Fate of federal budget in hands NDP (Reuters)

OTTAWA (Reuters) – If the Conservative government wants to hang on to power when it presents its budget on March 22 it will need the support of a small opposition party with which it shares almost no common ground.

The Conservatives do not have enough seats in the House of Commons to pass the budget by themselves and need the backing of one of the three opposition parties. If all three vote against the budget, the government will fall and Canadians will head for an election in early May.

This leaves the government's fate in the hands of the New Democrats, the only party that has not already said it will reject the budget.

Leader Jack Layton says Canadians want Parliament to work and is pressing the government to commit to a series of measures to help seniors, cut home heating costs and hire more doctors.

Layton, whose party favors more social programs and higher corporate taxes, often attacks the tax-cutting tough-on-crime Conservatives and is an odd political partner for Prime Minister Stephen Harper and Finance Minister Jim Flaherty.

But two crucial factors are at play: Layton's health, and whether the New Democrats can shrug off polls showing the party would lose seats in an election.

The energetic 60-year-old is under treatment for prostate cancer and recently suffered a hairline fracture of the hip, which means he is walking on crutches. Aides insist this would not overly hinder his traditionally hard-driving style of campaigning, which often involves a string of 16-hour days.

"Mr. Layton is doing well ... He is ready to campaign whenever the election may come," said spokesman Karl Belanger.

If the government gives Layton enough of what he wants, he will back the Conservatives while telling supporters that only his party is able to get things done in Ottawa.

Belanger said Harper and Flaherty "can decide to help Canadian families by including some of the practical and affordable proposals the NDP has put forward. We hope that these measures will be included in the budget, but so far, we haven't been given any guarantees."

Flaherty said on Tuesday he was still talking to some opposition legislators and had not finalized his budget plans.

"There are lots of things we can do in the budget ... there are a group of older people in Canada who are not entitled to (state pension) benefits who could use some support from government," he told reporters.

If the government makes enough concessions this could help Layton gain popularity at the expense of the Liberals, a traditionally big tent centrist party that has been inching left.

In 2005, the New Democrats kept the then minority Liberal government in power in return for pledges to boost spending on social programs. Both parties are now fighting for the support of the same segment of the electorate, a factor which helps the Conservatives stay in power.

If Layton decides to bring down the Conservatives, polls indicate the NDP would lose some of the near-record 37 seats it won in the 2008 election. It now holds 36 seats.

This would pain Layton, who took over as leader in 2003 when the party only about a dozen seats and was regarded as politically irrelevant. The House of Commons has 308 seats.

(Reporting by David Ljunggren; editing by Peter Galloway)

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Gunman kills two U.S. airmen at Frankfurt airport (Reuters)

FRANKFURT (Reuters) – German police arrested a man on Wednesday after two U.S. airmen were shot dead and two wounded in an incident on a U.S. Army bus at Frankfurt airport, authorities said.

Security round the airport was tightened and an investigation into the "terrible, senseless crime" was under way, said Boris Rhein, interior minister for Hesse state.

"Whether the incident was linked to terrorism I cannot say at this stage," he told reporters.

The suspected gunman was apparently a Kosovo national, he said. Police said he was 21.

A spokesman for Frankfurt airport operator Fraport said the shooting took place in a U.S. Army bus in front of Terminal 2. U.S. President Barack Obama said he was outraged by the attack.

Authorities in Kosovo believed they knew the identity of the suspected gunman but could not confirm it yet, Kosovo Interior Minister Bajram Rexhepi told Reuters in Pristina.

A police official identified the man as Arif Uka from the city of Mitrovica but no official confirmation was given yet.

"The government of the Republic of Kosovo is extremely touched and strongly condemns the killing of two American citizens and the wounding of two others by a citizen from Kosovo that happened today in Germany," the government said in a statement.

The United States has had troops in Kosovo since 1999, when a NATO bombing campaign pushed out Serbian forces. The U.S. troops there now are helping to oversee a fragile peace that has held since Kosovo declared independence from Serbia in 2008.

Major Beverly Mock, spokeswoman for the U.S. Air Force at Rammstein air base in Germany, said the identities of the dead airmen had not yet been confirmed.

"The German authorities have the shooter in custody," she said.

Chancellor Angela Merkel, speaking in Berlin, told a news conference: "We don't know the details but I would like to express how upset I am. We have to do everything we can to find out what happened."

(Reporting by Tilman Blasshofer; additional reporting by Fatos Bytyci in Pristina, Annika Breidthardt and Sarah Marsh in Berlin and Maria Sheahan in Frankfurt; writing by John Stonestreet; editing by Angus MacSwan)

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Gaddafi rebels look to Tripoli, peace plan mooted (Reuters)

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Pakistan media warns of growing chaos as minister slain (Reuters)

ISLAMABAD (Reuters) – Pakistan is being swept toward violent chaos by a growing wave of Islamist extremism, newspapers said on Thursday, a day after Taliban militants killed the country's only Christian government minister.

The assassination of Minister for Minorities Shahbaz Bhatti in broad daylight in the capital Islamabad on Wednesday, threatens to further destabilize the nuclear-armed U.S. ally where secular-minded politicians are imperiled by a rising strain of violent religious conservatism in the society.

"Mr. Bhatti's brutal assassination has once again highlighted the fact that we are fast turning into a violent society," the liberal Daily Times said in its editorial.

"This is not the time to be frightened into silence. It is time to implement the law and not surrender in front of extremists."

Bhatti is the second senior official to be assassinated this year for challenging the country's controversial blasphemy law, which sanctions the death penalty for insulting Islam or its Prophet Mohammad. Punjab provincial governor Salman Taseer was shot dead by his own bodyguard in January for calling for curbing abuses in the law.

"Terrorists silence another voice of interfaith harmony," the daily Dawn ran a banner headline on its front page. "Shahbaz Bhatti silenced forever," said The News.

President Asif Ali Zardari told a party meeting on Wednesday he would resist the slide toward extremism.

"We have to fight this mindset and defeat them. We will not be intimidated nor will we retreat the official APP news agency quoted him as saying.

Mehbood Ahmed, a senior police official, said around 20 people had been detained for questioning, but police did not yet know who was responsible. "But we are confident we will get hold of culprits," he said.

Condemnation poured in from around the world after news of Bhatti's killing broke, with the Church of England and the Vatican decrying the violence against Christians in Pakistan.

"I hope the government of Pakistan will not only hold the killers to account, but reflect on how it can more effectively confront the extremism which is poisoning Pakistani society," United Nations human rights chief Navi Pillay said from Geneva on Wednesday.

These killings, along with frequent militant attacks and chronic economic problems have raised fears for the future of the U.S.-ally, where an unpopular coalition government is struggling to cope.

'THERE'S BLOOD ON THEIR HANDS'

Ties between the two old allies have hit new lows after the arrest in January of Raymond Davis, a U.S. Central Intelligence Agency contractor, who shot dead two armed men in the city of Lahore. The United States says Davis has immunity, but Pakistan has said it is for the courts to decide.

In the meantime, Davis was in court on Thursday for the second hearing of his murder trial. His immunity hearing is March 14.

The government of President Asif Ali Zardari has repeatedly said it would not change the blasphemy law, and officials have distanced themselves from anyone calling for amendments for fear of a backlash from extremists, a move that dismayed moderates and liberals.

"Of course the silent majority, which keeps silent over these things, also must bear responsibility," I.A. Rehman, director of the Human Rights Commission of Pakistan, told the Express 24/7 television channel Wednesday night. "There's blood on their hands also."

