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Gross domestic product grew at a 2.0 percent annual rate in the July-September quarter, the Commerce Department said in its second estimate on Tuesday, down from the previously reported 2.5 percent.

While the growth pace was weaker than economists had expected, the composition of the report, particularly still-firm consumer spending and the first drop in businesses inventories in nearly two years, set the stage for a stronger performance in the final months of the year.

A deterioration in consumer sentiment likely had led businesses to anticipate weaker demand. With consumer spending showing resilience, analysts said they will now have to rebuild inventories, keeping factories busy.

"The mix or composition of growth improved. Inventory investment was lower so firms are more likely to produce more goods going forward. And exports rose," said Cary Leahey, a senior economist at Decision Economics in New York.

"So while you lost a half percentage point in the revision to third-quarter growth, you might easily get it back in the fourth quarter of this year or the first quarter of next."

Data so far suggest the fourth-quarter growth pace could exceed 3 percent, which would be the fastest in 18 months.

INVENTORIES A DRAG

U.S. Treasury debt prices were trading modestly weaker in the morning session, while stocks were lower. The dollar was little changed against a basket of currencies.

Despite the downward revision, last quarter's growth is still a step-up from the April-June period's 1.3 percent pace.

The government revised third-quarter output to account for an $8.5 billion drop in business inventories, the first decline since the fourth quarter of 2009.

The drop in inventories lopped off 1.55 percentage points from GDP growth, which was partly offset by strong exports.

Excluding inventories, the economy grew at an unrevised brisk 3.6 percent pace after expanding 1.6 percent in the second quarter.

Consumer spending was taken down a notch to a 2.3 percent growth pace from 2.4 percent, but remained the quickest pace since the fourth quarter of 2010.

But weak income growth could crimp spending going forward. Taking inflation into account, disposable income fell at a steeper 2.1 percent rate instead of 1.7 percent, the report showed. It had declined 0.5 percent in the prior three months.

The failure of a congressional "super committee" to agree on a deficit reduction package of at least $1.2 trillion also clouds the outlook. It is less clear now that Congress will extend a payroll tax cut and emergency unemployment benefits due to expire next month.

That potential fiscal drag, together with the festering European debt crisis, could undermine growth early next year.

"The economy looks to be moving in the right direction, but the first quarter could be a different story, particularly if the payroll tax cut isn't extended, which looks even more unlikely after the super committee fiasco," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

REVERSAL OF TEMPORARY FACTORS

Part of the pick-up in output during the last quarter reflected a reversal of factors that held back growth earlier in the year.

A jump in gasoline prices had weighed on spending in the first half of the year, and supply disruptions from Japan's big earthquake and tsunami in March had curbed auto production.

Business investment was revised down to a 14.8 percent rate from 16.3 percent as estimates for investment in nonresidential structures and outlays on equipment and software were lowered.

The department also said after-tax corporate profits increased at a 3.0 percent rate after rising 4.3 percent in the second quarter.

Exports grew at a stronger 4.3 percent rate instead of 4.0 percent, while imports rose at a much slower 0.5 percent rate rather than 1.9 percent.

Elsewhere, there were revisions to show modest residential construction and weak government spending.

The GDP report also showed inflation pressures subsiding, with a price index for personal spending rising at a 2.3 percent rate, instead of 2.4 percent. That compared to a 3.3 percent rate in the second quarter.

A core inflation measure, which strips out food and energy costs, rose at a 2.0 percent rate rather than 2.1 percent. The measure -- closely watched by the Federal Reserve -- grew at a 2.3 percent rate in the prior three months.

The ongoing debt crisis in the euro zone along with worries over how the United States will tackle its ballooning debt have sparked steep equity losses. The S&P 500 fell almost 2 percent on Monday while the Dow turned negative for the year. Last week, the S&P recorded its worst week in two months.

The FTSEurofirst 300 .FTEU3 rose as much as 0.7 percent but later pared gains in a volatile session after yields in a Spanish government debt auction rose to their highest in 14 years.

"We're getting to a point where there's been so much selling, bargain hunters are taking advantage of an oversold market," said Art Hogan, managing director of Lazard Capital Markets in New York.

