million.

But investors -- mindful of how the company led by CEO Reed Hastings had driven away customers in recent months and damaged its credibility with a price hike and other high-profile stumbles -- focused on the fourth-quarter warning.

Netflix shares plummeted almost 20 percent to $95.50 in after-hours trading.

"They missed slightly on subscribers for this quarter, and their guidance is not very good at all. Those are the two data points that are driving the stock lower," said Gabelli & Co analyst Brett Harriss.

The company also forecast a loss for the first quarter of 2012 as it expands into Europe.

"We expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and technology and development," Hastings said in a letter to shareholders accompanying its quarterly report.

Hastings added that subscriber defections because of the price-hike should slow in coming quarters "as the price effect washes through."

The company reported earnings per share of $1.16 on net income of $62 million. Analysts had expected earnings per share of 94 cents, according to Thomson Reuters I/B/E/S. But it was not immediately clear if those earnings numbers were comparable.

Netflix also said it had lost more than 800,000 U.S. subscribers in the third quarter, more than the approximately 600,000 it had forecast in September.

"The subscriber numbers were disappointing. It looks like they see very weak subscriber numbers in the fourth quarter," said Lazard Capital Markets analyst Barton Crockett.

The company that shook up Hollywood with its DVD-by-mail service is trying to recover from the roughest patch in its nearly 15-year history as it moves to emphasize online streaming of television and movies.

Shares of the one-time Wall Street darling have plummeted by more than 60 percent since July, when Hastings announced a price hike for subscribers who wanted both DVDs and streaming. A wave of cancellations hit the company that had been famous for red-hot growth and loyal customers.

Hastings apologized for not explaining his decision well and admitted to "arrogance," but instead of soothing concerns he set off a new wave of complaints with a plan to put the DVD service on a separate website called Qwikster. He quickly dropped the widely panned idea.

As Netflix stumbles, rivals such as Dish Network Corp's Blockbuster, Amazon.com Inc and Wal-Mart Stores Inc's Vudu are ramping up their online entertainment offerings to better compete with Netflix.

(Reporting by Lisa Richwine, editing by Bernard Orr)

The Peoria, Illinois, company said it expects full-year 2011 profit and revenue to be at the top end of its previous outlook range due to strong demand. In 2012, the company expects revenue to increase 10 percent to 20 percent above the $58 billion in sales it expects this year.

Caterpillar is one of a slate of industrial companies outpacing analyst expectations during the current earnings reporting season. Like some of its peers, the company is encouraged by the strong results but remaining cautious about the wider economy.

"Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point," Caterpillar Chief Executive Doug Oberhelman said in a press release. "We believe continued economic recovery, albeit a slow recovery, is the most likely scenario as we move forward."

The world's largest heavy machinery manufacturer reported third-quarter net income attributable to common shareholders of $1.14 billion, or $1.71 per share, compared with $792 million, or $1.22 per share, a year earlier.

Analysts on average had expected Caterpillar to earn $1.54 per share in the third quarter.

Sales rose 41 percent to $15.7 billion, which is a record, according to the company.

Caterpillar said full-year 2011 results would come in at the highest end of its previous outlook.

The company now expects annual revenue of $58 billion, including its recent acquisition of Bucyrus. Its previous forecast had been a range of $56 billion and $58 billion.

Profit is now expected to be $6.75 per share for the year, compared with a prior forecast of $6.25 to $6.75. Including the impact of Bucyrus, Caterpillar expects 2011 profit to reach $7.25 per share.

Caterpillar said 2011 will be a record year if the company hits its earnings and revenue expectations.

Caterpillar said it added 4,800 jobs during the quarter, including 2,000 in the United States.

Its shares were up about 5 percent in premarket trading.

(Reporting by John D. Stoll in Detroit; Editing by Lisa Von Ahn and Maureen Bavdek)