The law has been in the spotlight since last November, when a court sentenced a Christian mother of four to death after her neighbors complained she had insulted Prophet Muhammad. Both Taseer and Bhatti championed the cause of poor Christian woman.

Al Qaeda-linked Pakistani Taliban militants, fighting to bring down the state, had called for Bhatti's death because of his attempts to amend the law.

The funeral of Bhatti, a Catholic, is expected to take place on Friday or Saturday, his family friends said.

Christians and other religious minorities have staged protests in several cities, denouncing his death and have called on the government to provide them protection.

(Additional reporting by Chris Allbritton and Robert Evans in Geneva, editing by Andrew Marshall)

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Afghans, Western backers in contact with Taliban: Karzai (Reuters)

LONDON (Reuters) – The Afghan government and its Western backers are in contact with Taliban insurgents but it could take one to three years to reach a resolution, Afghan President Hamid Karzai said on Wednesday.

In an interview with Britain's Channel 4 News, he also advised Western nations not to intervene militarily in Libya, where Muammar Gaddafi faces a revolt against his 41-year rule.

Karzai said his government was in direct conversation with some members of the Taliban, who are waging an increasingly bloody insurgency in Afghanistan.

"The contacts are going on. The contacts don't get to a fixed address unfortunately, because that address is not there," he said, speaking during a visit to Britain where he held talks with Prime Minister David Cameron.

Karzai said contacts were being increasingly channeled through the High Peace Council, set up last year to seek a negotiated end to decades of violence.

"At the same time there are contacts by our international partners," he said.

Asked if the United States and Britain were talking to the same people the Afghan government was talking to, Karzai said: "There are contacts, but they will not be with the same people."

He said negotiations were just beginning although he hoped they would reach an end point soon.

Asked to be more precise, he said: "Unfortunately it doesn't mean weeks. I wish it did. It doesn't mean months. It probably will be one or two or three years."

Violence across Afghanistan is at its worst since the Taliban were ousted in 2001 and the insurgency has grown in the past year despite the presence of about 150,000 foreign troops.

The New Yorker magazine reported this month that the United States had entered direct talks with leaders of the Taliban in Afghanistan, but contacts were exploratory and not yet a peace negotiation.

Advising against Western military intervention in Libya, Karzai said it would stir "nationalistic fervor" among Libyans and cause more suffering for all concerned.

Admitting that there was "friction" with his Western allies over strategy in Afghanistan, Karzai said he had told his allies the military surge should be scaled back to permit negotiations.

"The military is less inclined to accept it (this argument). The political side, the civilian side, is more inclined to it," he said.

Karzai said the Western media had greatly exaggerated the extent of corruption in Afghanistan.

A scandal at Afghanistan's biggest private bank, Kabulbank, which has lost hundreds of millions of dollars, could jeopardize Western aid to Afghanistan.

"The Kabulbank is a corrupt case, sure, but so are the banks in the UK, so are the banks in America," Karzai said.

Allegations about his half brother, were "totally wrong, absolutely wrong, politically motivated," he said. Ahmad Wali Karzai, a leader in Kandahar province, has been accused of amassing a fortune from drugs, intimidating rivals and of having links with the CIA, charges he denies.

(Editing by Janet Lawrence)

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Trial for accused CIA shooter resumes in Pakistan (Reuters)

LAHORE, Pakistan (Reuters) – A Pakistani court resumed on Thursday the trial of CIA contractor accused of killing two Pakistanis in a case that has strained relations between the United States and its important Asian ally.

The American contractor, Raymond Davis, 36, shot dead two men in the eastern city of Lahore on January 27. He said he acted in self-defense and the United States says he has diplomatic immunity and should be repatriated.

The case has inflamed anti-American sentiment in Pakistan and is testing the often-fraught ties between the allies. Pakistani efforts against Islamist militants on its border with Afghanistan are seen as crucial for ending the Afghan war.

The trial resumes a day after Pakistani Taliban militants shot dead a government minister, Shahbaz Bhatti, who was also the only Christian in the cabinet, for his criticism of a law that mandates the death penalty for insulting Islam.

Hardline religious parties, which have been campaigning vociferously to prevent any reform of the blasphemy law, have also called for Davis to be hanged.

The United States had retaining a retired judge, Zahid Hussain Bokhari, who is also a former government prosecutor, to help with the Davis case, Bokhari said.

"The U.S. consulate has contacted me and I will represent Raymond Davis," Bokhari told Reuters before the hearing.

Security was tight at Kot Lakhpat jail, where the trial is being held for security reasons. Machine guns were installed on top of water towers inside the jail and concrete barriers were placed on the road leading to it.

Davis, a former U.S. special forces officer, has been charged with double-murder and faces possible execution.

DIPLOMATIC STANDOFF

There have been conflicting accounts about the identity of the two men Davis shot, with Davis and a police report indicating they were armed robbers while Pakistani media and some officials have portrayed them as innocent victims.

On March 14, the Lahore High Court will decide whether Davis enjoys diplomatic immunity, another contentious issue that the government has said must be decided legally, at the risk of angering the United States and jeopardizing up to $3 billion a year in U.S. military and civilian aid.

But with public anger and anti-American feeling running high, President Ali Asif Zardari's unpopular government had little choice but to let the case go through the courts.

In addition to causing a diplomatic standoff, the case has strained relations between the CIA and Pakistan's main Inter-Services Intelligence (ISI) spy agency, which says it did not know of Davis' presence in the country.

Relations between the spy agencies -- essential to the almost decade-old war in neighboring Afghanistan -- took a blow in December, when the CIA station chief in Islamabad was forced to leave the country after his name was published in a court filing over attacks in Pakistan by pilotless U.S. aircraft.

The latest case has made things worse, as even the usually tight-lipped ISI noted.

"Post incident conduct of CIA has virtually put the partnership into question ... it is hard to predict if the relationship will ever reach the level at which it was prior to the Davis episode," the ISI said in a letter to the Wall Street Journal last month.

(Additional reporting by Sheree Sardar; Writing by Chris Allbritton; Editing by Robert Birsel)

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Top SEC lawyer did not recuse himself on Madoff (Reuters)

By Sarah N. Lynch Sarah N. Lynch – Mon Feb 28, 6:29 pm ET

WASHINGTON (Reuters) – The top attorney for the U.S. securities regulator was advised not to recuse himself from handling Bernard Madoff matters for the agency, even though his family's estate had invested with the swindler.

Outgoing Securities and Exchange Commission General Counsel David Becker discussed his rationale for continuing to work on Madoff matters in a letter to several House of Representatives Republicans who inquired about the issue last week.

Becker, whose last day at the SEC was on Friday, is the subject of a lawsuit by Madoff Trustee Irving Picard. Picard filed suit against Becker and his brothers in December seeking to recover $1.5 million in phony profits the Becker family estate received from Madoff investments. Becker is a co-executor of his mother's estate. His mother passed away in 2004.

The suit does not claim Becker or his brothers knew anything about the fraud and merely seeks to recover money to harmed investors. Madoff was arrested in December 2008 after admitting he ran a decades-long, multibillion-dollar swindle, considered the biggest investment fraud in history.

Key House Financial Services Republicans last week raised ethical questions about Becker's family's investments and his role as general counsel at the SEC. Becker worked at the SEC between 1998 and 2002, serving as general counsel for part of that time. He later returned to work as general counsel under SEC Chairman Mary Schapiro in February 2009.

In a letter to Republicans, Becker said he disclosed his mother's investments to the SEC ethics attorney William Lenox in 2009 right around the time of his return.

"At the time, the SEC was focused on bringing enforcement actions against Mr. Madoff and others, and in the view of the ethics counsel, those matters did not have a direct and predictable effect on my financial interests," Becker wrote in a letter dated February 25, and disclosed on Monday.

