Job gains ease recession fears but still weak (Reuters)

WASHINGTON (Reuters) – Employers hired more workers than expected in September and job gains for the prior two months were revised higher, easing recession fears.

But the unemployment rate remained stuck at 9.1 percent for a third straight month, keeping pressure on President Barack Obama and the U.S. Federal Reserve to do more to spur the recovery.

Nonfarm payrolls rose 103,000 in September, the Labor Department said on Friday, but that included the return of 45,000 striking communications workers. Excluding those workers, employment increased by a meager 58,000.

"It underscores the belief that the economy has skirted a recession, but that's not to say it's out of the danger zone because there are significant risks out there," said Millan Mulraine, senior macro strategist at TD Securities in New York.

Job growth is still falling short of the pace needed to pull down unemployment, though the report had a firmer tenor than economists had expected. Hourly earnings rebounded, the length of the average work week rose, and revisions showed 99,000 more jobs were added in July and August than initially reported.

The unemployment rate also managed to hold steady despite a surge of new workers into the labor force.

U.S. stocks snapped a three-day rally as a downgrade of Spain and Italy's credit ratings overshadowed the jobs report. Treasury debt prices fell for a fourth straight day, while the dollar rose marginally against a basket of currencies.

Economists had expected payrolls to increase 60,000 last month, with the jobless rate steady at 9.1 percent. Employment growth has decelerated sharply from the first quarter of the year, when payroll growth averaged more than 165,000 a month.

The weak labor market poses a critical challenge for Obama, who faces a tough battle to win reelection in November 2012.

Obama has proposed a package of measures to spur jobs growth, but the plan has run into stiff opposition from Republicans, raising the prospect Washington will be unable to take decisive action.

"It's anemic growth at best, and you don't see anything from this administration that's going to turn it around," Rick Santorum, a former senator and a former Republican presidential hopeful, said on CNBC.

White House officials conceded the jobs growth was not good enough.

"I would not say that we are satisfied in the slightest," National Economic Council Director Gene Sperling told Reuters Insider. "There still is a risk that this economy could stall out or even have a double-dip recession."

The U.S. economy needs to grow by at least a 2.5 percent annual rate, with payrolls expanding by around 125,000 positions a month, just to keep the jobless rate from rising.

RECESSION WATCH

Health care, construction, retail, and professional and business services all contributed to the rise in payrolls, while manufacturing was a drag for a second straight month.

The closely watched report was the latest sign to suggest the world's largest economy was likely to skirt a recession despite weakness over the summer, although prospects for the nation's 14 million unemployed remained grim.

Private employment increased 137,000 last month, an acceleration from August's mere 42,000. But government payrolls fell 34,000 as employment at the local government level fell 35,000 and the Postal Service shed 5,000 positions.

The drop in local government payrolls included a loss of 24,400 education jobs.

Recent reports on manufacturing, business spending and auto sales suggest the economy fared better in the third quarter after growing at an anemic 1.3 percent annual pace in the April-June period, although job growth did not pick up.

Analysts warn that the economy is still not out of the woods, with Europe's debt crisis posing a threat that could derail the U.S. recovery. Industrial output in Germany -- Europe's biggest economy -- fell in August.

PUSHING ON A STRING

The Federal Reserve last month announced new steps to breathe life into the recovery by pushing long-term borrowing costs lower, but economists do not expect the effort to bear much fruit at a time many Americans are unable to access credit.

U.S. consumer credit fell by the most in nearly 1-1/2 years in August, the Fed said in a separate report, confirming the retrenchment by households whose confidence was damaged by a wrenching political fight over the U.S. deficit and steep stock price drops.

Uncertainty over the economic outlook has made businesses reluctant to hire aggressively.

"One of the main problems in the economy is the lack of confidence in economic policies here and in Europe," said Sung Won Sohn, an economics professor at California State University in the Channel Islands. "Most of the cards have been dealt and the politicians have been squabbling among themselves."

While the jobless rate held steady last month, other measures of unemployment grew darker.

The average duration of unemployment hit a record high of 40.5 weeks. and almost 45 percent of the 14 million jobless Americans had been out of work for six months or more, up from 42.9 percent in August.

In addition, a broader measure of unemployment that includes people who want to work but have given up looking for jobs and those working only part time for economic reasons rose to 16.5 percent from 16.2 percent.

But there were also some bright spots.

Hourly earnings rose 4 cents after falling in August; the length of the work week rose to 34.3 hours from 34.2 hours; and job gains were widespread.

Health care and social services payrolls increased by 40,800 jobs, construction added 26,000 workers -- possibly due to rebuilding after Hurricane Irene -- and temporary employment rose 19,400. Temporary hiring is sometimes seen as a harbinger of permanent hiring.

But manufacturing, which has been the pillar of the economy, shed 13,000 jobs, the second straight monthly decline.

(Additional reporting by Mark Felsenthal in Washington; Editing by Andrea Ricci and Leslie Adler)

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September auto sales up, allaying fears of recession (Reuters)

DETROIT (Reuters) – Major automakers posted double-digit percentage U.S. sales gains for September in a rebound that General Motors Co said showed the economy was likely to steer clear of a double-dip recession.