Crude oil rebounded more than 1 percent after dropping on Monday on concerns about how the debt issues would impact economic growth and commodity demand.

"After the uniform selloff we saw across pretty much all asset classes yesterday, we're seeing a nudge up, although we're still very concerned about what's going on in Europe, especially the yields on Spanish debt," Hogan said.

Technology shares will be in focus a day after Hewlett-Packard Co (HPQ.N) projected fiscal 2012 earnings of at least $4 per share versus estimates of $4.54. The Dow component also reported a steep drop in quarterly profit. The stock fell 2.1 percent to $26.30 in light premarket trading.

S&P 500 futures rose 1.4 points and were slightly above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures added 3 points, and Nasdaq 100 futures fell 5.75 points.

The S&P has fallen through a key support level at 1,200. The next technical support was seen at 1,187, representing the 61.8 percent retracement of the 2011 high to low.

"We're in a range between about 1,180 and 1,250 on the S&P, and we're unlikely to break out of that until we see real policy changes get implemented in Europe," Hogan said. "However, we do have a higher floor for markets than a month ago, and that's positive."

Late Monday, the co-chairs of a special U.S. congressional committee said it had failed to reach a deal on reducing government deficits. There are concerns the stalemate will make it more difficult to pass extensions of stimulative measures like payroll tax cuts, which could hurt the U.S. economy.

While the news was expected, it could further limit market upside. Trading volume is likely to be low this week as global uncertainties and the U.S. Thanksgiving holiday prompt investors to sit on the sidelines.

Economic data due later in the day includes the second estimate of U.S. third-quarter gross domestic product, with economists in a Reuters survey forecasting a 2.5 percent annualized rate of growth, same as the first estimate. The report is due at 8:30 a.m. EST <1330 GMT>

Campbell Soup Co (CPB.N) reported first-quarter earnings that beat expectations while sales were slightly below consensus. Medtronic Inc (MDT.N) also reported profit above estimates.

The news was a blow to customers still hoping to get more of their cash out of frozen broker accounts and raised new questions about why the authorities managed to locate only about 60 percent of the segregated customer funds three weeks after the parent firm's October 31 bankruptcy.

"I'm flabbergasted," said Tom Ward, a retired Chicago Board of Trade member whose two sons cleared their futures trades through MF Global and have been blocked from accessing their money. "The bottom line is, there's going to be a haircut involved. It's devastating, what this has done to the industry."

Monday's announcement was trustee James Giddens' first public statement on the size of the shortfall, which regulators initially said was about $600 million.

Regulators are investigating what happened to the money and whether MF Global may have improperly mixed customer money with its own -- a major violation of industry rules. No charges have been filed.

Hours after the statement, the bankrupt MF Global parent filed court papers along with JPMorgan Chase & Co (JPM.N), one of its key lenders, seeking the rare appointment of a separate trustee to take over the company's assets in bankruptcy.

Such appointments are reserved for cases in which a company's executives are accused of wrongdoing or when it may otherwise be in the estate's best interest. JPMorgan, which pledged $8 million of its collateral to keep MF Global afloat during bankruptcy, agreed to increase that pledge to $26 million if a trustee were appointed, according to the filing.

The request is on the agenda for a hearing tomorrow afternoon in U.S. Bankruptcy Court in Manhattan.

An MFGlobal spokeswomen declined to comment on the case.

QUESTIONS RAISED

In Monday's statement, Giddens said he currently controls about $1.6 billion of the brokerage's funds that he can use to pay back customers. His plans to pay back 60 percent of customer funds by early December would nearly exhaust that amount.

The sharply higher estimate of the shortfall raises questions about the investigation, said Tim Butler, an attorney for a group of customers demanding a fuller payback.

"What did the CFTC know three weeks ago and what do they know now?" Butler said. "If the amount has changed that much over three weeks, where did the money go? What were (regulators) looking at before?"

Leaders on Capitol Hill have entered the fray with calls for hearings and accountability.

