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The benchmark S&P 500 index last week recorded its worst weekly loss in five weeks.

Investors, frustrated by the lack of progress in the debate between the Democrat-controlled White House and Senate and the Republican-majority House of Representatives, could move into what are perceived as safer assets, such as cash.

While the wrangling over the debt ceiling takes center stage, earnings season will continue to heat up after a solid first week. According to Thomson Reuters data, 39 companies in the benchmark S&P 500 index .SPX have posted results, with 74 percent reporting earnings that topped Wall Street estimates.

Companies in the index are forecast to show a 6.5 percent rise in profits over the second quarter of 2010 when all the reports are in.

For last week, the S&P 500 ended down 2.1 percent; the Dow fell 1.4 percent and the Nasdaq declined 2.5 percent.

The overhang from the debt ceiling issue could diminish the focus on earnings.

House Speaker John Boehner, the top Republican in Congress, said on Friday that President Barack Obama and Democrats still had not put a serious deficit plan on the table, underscoring the acrimony in negotiations to avert a government default.

"The news flow (this) week dealing with the deficit issues and the political posturing that is taking place is going to intensify and is really going to drive these markets," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"People are starting to get nervous about what they are seeing out there. For a portfolio manager -- let alone an average investor -- this is a treacherous market to be trying to position yourself in."

ECONOMY IS A "DISASTER"

Economic data on tap for the coming week includes several reports on the housing market -- June housing starts on Tuesday and existing-home sales on Wednesday. In addition, data is due on leading economic indicators for June and the Philadelphia Fed survey of manufacturing activity in the Mid-Atlantic region. Economic reports over the last month have raised questions about the health of the U.S. recovery.

"The bigger picture is the economy is still a disaster," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Saluzzi said people still are watching earnings for signs growth may be stagnating. "Eventually, companies are not going to keep cutting costs."

Quarterly results are expected from a slew of companies this week, with more than 10 Dow components scheduled to report.

Major financial companies due to report include Goldman Sachs (GS.N), Morgan Stanley (MS.N), Bank of America Corp (BAC.N) and American Express (AXP.N). Also on the calendar are earnings news from technology companies Apple Inc (AAPL.O), Microsoft Corp (MSFT.O) and Intel Corp (INTC.O).

"Let's see what all the rest of these guys have. Let's see if it's still being driven by cost cuts or are they actually getting revenue gains. That is going to tell me a lot more than if they cut the debt deal," said Saluzzi.

After the S&P 500 weekly loss, the index was just below its 50-day moving average, a technical level that could indicate more selling. Some analysts believe the market could still come back if the U.S. debt issue is resolved soon.

"This area, as far as it pulling back, is balancing the threat of a default, but it would take an actual default to take us much lower than here," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

But the longer the debt ceiling question continues without a conclusion, the bigger the risk for further declines in stocks and for volatility to spike. The CBOE Volatility index .VIX rose nearly 30 percent last week

"The more it drags out into Tuesday, Wednesday, Thursday or whatever, then we've got some serious issues. That will be an overhang no matter how good the financials come in terms of earnings reports next week," said Tommy Huie, chief investment officer of BMO Asset Management U.S. in Milwaukee, Wisconsin.

"It could be a pretty volatile week, no doubt about it."

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

From Washington to Brussels, Moody's, Standard & Poor's and Fitch have added to the intense pressure on governments trying to deal with crushing sovereign debt.

Their warnings about the precarious finances of the world's top economies have also roiled investors more accustomed to seeing emerging market countries take the brunt of criticism.

Tension hit new highs on both sides of the Atlantic last week as Moody's and Standard & Poor's threatened to downgrade the United States' prized "triple-A" rating.

A few days earlier, Moody's slashed ratings in Ireland and Portugal to "junk" status, triggering an outcry from European officials.

"These opinions, they continue to give them in such a way that it worsens the crisis," Ewald Nowotny, a member of the European Central governing council, said on Tuesday, referring to the agencies. He said markets could live without them.

Now that the agencies are focusing their fire on the rich world, U.S. and European officials -- long proponents of seeing indebted nations "take their medicine" -- are crying foul.