Congressman Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations, told Reuters on Monday his staff is still reviewing Becker's responses to ensure that everything was properly disclosed.

"I think there are some unanswered questions there," he said.

In the letter, Becker said he sought counsel from the SEC's ethics lawyer on a second occasion in May 2009 after law firms wrote to the SEC asking the agency to get Picard to change his interpretation for how people could file claims to get their money back.

He said he recognized this issue could affect his financial interests because it could "affect the trustee's decision to bring clawback actions against persons like me."

The ethics counsel decided he could advise the SEC on how to respond to the letters from the law firms questioning Picard's interpretation of the term "securities positions" because it would "not have a direct and predictable effect on the trustee's decision to bring clawback actions."

Becker also said that, when he previously served as general counsel from 2000 to 2002, he did not interact with Madoff and was unaware of the tips the agency received about the Ponzi scheme from Harry Markopolos.

Becker added that "no one specifically considered the issue of whether to notify the public" about his mother's Madoff account when he rejoined the SEC in 2009.

Becker sent his responses to the top Republicans on the House Financial Services Committee, including Chairman Spencer Bachus and Vice Chairman Jeb Hensarling, as well as House Financial Services oversight subcommittee Chairman Randy Neugebauer and House Financial Services capital markets subcommittee Chairman Scott Garrett.

(Reporting by Sarah N. Lynch; editing by Gerald E. McCormick and Andre Grenon)

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TSX turns lower on financials, oil worries (Reuters)

TORONTO (Reuters) – Toronto's main stock index turned lower on Tuesday afternoon, weighed down by falling financial shares and by economic worries sparked by high oil prices.

The Toronto Stock Exchange's S&P/TSX composite index fell 2.03 points to 14,134.47, following drops on U.S. stock markets. Heavyweight financials were down 0.6 percent, leading seven of the index's 10 main sectors lower.

U.S. Federal Reserve Chairman Ben Bernanke said on Tuesday the recent surge in oil prices was unlikely to derail the U.S. economy, but his comments did little to reassure investors worried that the turmoil in the Middle East could affect Saudi Arabia, the world's largest oil exporter.

(Reporting by Ka Yan Ng; editing by Peter Galloway)

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SGX CEO says no more concessions on $7.7 billion ASX bid (Reuters)

SINGAPORE/HONG KONG (Reuters) – The head of the Singapore Exchange Ltd (SGXL.SI) drew a line under his $7.7 billion bid for Australian bourse operator ASX Ltd (ASX.AX), saying on Tuesday he did not plan any further concessions to win approval for the deal.

Magnus Bocker's bid for ASX last year was the first salvo in a spate of merger and acquisitions that has since erupted in the global exchanges industry, but has run into mounting opposition from Australian politicians and regulators.

SGX relaxed its terms for the takeover last month and Bocker heads to Australia later on Tuesday to campaign for the deal, but he signaled the offer would not be changed.

"We are not considering further concessions," Bocker, the chief executive of SGX, said at the Reuters Future Face of Finance Summit.

SGX and ASX want to team up to cut costs, fight growing pressure from alternative trading platforms and avoid being left behind as rivals in North America and Europe get together.

In less than three weeks, Deutsche Boerse announced a bid for NYSE Euronext, London Stock Exchange (LSE.L) unveiled plans to take over Toronto Stock Exchange parent TMX Group Inc (X.TO), and BATS Global Markets said it would buy fellow privately-owned venue operator Chi-X Europe.

To try to overcome opposition to its deal, SGX agreed last month to allow ASX to have an equal number of directors in the merged company as it seeks an agreement to lift a 15 percent cap on foreign ownership and counter calls for the merger to be scrapped. Yet, under the agreement, SGX will still own a 64 percent share after the merger.

Bocker, a 49-year-old Swede who made his mark bringing together seven Nordic bourses to form OMX AB, said he was not contemplating any other mergers or acquisitions.

"I don't see myself as a dealmaker. I see myself as an operator. I like building, changing and growing exchanges," he said, before heading to Australia to campaign for the ASX deal.

HONG KONG LIKES ICE

The surge of merger activity has shone a spotlight on the role SGX's larger Asian rival, Hong Kong Exchange and Clearing Ltd (0388.HK), will play in the consolidation.

HKEx Chairman Ronald Arculli told the Reuters Summit in Hong Kong he was watching moves closer and would love to replicate IntercontinentalExchange's (ICE.N) model of buying up businesses focused on commodities futures.

"If I could replicate the ICE model from the old international petroleum exchange, I would do it tomorrow, today, or now," Arculli said.

"If you look at the ICE model, it really is an amazing achievement. They have a lot of components and started out small, but now it's got a market cap of $8-9 billion."

The Hong Kong Exchange, the world's largest exchange operator by market value, has been seen as a possible buyer in any acquisition, although the company has previously said it does not have any targets currently.

U.S-based ICE started off as a physical commodities exchange trading energy products such as oil, and later expanded into the derivatives, options and futures businesses through a series of acquisitions.

It has been reported as looking at a rival bid with Nasdaq OMX (NDAQ.O) for NYSE Euronext (NYX.N), in an attempt to break up the Big Board's deal with Deutsche Boerse (DB1Gn.DE).

CHINA EYED

The HKEx, with its $23 billion market capitalization and $5 billion in cash, is also looking to neighboring Shanghai and Shenzhen for closer co-operation, where some of China's top companies such as the world's most valuable lender ICBC (1398.HK)(601398.SS) have a dual listing.

However, current restrictions on China's yuan currency, its closed capital account and hefty valuations on Shenzhen's Nasdaq-style technology board makes any such tie-up difficult, Arculli said.

"I think the situation is a bit more complex than that, neither Shanghai or Shenzhen are listed," he said.

"Clearly we would keep our ears and eyes open, we would look at developments that are going on in other markets - we do not rule out doing joint ventures or strategic alliances, but we don't see that equity is necessary a component of any possible co-operation," he said.

Seemingly unruffled by the merger mania hitting the exchanges space, he confidently argued his bourse's greatest weakness right now is being so successful.

Riding on China's coattails, HKEx has been the world's biggest IPO market for the past two years.

Buoyed by that growth, HKEx shares have risen about 60 percent from their May 2010 low, giving it the top ranking among exchanges by market value.

"I think in some ways our strength may be our weakness - in the sense that people think of Hong Kong Exchange as a must go-to place in Asia," Arculli said.

"I get a little worried because you want them to come for all the right reasons and not just because we're flavor of the month."

Arculli doesn't seem to be fazed by much. Before the interview, he accidentally knocked over a freshly poured cup of coffee near his lap.

In less than a minute, he was leaning back in the chair again, mess cleaned up, not an drop of coffee showing on his tailored suit, white shirt, or yellow tie.

He also brushed aside talk of competition from alternative trading platforms such as dark pools, which match stock orders by institutions that are not visible to regular retail investors.

"Their business model doesn't seem to propel them to great financial success," he said. "While they have been able to gain a modest market share, their impact in Asia hasn't been as significant as the impact in North America and in Europe."

For his part, Ned Phillips, the chief executive of CHi-East, the "dark pool" joint venture between Singapore Exchange and Nomura's (9716.T) Chi-X, said the consolidation in the exchanges sector was positive.

"I think it's good because exchanges are looking at platforms like us and saying we have to be more like those guys - exchanges know they have to be leaner and realize that the trading community wants to have more efficiency at a lower cost," Phillips told the summit in Hong Kong.