Sen. Chuck Grassley, R-Iowa, said the CFTC should "do everything possible" to get more information to customers on the status of their funds. The call comes as angry farmers and ranchers across the country begin to reconsider a livelihood in the market and how they hedge future crops and livestocks.

"Unlike the big banks, the average farmer who lost money in this fiasco can't afford to hire an attorney and attend proceedings in a Manhattan courtroom," Grassley said in a statement.

MF Global was run by former Goldman Sachs & Co Inc (GS.N) chief and New Jersey governor Jon Corzine before its bankruptcy. The Chapter 11 filing came after the New York-based company revealed it made a $6.3 billion bet on European sovereign debt. Corzine resigned on November 4.

On Sunday, Reuters reported that, based on initial reports of what was supposed to be segregated for customers, the trustee appeared to be keeping about $3 billion on hand to cover the shortfall.

Customers had been clamoring for more specifics, saying that was too large of a cushion -- a notion Giddens rejected.

"Restoring 60 percent of what is in segregated customer accounts ... would require approximately $1.3 to $1.6 billion to implement," or nearly all the money at the trustee's disposal, he said.

Giddens previously transferred more than $2 billion to other brokers, giving most customers access to a portion of their funds.

Sen. Pat Roberts, R-Kan., said legislators should call on Corzine to testify about his former company's actions. Roberts said in a statement on Monday that the Senate Committee on Agriculture, Nutrition and Forestry should hold a special hearing on the matter.

If the trustee does exhaust the funds he now controls, his focus would shift to going after monies that may belong to the brokerage, but may be tied up in foreign depositories, or may be part of the shortfall, Giddens spokesman Kent Jarrell said.

"We can't distribute money we don't have, but we do have legal means for going after other assets," Jarrell said.

INVESTIGATION CONTINUES

The Commodity Futures Trading Commission and other regulators are investigating MF Global.

CFTC Commissioner Jill Sommers refused to speculate on how the $1.2 billion figure might compare with earlier estimates.

"From the very beginning we have tried as much as possible to never use a figure, out of fear that it's not right," said Sommers, who has been leading the agency's investigation into MF Global after Chairman Gary Gensler recused himself from the probe because of his ties to Corzine.

"Until the final reconciliation (of accounts) is done, you don't know what the shortfall is."

CME Group Inc (CME.O), operator of the clearinghouse for most of MF Global's customers, declined to comment.

Commodity customers say they have more questions than answers about MF Global's collapse and the safety of their money.

Sean McGillivray, vice president of Great Pacific Wealth Management, still has about $5 million tied up in MF Global for his customers. He was aware of the latest estimates of the shortfall, but wants exact figures.

"It would be in the best interest of all clients, brokers and anyone else caught in this mess to know just how much has been transferred ... and how much is supposed to be there," he said. "You could do this with an abacus and it would take less (time)."

A spokesman for the Commodity Customer Coalition in Chicago, which represents more than 7,000 former MF Global customers, said it was unclear how much of the trustee's estimate related to possible co-mingling of customer money.

Some of the missing money could be tied up overseas, said spokesman John L. Roe.

"We're hopeful given what was accounted for initially that more of the money will be found and that the trustee will work with us on an expedited claims process for customers," he said.

INVESTORS REACT

In a sign that even distressed investors are losing faith in a decent return, MF Global's bonds fell to an all-time low below 30 cents on the dollar, according to Tradeweb, down more than 5 cents on the day. The $325 million in 6.25 percent notes were issued at par in August.

Some investors have targeted other financial institutions. Two pension funds have sued seven banks, including Bank of America Corp (BAC.N), JPMorgan and Goldman Sachs, over prospectuses that allegedly concealed the problems that led to MF's collapse.

The trustee's case is In re MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790.

The MF Global bankruptcy is In Re MF Global Holdings Ltd, in the same court, No. 11-15059.

(Reporting by Nick Brown and David Sheppard; additional reporting by Jonathan Stempel in New York, Philip Shishkin in Washington and Tom Polansek and Ann Saphir in Chicago; editing by Martha Graybow, Tim Dobbyn, Edward Tobin and Carol Bishopric)