Their complaints carry a strong sense of deja-vu.

In 1998, when Moody's pushed Brazil deeper into "junk" rating territory, the country's finance ministry called the decision a "mistake" that showed the agency needed to invest more in sovereign risk analysis.

In a sign of the turnaround of the fortunes of many emerging economies, 11 years later in its New York headquarters Moody's received a much friendlier Brazilian finance minister, Guido Mantega, to hand him Brazil's much-awaited "investment-grade" status.

The question now is whether the agencies will be able to withstand much stronger political pressures while the debt crisis rages in developed countries.

In Europe and the United States, policymakers have already promised tougher regulations for the agencies after they failed to spot the housing bubble in the middle of the last decade. and stand accused of contributing to it by giving generous ratings to subprime mortgage bonds.

Rating agencies came under fire from holders of subprime-related securities because raters are paid by the firms issuing the securities. Investors argued that kind of "economic incentive" blurred the analysis.

Sovereign nations, by contrast, do not shell out any money for their ratings.

That has not lessened the political anger. On Wednesday, U.S. Congressman Dennis Kucinich said: "No nation, agency or organization has the authority to dictate terms to the United States government. Moody's and its compatriot S&P were a direct cause of the near collapse of the economy of the United States."

EUROPEAN RATING AGENCY

In Europe, where the agencies poured cold water on a plan for Greece to extend debt maturities and avoid a default, sentiment is even worse. European Commission President Jose Manuel Barroso accused them of having an anti-European bias.

Barroso and other policymakers want the creation of an European rating agency which, they argue, would be better equipped to analyze euro zone issues. That argument overlooks the fact that Fitch is majority-owned by a French company.

The intensity of Europe's reaction to the latest sovereign downgrades is proportional to the power that ratings agencies retain over financial markets -- a clout that even the ratings agencies suggest is exaggerated.

In a recent special report about proposed regulation changes, Moody's said the agencies should not be seen as "gatekeepers in the financial markets" and their ratings should not be used as substitutes for disclosure by issuers.

WRONG TIMING

Some say policy makers may have a point when they criticize the timing of the downgrades by ratings agencies.

Their failure to anticipate the severe deterioration of sovereign credit was an issue in emerging market debt crises in the past, said Claudio Loser, a former Western hemisphere director for the International Monetary Fund.

"My experience with the rating agencies in Latin America during the debt crisis of the 1980s and 1990s is that they were a destabilizing factor," said Loser, now president of the Centennial Latin America consulting firm.

"They did not warn the markets when they should have and they did actually create more noise when it was not the appropriate thing to do."

Loser believes policymakers will force the agencies to "adjust significantly," and that they will emerge stronger from this crisis.

(Reporting by Walter Brandimarte; Editing by David Gaffen, Jennifer Ablan and Maureen Bavdek)

The benchmark S&P 500 index this week recorded its worst weekly loss in five weeks.

Investors, frustrated by the lack of progress in the debate between the Democrat-controlled White House and Senate and the Republican-majority House, could move into what are perceived as safer assets, such as cash.

While the wrangling over the debt ceiling takes center stage, earnings season will continue to heat up after a solid first week. According to Thomson Reuters data, 39 companies in the benchmark S&P 500 index .SPX have posted results, with 74 percent reporting earnings that topped Wall Street estimates.

Companies in the index are forecast to show a 6.5 percent rise in profits over the second quarter of 2010 when all the reports are in.

For this week, the S&P 500 ended down 2.1 percent; the Dow fell 1.4 percent and the Nasdaq declined 2.5 percent.

The overhang from the debt ceiling issue could diminish the focus on earnings.

House Speaker John Boehner, the top Republican in Congress, said President Barack Obama and Democrats had still not put a serious deficit plan on the table, underscoring the acrimony in negotiations to avert a government default.

"The news flow next week dealing with the deficit issues and the political posturing that is taking place is going to intensify and is really going to drive these markets," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"People are starting to get nervous about what they are seeing out there. For a portfolio manager -- let alone an average investor -- this is a treacherous market to be trying to position yourself in."