Chi-East completed the roll-out of its trading platform for securities listed in Hong Kong, Japan and Singapore in January. (Additional reporting by Alison Leung, Charlie Zhu, Michael Flaherty, Elzio Barreto and Rachel Armstrong in HONG KONG and Raju Gopalakrishnan in SINGAPORE; Writing by Lincoln Feast; Editing by Neil Fullick)

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CME to slash rate traders' costs to fight NYSE (Reuters)

WASHINGTON/NEW YORK (Reuters) – CME Group Inc (CME.O) unveiled a plan that would slash costs for interest-rate traders to shore up its key Treasury futures franchise ahead of an imminent challenge from NYSE Euronext (NYX.N).

The move on Monday comes the same day the U.S. Securities Exchange Commission is expected to rule on an application by NYSE's partner in its co-owned clearinghouse to offer similar margin reductions. The plan also highlights increasing competition in the rapidly consolidating global exchange industry.

NYSE earlier this month agreed to a takeover by Germany's Deutsche Boerse (DB1Gn.DE), a combination that would dominate European futures trading and squarely take on CME on the world stage. CME, whose Chicago Board of Trade unit has dominated interest-rate futures since its inception, wants to keep the New York exchange operator from making inroads in that business.

"It would seem that CME has added another feature to its market that will make it even more difficult for a competing fixed-income derivatives clearing house to crack into CME's safe," BMO Capital Markets analyst Michael Vinciquerra told investors in a note Monday. "It's likely that the new program will be very attractive to a meaningful portion of CME's customer base."

Shares of CME closed down 0.7 percent at $311.28, while NYSE closed unchanged at $37.

CME will create a new clearing membership class that will offer margin discounts to traders of both Treasury securities and Treasury futures. The new membership category -- called Financial Instruments Clearing Membership -- will provide margin benefits of up to 65 percent between interest rate futures and Treasury securities.

The company, whose clearinghouse holds rate futures with a notional value of $30 trillion, plans to introduce the service by the end of the current quarter.

CME has been working on the margining plan for about two years, managing director Derek Sammann told Reuters.

"It's a significant margin-saving opportunity," Sammann said, though he added he could not provide an estimate for the dollar value of the savings.

Sammann said that by lowering the cost of the so-called basis trade -- buying or selling Treasury futures against Treasury securities -- the plan also could boost overall volume at the CME. He could not say how many traders would be able to take advantage of the new margining system, saying only the number is "bigger than a breadbasket."

CME named four trading firms -- Breakwater Trading, Endeavor Trading, Henning-Carey Proprietary Trading and HTG Capital Partners -- that have tested the offering and are working toward becoming FICM members. CME is also speaking to a number of brokers that may participate, Sammann said.

Meanwhile, the New York Stock Exchange parent expects in March to launch NYSE Liffe U.S., a rate futures market, at the same time as its partly owned New York Portfolio Clearing clearinghouse for the products.

NYPC won approval from the Commodity Futures Trading Commission last month. On Monday, the SEC is expected to rule on a cross-margining plan from NYPC's other owner, the Depository Trust & Clearing Corp, that would offer similar margin discounts.

SAME, BUT DIFFERENT

CME and NYPC will use different mechanisms to offer traders cost savings.

At NYPC, margins put up for Treasury futures and for Treasury securities will go in a single pot, allowing the clearinghouse to give traders margin reductions when positions offset each other.

Proprietary traders at CME will get similar discounts as long as they trade their Treasury cash and futures contracts at a single broker. The broker will provide CME information on the trader's cash positions, and CME will reduce the margins it takes on the futures accordingly.

As part of the new service, CME will contribute an extra $100 million to its guarantee fund, to which proprietary traders will also have to provide money.

CME's version of cross-margining will primarily benefit traders, who may use the freed up cash to do more trading, BMO's Vinciquerra said. NYPC's version will benefit dealers, he said.

An NYPC spokesman declined to comment on CME's cross-margining plan.

(Editing by Maureen Bavdek, Lisa Von Ahn and Steve Orlofsky)

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U.S. hedge fund manager gets deferred prosecution deal (Reuters)

SAN FRANCISCO (Reuters) – A Northern California hedge fund manager faces one count of wire fraud for improperly diverting more than $12 million, but that charge will be dismissed after three years provided he fulfills an agreement with U.S. prosecutors, according to a court filing.

Lawrence Goldfarb, of Baystar Capital Management in Larkspur, California, also settled civil charges for transferring the money to other entities he controlled, securities regulators announced on Tuesday.

Attorneys for Goldfarb did not respond to repeated requests for comment.

Goldfarb allegedly redirected some money from the Baystar Capital II fund, which was worth more than $100 million at its peak, the U.S. Securities and Exchange Commission said in a court filing on Tuesday.

The diverted funds came from a "side pocket" investment, which is commonly used by hedge funds to separate illiquid assets from the rest of the fund's investments, the SEC filing said.

Instead of returning money to fund investors, Goldfarb diverted it to several entities he controlled, including a separate real estate fund, a San Francisco record company and various other private companies.

Along with Goldfarb, the company Baystar Capital Management also faces a wire fraud count. But a deferred prosecution with the U.S. Attorney's Office in San Francisco provides for the criminal charge to be dismissed after three years -- provided Goldfarb makes full restitution and cooperates with the government.

A spokesman for the U.S. attorney's office in San Francisco declined to comment.

Goldfarb agreed to pay more than $14 million to settle the SEC case, including nearly $2 million in prejudgment interest and a $130,000 penalty.

He will also be barred from associating with any investment adviser or broker for three years, according to the deferred prosecution agreement.

In addition to managing Baystar, Goldfarb also ran LRG Capital Group, which promotes itself as a global investment, banking and advisory boutique, the SEC said in its filing.

According to LRG's website, Goldfarb once worked at Credit Suisse (CRP.N) as a partner and director of mergers and acquisitions. Before that, he was an attorney at law firms including Skadden, Arps, Slate, Meagher & Flom, the website says.

A Credit Suisse representative had no comment, and Skadden spokesman Brendan Intindola said Goldfarb worked as an associate at the firm over 20 years ago.

(Reporting by Dan Levine; Editing by Maureen Bavdek, Matthew Lewis and Richard Chang)

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SEC charges ex-Goldman director in insider case (Reuters)

NEW YORK (Reuters) – A former Goldman Sachs Group Inc director leaked secret details to Galleon Group hedge fund manager Raj Rajaratnam about Warren Buffett's plan to invest $5 billion in the Wall Street bank at the height of the financial crisis, a U.S. securities regulator charged.

The U.S. Securities and Exchange Commission said the director, Rajat Gupta, tipped Rajaratnam by phone just minutes before the public learned of the investment by Buffett's Berkshire Hathaway Inc, which helped ensure Goldman's stability.

Gupta, a former worldwide managing director at consulting firm McKinsey & Co, was also accused of tipping Rajaratnam about quarterly earnings at Goldman and Procter & Gamble Co, where he was a director before resigning on Tuesday.

The 62-year-old Gupta is one of the highest-ranking corporate executives implicated in the government's wide-ranging insider trading probe, which has resulted in criminal or civil charges against dozens of individuals.

Tuesday's charges mark the first time that activity said to have occurred at Goldman was directly implicated in the probe.

The SEC said Rajaratnam, who faces a March 8 criminal insider trading trial, used the tips to trade at his firm, Galleon Group, reaping more than $18 million of illegal gains. It said Gupta invested in at least some Galleon hedge funds.

"Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets," SEC enforcement chief Robert Khuzami said in a statement. "Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions."

The SEC began administrative and cease-and-desist proceedings against Gupta. It described Gupta as a "friend and business associate" of Rajaratnam.

