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A flat close on Wall Street offered stock markets little inspiration, while resurgent fears of an imminent Chinese interest rate rise kept investors on the defensive.

In Japan, the benchmark Nikkei average .N225 was dragged down by the strength of the yen, and a Reuters poll showed the mood among Japanese manufacturers darkened in late November and is expected to grow even gloomier in the coming months as a strong yen and the global slowdown eat into profits.

"The impact of a strong yen, slowing exports and declines in profits weighed on corporate sentiment and companies are growing more cautious about the outlook," said Yoshimasa Maruyama, an analyst at Itochu Corp.

The Nikkei fell 0.4 percent, though Sumitomo Corp (8053.T) and Mitsubishi Corp (8058.T) outperformed the broader index on reports they are making moves to expand their rare earths businesses. Non-Chinese sources of the hi-tech minerals are much in demand, on worries the world's biggest supplier may in future restrict exports.

MSCI's gauge of Asian stocks excluding Japan .MIAPJ0000PUS rose 0.4 percent, taking its gains for the year to over 12 percent versus 7.5 percent for the MSCI world index.

Asia has been one of the chief beneficiaries of flows of capital from the United States, where the Federal Reserve is pursuing a policy of printing more cash.

But adding to the market's generally cautious tone was the belief that the cost of borrowing in China will soon rise.

China's central bank may raise rates again this weekend as it tries to contain inflationary pressures, official newspaper the China Securities Journal reported on Tuesday.

Another newspaper said Chinese bank lending had exceeded by the end of November the government's full-year loan target of 7.5 trillion yuan ($1.13 trillion), supporting arguments in favor of further credit tightening.

POLITICAL BICKERING WEIGHS ON EURO

The euro slipped in early trade before recovering to $1.3325, just above its late levels in New York on Monday, with support seen at $1.3268.

The next major market event will be the outcome of the Irish budget, due later on Tuesday, traders said., The deeply unpopular government is set to unveil a record austerity plan that will inflict more pain on voters.

"If the (Irish) parliament fails to approve proposals, we could see a fresh flare-up in euro zone tensions and the euro could fall sharply against major forex counterparts," said David Rodriguez, strategist at DailyFX.

Ireland last month received an 85 billion euro bailout from the International Monetary Fund and European Union, and markets are wondering if Portugal and Spain will be the next ones in need of rescue.

In a banner headline across its front page, the China Securities Journal said this weekend offered a "sensitive window" for a rate rise, which would be the country's second after a surprise increase in October, the central bank's first rate hike since 2007.

An increase in rates would also put flesh on the bones of Beijing's announcement late last week that it was switching to a "prudent" monetary policy from the "appropriately loose" stance of the past two years.

The report weighed on Asian stock markets in early trade, though the country's main index in Shanghai later pared losses. Chinese asset markets have tumbled in recent weeks as investors have priced in more tightening.

The newspaper said the timing was right for a rate rise with official monthly economic indicators, notably the consumer price index (CPI), likely to show an increase in inflationary pressure when released on Monday, December 13.

"With reference to the central bank's record of raising interest rates just ahead of the release of CPI, this weekend will provide a window for a possible policy change," the newspaper said, without citing any source.

China's CPI in November may have accelerated to a 27-month high of 4.7 percent from a year earlier, according to a Reuters poll, up from a 4.4 percent pace in October.

"The general trend of China's monetary policy is appropriate tightening on the basis of the previous extremely loose stance," said Chen Jiagui, a senior government economist.

GETTING READY

Traders in China's interbank market said big lenders have already prepared enough money for another 50 basis point increase in banks' required reserves, which are already at a record high for big banks.

So far, the People's Bank of China has relied primarily on reserve requirements to mop up excess cash in the economy, officially ordering lenders to lock up more of their deposits five times this year.

Banks had also been holding back from lending in anticipation of more government moves to curb inflation, driving up short-term money market rates. But these rates tumbled on Tuesday after large banks caved into pressure from smaller institutions which had refused to borrow at the higher rates.

But concern over further hot money inflows could make Beijing hesitate before raising interest rates aggressively.

Comments from Chairman Ben Bernanke that the Federal Reserve could increase its commitment to buy $600 billion in U.S. government bonds has reinforced fears in Beijing that money printed in the United States will compound the inflationary headache in China.

"I don't think China should increase interest rates on a continuous basis," said Chen Kexin, an economist with a government-sponsored market monitoring agency in Beijing.

The U.S. Treasury said it will take in $10.5 billion from a public offering of 2.4 billion Citigroup shares, announced just hours earlier. The price is 10 cents below the $4.45 closing price on the New York Stock Exchange.

"By selling all the remaining Citigroup shares today, we had an opportunity to lock in substantial profits for the taxpayer and avoid future risk," said Tim Massad, Treasury acting assistant secretary for financial stability.

"With this transaction, we have advanced our goals of recovering TARP funds, protecting the taxpayer, and getting the government out of the business of owning stakes in private companies," Massad added in a statement.

The Treasury invested a total of $45 billion to bail out Citigroup in 2008 and 2009 during the financial crisis. The company paid back $20 billion in preferred stock, while another $25 billion was converted to 7.7 billion common shares held by the Treasury.

It has whittled that stake down over the past year from 27 percent to less than 7 percent through controlled sales in the market.

The move to sell the remaining shares in one large offering follows last month's successful initial public offering in General Motors Corp, which significantly reduced the government's stake. The GM IPO attracted strong interest from domestic institutional investors and foreign sovereign wealth funds alike.