ECONOMY IS A "DISASTER"

Economic data on tap for next week includes several reports on the housing market -- June housing starts on Tuesday and existing-home sales on Wednesday. In addition, data is due on leading economic indicators for June and the Philadelphia Fed survey of manufacturing activity in the Mid-Atlantic region. Economic reports over the last month have raised questions about the health of the U.S. recovery.

"The bigger picture is the economy is still a disaster," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Saluzzi said people still are watching earnings for signs growth may be stagnating. "Eventually, companies are not going to keep cutting costs."

Quarterly results are expected from a slew of companies next week, with more than 10 Dow components scheduled to report.

Major financial companies due to report include Goldman Sachs (GS.N), Morgan Stanley (MS.N), Bank of America Corp (BAC.N) and American Express (AXP.N). Also on the calendar are earnings news from technology companies Apple Inc (AAPL.O), Microsoft Corp (MSFT.O) and Intel Corp (INTC.O).

"Let's see what all the rest of these guys have. Let's see if it's still being driven by cost cuts or are they actually getting revenue gains. That is going to tell me a lot more than if they cut the debt deal," said Saluzzi.

After the S&P 500 weekly loss, the index was just below its 50-day moving average, a technical level which could indicate more selling. Some analysts believe the market could still come back if the U.S. debt issue is resolved soon.

"This area, as far as it pulling back, is balancing the threat of a default, but it would take an actual default to take us much lower than here," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

But the longer the debt ceiling question continues without a conclusion, the bigger the risk for further declines in stocks and for volatility to spike. The CBOE Volatility index .VIX rose nearly 30 percent for the week

"The more it drags out into Tuesday, Wednesday, Thursday or whatever, then we've got some serious issues. That will be an overhang no matter how good the financials come in terms of earnings reports next week," said Tommy Huie, chief investment officer of BMO Asset Management U.S. in Milwaukee, Wisconsin.

"It could be a pretty volatile week, no doubt about it."

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

While S&P had already made clear it could downgrade the United States' sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills.

The Treasury took the last available step Friday to try and extend that borrowing capacity.

S&P on Friday put on review for possible downgrades a range of powerful financial firms -- many of them little known to the public but crucial to the country's financial infrastructure. U.S. government securities are central to the operations of most of the companies cited.

They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks. They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the residential mortgage market.

S&P characterized its targets as "entities with direct links to, or reliance on, the federal government."

Separately, the agency said the four remaining U.S. nonfinancial companies with triple-A ratings were not affected by the downgrade threat.

'WARNING SHOT'

"S&P is firing a warning shot, saying the entire financial clearing system is in question," said Peter Niculescu, a partner at Capital Markets Risk Advisors, a risk management advisory firm in New York.

He raised the prospect of a financing squeeze for financial institutions if Treasury debt is downgraded. S&P said Friday it still sees the risk of default as "small, though increasing."

Nik Khakee, an S&P analyst who worked on the team assessing the clearinghouses, emphasized that the decline for the triple A-rated companies from "outlook negative" to "creditwatch negative" -- signaling a 50 percent chance of a downgrade within three months -- directly follows a similar change for the debt of government securities.

Earlier this week, Moody's also put its U.S. credit rating on review for a possible downgrade.

Some investors downplayed the chances of a severe market reaction if the United States is downgraded, given that the market has known this could be coming.

"Do you think China is going to sell all their Treasuries when they find out the ratings are lowered? They know the situation, they've known it all along," said James Melcher, founder and president of Balestra Capital Ltd, a global-macro investment manager based in New York. "They cannot sell a significant amount of their Treasuries without running interest rates up to 20 percent or more; they would be shooting themselves in the foot."

ONUS ON WASHINGTON

Many of the firms put on review for a possible downgrade were quick to turn the focus back on President Barack Obama and the congressional leaders trying to hash out a deal to stave off a debt default.

"Whatever happens will have nothing to do with us, and everything to do with Washington. The hope on everyone's part is obviously that Washington gets its act together so that both their rating and ours can remain where they belong -- at AAA," said Patrick Korten, a spokesman for insurer Knights of Columbus, which was included on the negative watch list.