"Based on the allegations in the order instituting the administrative proceedings, it appears the SEC has a powerful, circumstantial case against Gupta," said Kathleen Hamm, managing director at Promontory Financial Group in Washington and a former SEC enforcement official.

"TOTALLY BASELESS" CHARGES, LAWYER SAYS

Gary Naftalis, a lawyer for Gupta, called the SEC allegations "totally baseless," and said his client had lost his entire $10 million investment in a Galleon fund that Rajaratnam managed, known as GB Voyager.

"Mr. Gupta has done nothing wrong," Naftalis said in a statement. "There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo."

Gupta sat on Goldman's board from November 2006 until last May and served on its corporate governance committee.

The Westport, Connecticut, resident had served on Procter & Gamble's board since 2007 before resigning on Tuesday.

"He's stepping down in the interest of the company, to prevent any distraction to the P&G board or our business," company spokesman Paul Fox said.

Rajaratnam also faces SEC civil charges. He has denied wrongdoing.

"This is simply an effort to destroy a favorable witness," John Dowd, a lawyer for Rajaratnam, said in a statement about the Gupta charges. "There is no case, absolutely none. No conversations, no benefit, no nothing. These are old friends and Mr. Gupta is a distinguished human being."

Goldman spokesman Ed Canaday declined to comment. Berkshire did not return a request for comment.

"It is striking the SEC refers to phone calls immediately before the trades," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick PC in Washington and a former SEC enforcement lawyer. "This suggests there was a witness, or that the SEC has more circumstantial evidence."

Gupta is one of a web of associates in Corporate America that investigators have said Rajaratnam used to learn advance tips about potentially market-moving news.

A Harvard Business School graduate, Gupta was previously worldwide managing director at McKinsey, where he worked for more than three decades.

The Gupta case "does not help in instilling confidence in Main Street investors that they're getting a fair shake at these multinational companies," said Michael Nix, co-chief investment officer at Greenwood Capital Associates LLC.

In trading on the New York Stock Exchange on Tuesday, Goldman fell $2.47, or 1.5 percent, to close at $161.31, while Procter & Gamble fell 31 cents, or 0.5 percent, to $62.74.

MULTIPLE TIPS ALLEGED

Prosecutors have said a Morgan Stanley banker also leaked inside information that found its way to Rajaratnam.

Former McKinsey consultant Anil Kumar pleaded guilty in January 2010 to leaking inside information about a possible merger to Rajaratnam, in return for $1.75 million.

White-collar defense lawyers said civil administrative proceedings may afford the SEC a more friendly forum in which to pursue its case. They also allow the regulator to avoid having to amend its own lawsuit against Rajaratnam.

"It's faster, the evidence rules are more liberal, and the SEC can wield a bigger hammer in penalties, which can include barring someone from the securities industry." Weissman said.

The SEC alleged Gupta tipped Rajaratnam about Goldman's results for the second and fourth quarters of 2008, resulting in more than $16.6 million of illicit gains.

It said he also tipped Rajaratnam about Procter & Gamble's results for the final quarter of 2008, resulting in more than $570,000 of profit.

The SEC said Gupta had at least two phone calls with Rajaratnam shortly before Goldman announced Berkshire's investment on September 23, 2008.

It said one call came just before the market closed that day, immediately after Gupta had disconnected from a phone link to the board meeting where Goldman approved the investment. Goldman announced the Berkshire stake after markets closed.

Rajaratnam's trades in Goldman based on these tips resulted in more than $900,000 of profit, the SEC said.

(Reporting by Jonathan Stempel in New York; additional reporting by Matthew Goldstein, Grant McCool and Phil Wahba in New York; Joe Rauch in Charlotte, North Carolina and Jessica Wohl in Chicago; editing by Dave Zimmerman and John Wallace)

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Global stocks tumble as oil rises on Mideast worries (Reuters)

HONG KONG (Reuters) – Oil rose toward a 2-1/2 year high and stocks fell on Wednesday as investors shunned risky assets on concern that escalating tension in Libya would spread in the Middle East and disrupt fuel supplies.

Brent crude's dizzying 15 percent jump in less than two weeks has fanned worry about a stifling impact on the economic recovery, sending investors into relative safe assets such as gold and government bonds in volatile trading.

Though Asian stocks have gyrated to the swings in oil, markets have been largely resilient this time around compared with January's sell-off when investors dumped shares because of worry about inflation.

While oil's jump has put monetary policy behind the curve in some countries, many Asian central banks have already tightened considerably since the recovery began and therefore policy is not excessively loose in the region, IHS Global Insight said.

Shares in most Asian markets fell after Wall Street's slide overnight and as the CBOE Volatility Index VIX (.VIX), the so-called fear gauge, jumped sharply.

Tokyo (.N225) lead the losers with stocks falling more than 2 percent on futures-led selling. Seoul (.KS11) and Taiwan (.TW11) were down nearly a percent each.

Yahoo Japan (4689.T) was the notable outperformer with shares surging by 4.5 percent after a Reuters report that Yahoo Inc (YHOO.O) was in advanced talks to wind down its joint venture in Japan with Softbank Corp (9984.T).

"The market is volatile as oil's persisting gains and civil unrest in the Middle East is negatively affecting investor sentiment," said Lee Sun-yeb, a market analyst at Shinhan Investment Corp.

"But as long as we do not see the turmoil spreading to other countries within the region, current volatility will be contained and will eventually recover," Lee added.

The broader MSCI index of Asia-ex Japan stocks (.MIAPJ0000PUS) was down more than a percent. It fell two percent in February.

In the credit space, Asian sovereign spreads weakened with the Philippines widening the most by 4 bps to 140/143 bps.

Markets will keenly watch developments in the Middle East, especially Saudi Arabia, where stock markets tanked by nearly 7 percent on Tuesday and CDS spreads jumped.

GOLD, BONDS GAIN

U.S. Treasuries, a safe-haven asset, held near one-month lows with 10-year yields stabilizing at 3.40 percent, well below a peak of 3.74 percent hit last month..

Japanese government bonds too rose, with futures snapping a three-day losing streak.

Gold held just below a record high of $1,434 an ounce while spot silver hit a 31-year high.

In the currency markets, the euro dipped slightly after failing to break through a key resistance level, though further declines for the common currency may be limited a day before a European Central Bank (ECB) meeting.

Given euro zone inflation holding well above the ECB's target, markets expect the central bank to ramp up its anti-inflation talk with U.S. Federal Reserve Chairman Ben Bernanke's comments reinforcing market speculation that the ECB would raise rates before the Fed.

In Asian FX, the won is among the leading underperformers with the stock market working through a major support level.

The New Zealand dollar fell sharply after Prime Minister John Key said he expected the Reserve Bank of New Zealand (RBNZ) would cut interest rates next week after the devastating earthquake in Christchurch.

The Aussie/kiwi was last at NZ$1.3616 after hitting a high of NZ$1.3667, levels not seen since August 1992.

(Additional reporting by Jungyoun Park in SEOUL, Mantik Kusjanto in WELLINGTON, Krishna Kumar in SYDNEY, Jonathan Rogers at IFR; Editing by Robert Birsel)

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Oil price fuels Wall Street selling (Reuters)

NEW YORK (Reuters) – Concerns that rising oil prices could hurt economic recovery prompted investors on Tuesday to sell stocks and hedge against further declines.

The CBOE Volatility Index VIX (.VIX), Wall Street's so-called fear gauge, jumped 14.5 percent to 21.01 on growing uncertainty about oil. The index measures the cost of using options as insurance against a decline in the S&P 500 (.SPX) index.