Among the Detroit automakers, GM sales rose 20 percent, while Ford's rose 9 percent and Chrysler Group was up 27 percent. Nissan Motor Co saw a sales gain of 25 percent and Volkswagen AG posted a sales increase of 36 percent.

The initial sales reports put industrywide sales on track to near 13 million vehicles on an annualized basis, at the high end of the range of analysts' forecasts.

That would represent the strongest sales pace since April and an increase of roughly 10 percent from the sales rate of September 2010.

Last month's auto sales were bolstered by increased inventory levels for Japanese automakers that had been depleted through the summer, by steady gasoline prices and a trickle back of demand from customers looking to replace aging vehicles, executives and analysts said.

GM sales chief Don Johnson said the September auto sales and other recent economic data "all point to a slow growth scenario but not a double dip."

GM kept its forecast for industrywide auto sales unchanged and said it expected to see increasing sales in October through December.

The top U.S. automaker forecasts overall U.S. vehicle sales of at least 13 million, including medium and heavy duty trucks. That would be up from the sales rate of 12.8 million on that basis in the year to date.

In another indicator of economic resilience, U.S. factory activity expanded at a faster pace than expected in September, the Institute for Supply Management said on Monday.

VW America Chief Executive Jonathan Browning said the September sales results pointed to a moderate increase in U.S. auto sales through the remainder of the year.

"It's hard to give a very simple summary because a lot of people are anxious about the future and you see that in the consumer sentiment, consumer confidence surveys, but at the same time many people are recognizing that this is a good time to buy," he said.

U.S. auto sales represent one of the earliest snapshots of consumer demand.

GM shares were up 1 percent at $20.41 around midday and Ford Motor Co shares were flat at $9.67.

CHRYSLER'S BEST SEPT. SINCE 2007

Chrysler, the No. 3 U.S. automaker, had its best performance for September since 2007. Chrysler is managed and primarily owned by Italy's Fiat SpA.

Stronger showings by Toyota Motor Corp and Honda Motor Co are expected, after the top two Japanese automakers in the U.S. market have returned to full production after having inventories slimmed after the March earthquake and tsunami in Japan.

During the past summer -- typically a busy sales period -- some consumers had held back from shopping for vehicles because the major Japanese automakers had an unusually spare stock of cars on dealer lots.

"A vehicle in content and color isn't something people are likely to compromise. They're more likely to wait. Now this is a release of some pent-up demand, which is exactly what we want to see," said IHS analyst Rebecca Lindland.

Both Toyota and Honda also increased sales incentives in September to lure back consumers, analysts have said.

U.S. new light vehicle auto sales were averaging 13.1 million on a seasonally adjusted annualized basis in the first four months of the year. A diminished supply of vehicles and auto parts began to cut into sales beginning in May.

The annualized sales rate dipped to 11.8 million vehicles from May to August.

Analyst Peter Nesvold of Jefferies & Co said last week that September will be the first month since April not to reflect the effects of the Japanese earthquake and the resulting production disruption.

J.D. Power & Associates as well as Edmunds.com forecast that September sales will be 12.9 million vehicles on the seasonally adjusted annualized basis the industry uses to monitor sales strength.

Before the industry downturn during the recent recession, U.S. also sales averaged nearly 17 million vehicles a year. Sales began to fall in 2008 and by 2009 hit the lowest level since the early 1980s, at 10.4 million vehicles sold.

(Reporting by Bernie Woodall and Ben Klayman, writing by Kevin Krolicki, editing by Matthew Lewis)

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Wall Street falls on euro zone debt fears (Reuters)

NEW YORK (Reuters) – Wall Street stocks tumbled on Tuesday on rising concerns the euro zone's debt crisis could hurt the global economy.

Major U.S. banks were among the day's biggest decliners, with the KBW Bank index off nearly 2 percent.

Nervous investors channeled cash into less risky assets as doubts resurfaced over the political will of Italy and Greece to push through tough budget and debt measures demanded by other euro zone members, while Germany hardened its stand against giving them more aid.

"The spillover from Europe's heavy selloff was expected, and not just to our market here, but globally," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

"Until things settle down over there, this kind of a selloff could go on for a day or for a week."

The Dow Jones industrial average slid 212.52 points, or 1.89 percent, at 11,027.74. The Standard & Poor's 500 Index was down 21.76 points, or 1.85 percent, at 1,152.21. The Nasdaq Composite Index took off 41.55 points, or 1.68 percent, at 2,438.78.

European shares fell to their lowest close in more than two years on Tuesday on worries the euro zone debt crisis was deteriorating, while the PHLX Europe sector index slumped 4.4 percent. U.S.-listed shares of Credit Suisse fell 13.5 percent to $23.69.

The Financial Times reported several big U.S. banks, in talks with state officials on settling claims of improper mortgage practices, were offered a deal to limit legal liability in return for a multibillion-dollar payment.

Several brokerages including Nomura cut their price targets on big lenders.

Bank of America Corp lost 3.2 percent to $7.02 and JPMorgan Chase & Co fell 3.7 percent to $33.34.