A spokesman for Goldman Sachs, parent company to Goldman Sachs Mitsui Marine Derivative Products LP, declined to comment. A spokesman for New York Life said S&P told it no financial institution can carry a higher rating or outlook than its sovereign rating, and that the insurer believes its rating to be fully justified.

Northwestern Mutual said it remained "completely confident" in its financial strength.

Other insurers on the list were not immediately available to comment.

Another broad group in S&P's sights is the clearinghouses, which guarantee contracts tied to everything from oil contracts to shares of Google Inc and are critical to U.S. financial market stability.

"It's not unexpected and we don't see this as a reflection on how OCC conducts its business," said Jim Binder, spokesman for the Options Clearing Corp, which clears U.S. options or futures for 14 exchanges. "It's all about what's going on in Washington."

The U.S.-based Depository Trust & Clearing Corporation, which provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at $33.9 trillion, said the S&P action was expected.

"Changing the outlook on various financial institutions is common practice for ratings agencies when the outlook on a sovereign is changed," DTCC said in a statement. DTCC runs the National Securities Clearing Corporation and the Depository Trust Company.

Freddie Mac also declined to comment. Fannie Mae did not immediately respond to requests for comment.

Europe's sovereign debt crisis, stalled budget talks in Washington and an uncertain economic backdrop have sent Wall Street on a roller coaster ride since the spring.

A health check of European banks is expected to show that as many as 15 lenders need more capital to withstand a prolonged recession, with criticism growing that the tests do not encompass the impact of a Greek default.

"We expect it to continue to be a roller coaster, driven by the European stress test, the U.S. debt and tax agreements ... and earnings," said Kim Caughey Forrest senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

"We have all this crazy stuff going on that normally the market doesn't have to deal with, and certainly doesn't have to deal with all at the same time."

Ratings agency Standard & Poor's warned there was a 1-in-2 chance it could cut the United States' triple-A rating if a deal to raise the government debt ceiling is not reached soon.

Global events have overshadowed stronger earnings from big U.S. companies like Google (GOOG.O) and JP Morgan (JPM.N). Citigroup (C.N) is set to report earnings, with investors likely to scrutinize the bank's loan book for signs it is on a sustainable path to profit growth.

S&P 500 futures rose 1.6 point and were 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 rose 31 points, and Nasdaq 100 futures added 8 points.

The S&P 500 is down 2.6 percent this week, its worst week since the middle of August, 2010. Two weeks ago Wall Street posted its best week in two years.

The Nasdaq will be in focus after Google Inc (GOOG.O) reported adjusted quarterly earnings that exceeded Wall Street's most bullish forecasts, sending its shares up 13 percent in premarket trading.

There was some high profile acquisition activity. Top global miner BHP Billiton (BLT.L) is to buy U.S. gas producer Petrohawk Energy Corp (HK.N) for $12.1 billion, ramping up its bets on the booming but environmentally controversial shale gas industry. Petrohawk's shares rose nearly 65 percent.

Billionaire investor Carl Icahn said he and his affiliates offered to buy shares of Clorox Co (CLX.N) that are not owned by him for $76.50 per share in cash, valuing the company at $10.2 billion. The shares jumped 12 percent in premarket trade.

President Barack Obama suspended U.S. budget negotiations for the day to give congressional leaders a chance to come up with a plan of action on how to unblock talks meant to cut deficits and avert a debt default.

U.S. stocks fell on Thursday as Fed Chairman Ben Bernanke backed off hints additional near-term stimulus could be on the way, undercutting comments from a day earlier that spurred a late-session rally in equities.

The U.S. consumer price index (CPI), due at 8:30 (1230 GMT), is seen falling 0.1 percent in June after a 0.2 percent rise in May, giving an unchanged annualized inflation rate of 3.6 percent.

July's Empire State index is also due at 8:30 (1230 GMT), when investors will look for signs of stabilization in the manufacturing sector, while the July Reuters/University of Michigan consumer sentiment survey will be released at 9:55 (1355 GMT).

(Editing by Kenneth Barry)