"We've been seeing how quickly the VIX can spike up, and there is no reason to believe that it won't double from where it is now," said Harry Rady, CEO of Rady Asset Management in San Diego, California.

Brent crude rose above $116 a barrel as supply disruptions persist and political violence spreads in the Middle East and North Africa. Higher oil translates into increased energy and gasoline costs for consumers.

U.S. crude and gasoline futures extended gains in extended-hours trading after data showed domestic crude inventories unexpectedly fell. U.S. stock index futures fell slightly, with S&P futures off 3.3 points.

Federal Reserve Chairman Ben Bernanke said the recent surge in oil was unlikely to derail the economy, but his comments did little to reassure investors worried that turmoil in the Middle East could hit Saudi Arabia, the world's largest oil exporter. The Dow Jones Transports index (.DJT) fell 2.5 percent.

Stocks have taken their cue from oil since the start of turmoil in the Middle East and North Africa in January. The S&P had its weakest performance since November last week but still tallied three months of gains.

The Dow Jones industrial average (.DJI) fell 169.38 points, or 1.39 percent, at 12,056.96. The Standard & Poor's 500 Index dropped 21.04 points, or 1.59 percent, to 1,306.18. The Nasdaq Composite Index (.IXIC) lost 44.86 points, or 1.61 percent, to 2,737.41.

About 8.67 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, higher than last year's daily average of 8.47 billion. Volume has recently been solid on days when the market falls, but often comes under 7 billion on up days.

Investors took a cautious stance as cyclical sectors experienced the biggest losses, while defensive sectors such as utilities, healthcare and consumer staples limited losses.

Wal-Mart Stores Inc (WMT.N) and Coca-Cola Co (KO.N) helped the Dow to limit losses. Wal-Mart rose 0.2 percent to $52.06, while Coca-Cola was up 1.5 percent to $64.91.

Gasoline and heating oil futures each gained about 3.5 percent to $3. The S&P's materials (.GSPM) index dropped 2.3 percent while the industrials (.GSPI) dropped 2.2 percent. According to AAA, the national average price of regular unleaded gasoline is currently at $3.35 per gallon.

"The real story is gasoline," said Nick Kalivas an analyst, at MF Global in Chicago. "The market is getting worried that you could see $4 gasoline in the U.S."

Financial stocks came under pressure after JPMorgan Chase & Co (JPM.N) said it could face "material" fines and "significant" legal costs from a wide-ranging probe into the industry's foreclosure practices.

JP Morgan fell 2.3 percent to $45.60 while the KBW bank index (.BKX) fell 2.3 percent.

Declining stocks outpaced advancing stocks on the NYSE by a ratio of about 3 to 1, while on the Nasdaq, decliners beat advancers by a ratio of 10 to 3.

(Reporting by Angela Moon, Editing by Kenneth Barry)

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Gaddafi defiant as West flexes military muscle (Reuters)

TRIPOLI (Reuters) – U.S. warships will pass through the Suez Canal on Wednesday on their way to Libya as Western nations put more pressure on Muammar Gaddafi to stop a violent crackdown and step aside.

The United States said Libya could sink into civil war unless Gaddafi quits amid fears that the uprising, the bloodiest against long-serving rulers in the Middle East, could cause a humanitarian crisis.

Gaddafi remained defiant and his son, Saif al-Islam, warned the West against launching military action. He said the veteran ruler would not step down or go into exile.

Italy said it was sending a humanitarian mission to neighboring Tunisia to provide food and medical aid to as many as 10,000 people who had fled violence in Libya on its eastern border.

Tunisian border guards fired into the air on Tuesday to try to control a crowd of people clamoring to cross the frontier.

About 70,000 people have passed through the Ras Jdir border post in the past two weeks, and many more of the hundreds of thousands of foreign workers in Libya are expected to follow.

"Using force against Libya is not acceptable. There's no reason, but if they want ... we are ready, we are not afraid," Saif al-Islam told Sky television.

Secretary of State Hillary Clinton told U.S. lawmakers: "Libya could become a peaceful democracy or it could face protracted civil war." The United States said it was moving ships and planes closer to the oil-producing North African state.

The destroyer USS Barry moved through the Suez Canal on Monday and into the Mediterranean. Two amphibious assault ships, the USS Kearsarge, which can carry 2,000 Marines, and the USS Ponce, were in the Red Sea and are expected to go through the canal early on Wednesday.

U.S. RULES NOTHING OUT

The White House said the ships were being redeployed in preparation for possible humanitarian efforts but stressed it "was not taking any options off the table."

"We are looking at a lot of options and contingencies. No decisions have been made on any other actions," Defense Secretary Robert Gates said.

French Foreign Minister Alain Juppe sounded a note of caution, saying military intervention would not happen without a clear United Nations mandate.

British Prime Minister David Cameron, who said Britain would work with allies on preparations for a no-fly zone in Libya, said it was unacceptable that "Colonel Gaddafi can be murdering his own people using airplanes and helicopter gunships."

General James Mattis, commander of U.S. Central Command, told a Senate hearing that imposing a no-fly zone would be a "challenging" operation. "You would have to remove air defense capability in order to establish a no-fly zone, so no illusions here," he said. "It would be a military operation."

Analysts said Western leaders were in no mood to rush into the conflict after drawn-out involvements in Afghanistan and Iraq.

Gaddafi, a survivor of past coup attempts, told the U.S. ABC network and the BBC on Monday: "All my people love me," dismissing the significance of a rebellion that has ended his control over much of oil-rich eastern Libya.

REBELS SAY STRENGTH GROWING

Rebel fighters said the balance of the conflict was swinging their way. "Our strength is growing and we are getting more weapons. We are attacking checkpoints," said Yousef Shagan, a spokesman in Zawiyah, 50 km (30 miles) from Tripoli.

A rebel army officer in the eastern city of Ajdabiyah said rebel units were becoming more organized.

"All the military councils of Free Libya are meeting to form a unified military council to plan an attack on Gaddafi security units, militias and mercenaries," Captain Faris Zwei said. He said there were more than 10,000 volunteers in the city, plus defecting soldiers.

The New York Times reported that the rebels' revolutionary council was debating whether to ask for Western air strikes on some of Gaddafi's military assets under a United Nations banner.

The Times said Abdel-Hafidh Ghoga, the council's spokesman, declined to comment on its deliberations but said: "If it is with the United Nations, it is not a foreign intervention," which the rebels have said they oppose.

The Times said there was no indication the U.N. Security Council would approve such a request, or that Libyans seeking to oust Gaddafi would welcome it.

Despite the widespread collapse of Gaddafi's writ, his forces were fighting back in some regions. A reporter on the Tunisian border saw Libyan troops reassert control at a crossing abandoned on Monday, and residents of Nalut, about 60 km (35 miles) from the border, said they feared pro-Gaddafi forces were planning to recapture the town.

Mohamed, a resident of rebel-held Misrata, told Reuters by phone: "Symbols of Gaddafi's regime have been swept away from the city. Only a (pro-Gaddafi) battalion remains at the city's air base but they appear to be willing to negotiate safe exit out of the air base. We are not sure if this is genuine or just a trick to attack the city again."

Across the country, tribal leaders, officials, military officers and army units have defected to the rebels.

Tripoli is a clear Gaddafi stronghold, but even in the capital, loyalties are divided. Many on the streets on Tuesday expressed loyalty, but a man who described himself as a military pilot said: "One hundred percent of Libyans don't like him."

The U.N. General Assembly on Tuesday unanimously suspended Libya's membership of the U.N. Human Rights Council. A U.N. Security Council resolution on Saturday called for a freeze on Gaddafi's assets and a travel ban and refers his crackdown to the International Criminal Court.