"Citi is pleased that the U.S. Department of the Treasury has finalized plans to exit from its remaining holdings of Citigroup common stock. We are very appreciative of the support provided by the Treasury during the financial crisis," Citigroup spokesman Jon Diat said in a statement.

The offering, run by Morgan Stanley as bookrunning manager, is expected to close on or about December 10, 2010. Underwriting fees for the transaction will be paid by Citigroup, Treasury said.

IN THE BLACK

The Treasury said its estimate of a $12 billion profit from the $45 billion bailout includes gains from the sale of common stock, interest and dividends of $2.9 billion and $2.2 billion in Trust Preferred Securities it received for guarantees on a pool of Citigroup assets.

Treasury averaged a price of $4.14 for each of the 7.7 billion Citgroup shares it sold. It received the shares at a conversion rate of $3.25 each.

The sale, however, does not completely free Citigroup from the government's clutches. The Treasury also said it would continue to hold warrants to purchase Citigroup shares issued as part of the bailout. These may be repurchased by Citigroup or sold in a separate auction for an additional profit.

The Treasury also said it is entitled to receive some $800 million in Citigroup Trust Preferred Securities from the Federal Deposit Insurance Corp under a debt guarantee program -- provided that the FDIC incurs no losses on Citigroup debt it backstopped during the financial crisis.

The Treasury next year is expected to begin selling off its stake in bailed-out insurer American International Group, and it anticipates a profit on the complex series of transactions. (Additional reporting by Glenn Somerville in Washington, Paritosh Bansal and Maria Aspan in New York; Editing by Muralikumar Anantharaman)

Under the deal being discussed, Bright Food would purchase GNC for $2.5 billion to $3 billion, a source familiar with the situation said late on Monday in the United States.

The potential acquisition of Pittsburgh-based GNC, which is owned by Ares Management and the Ontario Teachers' Pension Plan Board, could be announced in the next few days, said the source who declined to be identified because the talks were not public.

A spokesman for Shanghai-based Bright Food Group had no comment.

China has been aggressively snapping up overseas assets in the resources sector to feed its fast-growing economy, but a purchase of GNC marks a less common instance of a major acquisition in the U.S. consumer space by a Chinese company.

Analysts were generally positive on the deal, saying it would help Bright Food, backed by the Shanghai city government, to catch up with domestic rivals in catering to the growing number of Chinese who have money to spend on more discretionary products such as vitamins.

Bright Food, best known for its dairy products, has been less successful in building its brand compared with other major rivals including Mengniu (2319.HK) and Yili (600887.SS), said Shaun Rein, managing director of China Market Research Group.

"If they buy strong foreign brands and then bring them back to China, they are able to catch up with the local competitors which have better brands in their products category," he said.

"It is a very smart move because they need to be able to capture brands and technical expertise and products they currently don't have."

OTHER DEALS EXPLORED

GNC, which sells nutrition supplements, vitamins, sports drinks and other diet products through 7,100 stores worldwide, had been exploring an initial public offering, as well as an outright purchase.

In September, it filed registration papers with the U.S. stock regulator for an IPO to raise up to $350 million.

Ares Management LLC and the Ontario Teachers' Pension Plan bought GNC in 2007 from Apollo Management LP APOLO.UL in a deal with a total enterprise value of $1.65 billion. Apollo had twice previously tried to take GNC public.

Ares Management, and the Ontario Teachers' Pension Plan could not be immediately reached for comment.

Bright Food controls four listed companies, including Bright Dairy & Food Co.

The proposed offering would mark the disposal of a government stake in Citigroup that once stood as high as 36 percent after $45 billion in taxpayer bailouts in 2008 and 2009.

Citi has paid back $20 billion in preferred stock, while another $25 billion was converted to 7.7 billion common shares held by the Treasury. A subsequent Citi share offering reduced the government's stake to 27 percent, which the Treasury has whittled down over the past year via the sale of 5.3 billion shares in controlled trades in the market.

The Treasury, which will sell the final stake with Morgan Stanley acting as bookrunning manager, on Monday filed a prospectus for the sale with the Securities and Exchange Commission. It can be seen at: here#107

"Citi is pleased that the U.S. Department of the Treasury has finalized plans to exit from its remaining holdings of Citigroup common stock. We are very appreciative of the support provided by the Treasury during the financial crisis," Citigroup spokesman Jon Diat said in a statement.

The move to sell the remaining shares in a public offering follows last month's stronger-than-expected initial public offering in General Motors Corp. (GM.N), the bailout-out automaker whose IPO attracted interest from domestic institutional investors and foreign sovereign wealth funds alike.

IN THE BLACK

The Treasury can already declare a profit on the Citigroup bailout, a person close to the offering said.

Through October, it took in $42.8 billion in total proceeds from Citigroup, including repayments, share sale proceeds and dividend payments against the $45 billion bailout.

The Treasury sold another 900 million shares in November and so far in December at prices above $4, providing at least another $3.6 billion, pushing the total take above $46 billion, said the person, who cited figures that have not yet been made public.

If the remaining 2.4 billion shares were sold at Monday's closing price of $4.45 a share, the offering would add another $10.68 billion to the Citi proceeds. The Treasury acquired the shares at a $3.25 conversion rate.

The Treasury also said it would continue to hold warrants to purchase Citigroup shares issued as part of the bailouts. These may be repurchased by Citigroup or sold in a separate auction for an additional profit.

The Treasury also said it is entitled to receive some $800 million in Citigroup Trust Preferred Securities from the Federal Deposit Insurance Corp under a debt guarantee program -- provided that the FDIC incurs no losses on Citigroup debt it backstopped during the financial crisis.

(Additional reporting by Paritosh Bansal and Maria Aspan in New York; Editing by Leslie Adler)