The United States has frozen $30 billion in Libyan assets.

Libya's National Oil Corp said output had halved because of the departure of foreign workers. Brent crude prices surged above $116 a barrel as supply disruptions and the potential for more unrest in the Middle East and North Africa kept investors on edge.

Britain's Daily Telegraph newspaper, citing unnamed U.S. sources, said British special forces were preparing to seize mustard gas and other potential chemical weapons in Libya.

It quoted unnamed British sources as saying they had not yet received a specific U.S. request for involvement, but officials said plans were being drawn up for "every eventuality."

(Additional reporting by Yvonne Bell and Chris Helgren in Tripoli, Dina Zayed and Caroline Drees in Cairo, Tom Pfeiffer, Alexander Dziadosz and Mohammed Abbas in Benghazi, Yannis Behrakis and Douglas Hamilton; Christian Lowe and Hamid Ould Ahmed in Algiers, Souhail Karam and Marie-Louise Gumuchian in Rabat and Samia Nakhoul, William Maclean and Alex Lawler in London; writing by Janet Lawrence; editing by Philip Barbara)

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"Day of Rage" shakes Yemen, Saleh sacks governors (Reuters)

By Mohammed Ghobari and Mohammed Mukhashaf Mohammed Ghobari And Mohammed Mukhashaf – Tue Mar 1, 3:59 pm ET

SANAA/ADEN (Reuters) – Tens of thousands of protesters flooded Yemen's streets on Tuesday in a "Day of Rage," demanding an end to the president's three-decade rule.

In the capital Sanaa, demonstrators chanted "With blood and soul we support you, Aden," referring to the southern port city where most of the 24 people killed in the past two weeks of protests have died.

Some demonstrators flashed "V" for victory signs while others wore white headbands with "Leave" written in red -- a message addressed to President Ali Abdullah Saleh.

Tens of thousands more marched through the streets of Ibb and Taiz, south of Sanaa.

Already rocked by separatism and an al Qaeda insurgency, Yemen is one of the Arab nations most shaken by popular protests sweeping across North Africa and the Middle East.

Saleh, a U.S. ally against al Qaeda, has failed to quell two months of protests in a country of 23 million where 40 percent live on less than $2 a day and a third are undernourished.

On Monday he offered to form a unity government but the opposition rejected it. On Tuesday, Saleh replaced the governors of five mostly southern provinces at the center of the protests.

"Victory is coming and it is near," Hassan Zaid, an opposition leader, shouted to the protesters gathered in Sanaa, where they have been camping out for two weeks. "We have one goal and one demand, and that is the quick end of the regime."

Protesters are angry at widespread corruption, as university graduates struggle to get jobs without connections, and youth unemployment is high. Northern rebels and southern separatists say they are denied resources and a say in politics.

As oil and water resources dry up, the 68-year-old Saleh is less able to pay off allies to keep the peace.

CLASHES IN NORTH

In Hodeidah province in the north, Saleh loyalists and protesters fought with rocks and sticks. Four people were hurt.

Security forces in the south have come under frequent attack in recent days. On Tuesday, separatists fought the army in southern Habilayn, killing two soldiers and wounding three.

The U.S.-based group Human Rights Watch said at least eight people detained by Yemen security forces last month, including several southern separatists, had disappeared.

"Snatching and hiding political opposition leaders ... is hardly compatible with the government's claim to protect rights," said Sarah Leah Whitson, HRW's Middle East director.

U.N. High Commissioner for Human Rights Navi Pillay said in a statement: "We have seen over and over again in the past few weeks that violent responses, in breach of international law, do not make the protesters go away and only serve to exacerbate their frustration and anger."

CLERIC SWITCHES SIDES

A leading hardline Muslim cleric, Sheikh Abdul-Majid al-Zindani, who two weeks ago backed the idea of Saleh staying in power until his term ends in 2013, joined protesters in the capital.

"There is no legitimacy to a ruler whose people do not want him," Zindani said in Sanaa.

Veteran leader Saleh lashed out at President Barack Obama over demands that leaders show restraint in tackling unrest as protests, galvanized by successful uprisings in Egypt and Tunisia, rage across Libya, Yemen, Bahrain and Oman.

"Every day we hear a statement from Obama saying 'Egypt you can't do this, Tunisia don't do that'," Saleh said in a speech at Sanaa University, a rallying point for protests in the capital where tens of thousands have gathered outside campus.

"What do you have to do with Egypt? Or Oman? Are you the president of the United States, or president of the world?"

(Additional reporting by Mohamed Sudam in Sanaa and Stephanie Nebehay in Geneva; Writing by Erika Solomon; editing by Mark Trevelyan)

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Ivorian pro-Gbagbo groups rampage against foreigners (Reuters)

ABIDJAN (Reuters) – Youth supporters of Ivory Coast's incumbent Laurent Gbagbo rampaged through the business district of Abidjan on Tuesday, pillaging shops owned by foreigners.

The violence followed a call on Friday by Ble Goude, the head of Gbagbo's youth wing, to resist an insurgency seeking to depose Gbabgo and install rival Alassane Ouattara, winner of a November 28 poll according to U.N.-certified results.

Security in the world's top cocoa grower is deteriorating, with gunbattles erupting for most of last week and hostilities resuming across a north-south ceasefire line that had been largely quiet since a 2002-3 war ended in stalemate.

Gbagbo's Young Patriots have long been notorious for xenophobic violence, including attacks against the country's French community in 2004, on its large Burkinabe and Malian communities and on northern Ivorians with cultural ties to them.

United Nations staff have also been attacked and robbed by pro-Gbagbo gangs this week after repeated broadcasts on state television accusing them of backing pro-Ouattara rebels. Gbagbo is furious with the mission for recognizing Ouattara's win.

U.N. investigators are trying to confirm whether Gbagbo breached an arms embargo by importing helicopters from Belarus. They had to abandon their search in the capital Yamoussoukro after his forces fired at them on the weekend.

A source at U.N. headquarters said information on the helicopter deal came from the intelligence services of one of the five permanent Security Council member states.

He said two helicopter gunships the U.N. mission urgently needed had arrived, which he called a "game changer" that would make it harder for Gbagbo's forces to attack U.N. patrols.

ANTI-FOREIGNER SENTIMENT

November's election was meant to heal divisions sown by a 2002-3 civil war that left the country divided into a rebel-run north and government-run south, but the dispute has worsened divisions and killed well over 300 people since November.

The U.N. says the number of Ivorian refugees in Liberia had reached 68,000, with another 40,000 internally displaced.

Anti-foreigner sentiment is at the core of the troubles that have dogged Ivory Coast for years and has worsened as most nations recognize Ouattara's win. Ouattara was twice barred from running in past polls because his father is from Burkina Faso.

"I don't understand what happened. The youths arrived ... and starting destroying the things in my shop. They looted everything and now I have nothing left," Senegalese shopkeeper Ismael Bah told a Reuters reporter.

"What did I do? I'm not involved in politics," he added.

Mobile phone retailer Mamadou Barro, also from Senegal, fell victim to a similar attack. "Everything I owned was invested in this business. Now it's gone," he said.

Insurgents believed to back Ouattara now control most of the northern Abidjan suburb of Abobo after the clashes, and a huge number of refugees have streamed out of it.

"The situation is now calm, with everything under control of the invisible commandos," said Abobo resident Vasseriki Sumaro, a teacher. "All the security forces have left."

Elsewhere in Abidjan, Young Patriots armed with guns, clubs and machetes have set up roadblocks and in some cases killed suspected rebels, local press and residents say.

In the rebel-held northern half of the country, residents complained that Gbagbo's forces, which seized the electricity and water distribution company last month, had cut both off since Monday morning.

"We consider this a grave violation of human rights." said the rebels' civilian spokesman Felicien Sekongo.

There was no immediate comment from Gbagbo's camp.

Separately, thousands of civil servants were anxiously waiting on Tuesday to see if they will be paid for the month of February, after an exodus of international banks.

"They promised us Friday, but I'm really afraid the money is going to run out," health ministry official Mathias Gosse said.

Gbagbo's government nationalized two French banks, saying they would reopen them soon, but analysts doubt it will work, as West Africa's central bank has cut ties with him.

Nine newspapers that either support Ouattara or are independent shut this week in protest at threats and harassment by Gbagbo's camp, press freedom watchdogs said.

(Additional reporting by Louis Charbonneau at the United Nations, Loucoumane Coulibaly in Abidjan and Charles Bamba in Bouake; writing by Tim Cocks; editing by Andrew Roche)

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UK parliamentary committee urges U.S.-Taliban talks (Reuters)

LONDON (Reuters) – The United States must hold direct talks with the Taliban if it is to have any hope of ending the Afghan war, an influential British parliamentary committee said on Wednesday.

The Foreign Affairs Committee said the military campaign was not working and urged the British government to use its influence in Washington to convince it to engage fully in direct talks with Taliban leaders.

"An Afghan-led, but U.S. driven, process of political reconciliation is the best remaining hope that the UK and others have of achieving an honorable exit from Afghanistan," the report, based on interviews with experts and officials, said.

Britain and the United States have long stressed the need for a political settlement in Afghanistan. But officials have also said any talks must be Afghan-led, and insisted military pressure is helping bring insurgents to the negotiating table.

The report, however, argued the Afghan government led by President Hamid Karzai did not have the clout to negotiate a settlement without the direct involvement of Washington.

"All of those from whom we took evidence were convinced that the U.S.'s direct endorsement of, and participation in, talks was essential if a peace settlement is to be brokered..."

It said that while the military campaign might be achieving tactical successes, the overall security situation remained precarious. Current tactics might even reduce chances of a settlement by raising mistrust and radicalizing the insurgency.

"Given that the pre-requisites for a successful military campaign are currently lacking, we conclude that the U.S. should not delay its significant involvement in talks with the Taliban leadership..." it said.

The report -- which echoed comments made by Pakistan and some regional analysts that the Taliban could be convinced to break with al Qaeda in a political settlement -- was researched last year and may have been overtaken by events.

KARZAI IN LONDON TALKS

U.S. Secretary of State Hillary Clinton said in a speech last month that Washington was "launching a diplomatic surge to move this conflict toward a political outcome that shatters the alliance between the Taliban and al-Qaeda ..."

"Now, I know that reconciling with an adversary that can be as brutal as the Taliban sounds distasteful, even unimaginable. And diplomacy would be easy if we only had to talk to our friends. But that is not how one makes peace," she said.

British Foreign Secretary William Hague said on Wednesday the situation in Afghanistan had in some cases moved on from the evidence given to the parliamentary committee.

"I fully support the committee's assessment that now is the right time to advance a political process in Afghanistan," he said in a statement.

Official sources from several countries say talks are already underway with the Taliban, although these have yet to find shape in any kind of formal peace process.

The Taliban says publicly it will not negotiate until foreign forces leave, although many Afghan experts -- including those cited in the report -- say the original leadership of the movement which ruled Afghanistan from 1996 to 2001 are privately pragmatic about the need for talks.

The release of the report coincided with a fresh flurry of diplomatic contacts over Afghanistan.

Karzai met newly appointed U.S. special envoy for Afghanistan and Pakistan Marc Grossman, officials said, during a visit to London on Tuesday in which he also held talks with British Prime Minister David Cameron.

Echoing comments made by Clinton, Cameron called for real progress this year on reconciliation with insurgents who were ready to abandon violence, cut ties to al Qaeda and accept the basic tenets of the Afghan constitution.

"It is time for the Taliban to start this journey and to make this year a decisive year for peace in Afghanistan," he told a news conference held jointly with Karzai.

The Organization of the Islamic Conference (OIC) is hosting a meeting in Saudi Arabia this week on Afghanistan which is expected to bring together representatives of more than 40 countries along with leaders of an Afghan peace council. Clinton said it would review efforts toward reconciliation.

(Additional reporting by Adrian Croft, Editing by Janet Lawrence)

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U.S. forces to target Taliban returning to Kandahar (Reuters)

WASHINGTON (Reuters) – Beefed up U.S. security in southern Afghanistan will make it difficult for the Taliban to reintroduce forces into their Kandahar stronghold when the spring fighting season begins, a top general said on Tuesday.

General James Mattis, head of U.S. Central Command that oversees American forces in Afghanistan, also said the war against Taliban militants was no longer a "strategic stalemate" and "the enemy is now in a worsening situation."

Mattis, testifying before the Senate Armed Services Committee, said General David Petraeus, the head of U.S.-led forces in Afghanistan, had deployed a U.S. Army surveillance brigade to monitor the area between Kandahar and the Pakistani border to guard against infiltration.

"In other words, it's not just a thoroughfare," he said. "The enemy's going to have a very difficult time come spring when they try to reintroduce their troops back into the area -- Helmand, Kandahar -- where they've lost the initiative."

The Kandahar area is the Taliban's birthplace and is considered its home turf. International forces moved to take control of the area last year once additional U.S. troops authorized by President Barack Obama arrived in the country.

U.S. lawmakers expressed frustration over Pakistan's failure to shut down safe havens in its territory used by the Afghan Taliban and al Qaeda. Mattis acknowledged the situation is "not perfect" but defended the actions Pakistan has taken.

"It's not that the Pakistanis have done nothing here," he said. "They've lost thousands of troops. They've had almost 30,000 of their civilians murdered by these enemies."

'RECONCILIATION, REINTEGRATION'

Mattis and Admiral Eric Olson, head of the U.S. Special Forces Command, both indicated the war needed to be solved via political reconciliation rather than on the battlefield.

"First point, make certain the enemy doesn't think they're going to win. That's what we've had to reverse in the last year," Mattis said. "Then the diplomats have more of a chance to get these other efforts -- reconciliation, reintegration -- going."

With the U.S. Congress in a budget-cutting mood as it works on a resolution to fund the government for the rest of the fiscal year, both military leaders warned that cuts to their funding would have an impact on the war effort.

"Absolutely it will," Mattis said. "We've just in the last year and a half gotten the resources, personnel, training ... correct. And we are right now approaching the time when we're going to see the results of all that. We're already seeing the results but they're going to be very telling shortly."

Olson said: "In Afghanistan, Special Operations forces are operating at the edge of their people and at the edge of their budget and a reduction in either would be detrimental to the effectiveness."

(Editing by John O'Callaghan and Cynthia Osterman)

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Canada freezes C$2.3 billion in Gaddafi assets (Reuters)

OTTAWA (Reuters) – Canada has frozen C$2.3 billion ($2.4 billion) worth of assets belonging to Libyan leader Muammar Gaddafi, a government official told Reuters on Tuesday.

The official did not give details.

Ottawa announced a clampdown on doing business with Libyan institutions on Sunday and later said it had blocked unspecified financial dealings the Libyan government had planned to carry out in Canada.

The United States, Austria and Britain have also frozen Gaddafi assets over the last few days.

($1=$0.97 Canadian)

(Reporting by David Ljunggren; editing by Rob Wilson)

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