Sunoco Inc rose 4 percent to $37.55 after the energy company said it plans to exit its refining business and focus on its logistics operations.

Temple-Inland Inc jumped 25 percent to $30.81 after International Paper Co agreed to buy the packaging firm for $32 per share. International Paper rose 4.2 percent to $26.55.

European and U.S. stocks briefly pared losses after data showed the pace of expansion in the U.S. services sector unexpectedly accelerated in August. Data on Friday showed zero net employment growth, stoking recession concerns.

Trading volume was lower than usual at 3.97 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq.

Decliners beat advancers by more than six-to-one on the New York Stock Exchange. On Nasdaq, decliners were beating advancers by about four-to-one.

(Reporting by Angela Moon; editing by Jeffrey Benkoe)

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Job growth stalls, fuels recession fears (Reuters)

WASHINGTON (Reuters) – Employment growth ground to a halt in August, reviving recession fears and piling pressure on both President Barack Obama and the Federal Reserve to provide more stimulus to aid the frail economy.

For the first time in nearly a year the economy failed to create new jobs on a net basis according to the Labor Department's monthly nonfarm payrolls survey on Friday.

Economists had expected nonfarm employment to rise 75,000 last month but they cautioned against viewing the data as a surefire sign of recession.

A worsening debt crisis in Europe and an acrimonious political fight over the government budget and debt, which led Standard & Poor's to strip the country of its AAA credit rating, ignited a massive stock market sell-off last month and sent business and consumer confidence tumbling.

"The economy is struggling against stiff headwinds, which appear to have intensified in recent months," said Millan Mulraine, senior macro strategist at TD Securities in New York. "While it has clearly not fallen off the cliff, there is little to suggest it is anywhere close to regaining its momentum."

Investors fled riskier assets on the news, sending stocks tumbling, pushing up the price of gold, and lowering U.S. Treasury bond yields.

Employment was dampened by 45,000 striking workers at Verizon Communications. Those workers have since returned to work and will be counted as on the payroll in September.

But even taking that into account the report was largely bleak. The unemployment rate, however, held at 9.1 percent as a survey of households found both job growth and, for the first time in a year, an expanding labor force.

With the jobless rate stuck above 9.0 percent and confidence collapsing, President Barack Obama faces pressure to come up with ways to spur job creation. The health of the labor market could determine whether he wins re-election next year.

Obama will lay out a new jobs plan in a speech to the nation on Thursday, and White House advisers said the data underscored a need for action.

"He will be very specific about what we can do that can have a meaningful impact on job growth in the economy right away," Gene Sperling, a top economic adviser to Obama, told Reuters Insider.

Obama on Friday withdrew new rules to limit smog pollution that businesses had argued would kill jobs and cost them billions of dollars.

The Republican speaker of the House of Representatives, John Boehner, said in a statement it was time for political cooperation "to end the uncertainty facing families and small businesses, and create a better environment for long-term economic growth."

But speaking later to reporters in Ohio, Boehner struck a combative tone toward the White House and Senate Democrats. "They want to push for the same kind of agenda -- more stimulus spending and short-term gimmicks, higher taxes, more regulations. We've seen more of this before and it has failed."

EYES ON THE FED

Despite massive cash injections by both the government and the Fed, sustainable job growth has eluded the economy.

"The entire recovery has been a recovery in name only. The Achilles heel ... has always been the lack of job creation," said John Ryding, chief economist at RDQ Economics in New York.

The data could strengthen the hand of officials at the Fed who wanted to do more to help the sputtering economy in August. The economy needs to generate about 150,000 jobs each month just to keep the unemployment rate steady over time.

The central bank, which meets on September 20-21, cut overnight interest rates to near zero in December 2008 and has bought $2.3 trillion in securities to inject cash into the economy.

Despite simmering inflation pressures, many economists expect the Fed to launch a third round of bond buying soon to put downward pressure on long-term rates, partly because the federal government appears intent on belt-tightening.

"Even the inflation hawks have to be concerned by this report," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "With fiscal policy at all levels of government restraining growth, the Fed is the only game in town."

Expectations of further Fed action drove the yield on the benchmark 10-year Treasury note below 2.0 percent. The U.S. dollar rose on safe-haven flows, while the S&P 500 stock index fell 2.53 percent.

UNDERLYING PACE OF JOB GROWTH WEAK

While employment was held back by the Verizon strike, the impact was offset somewhat by the return of 23,000 public employees in Minnesota after a partial government shutdown.

Stripping out both of those factors, employment would have expanded by more than 20,000 jobs last month and, without the strike, private payrolls would have increased by 62,000, instead of a paltry 17,000.

Still, the overall tenor of the report was decidedly weak.

Employers created a combined 58,000 fewer jobs in June and July than previously thought, and the length of the average workweek fell 0.1 hour to 34.2 hours, the fewest since January. In addition, average hourly earnings dropped three cents.

About 43 percent of the 14 million Americans unemployed in August had been out of work for at least six months. The jobless rate would have been 16.2 percent if people who want to work but have given up looking for jobs and those working only part time for economic reasons were counted.

Although hiring cooled, fairly steady readings on claims for jobless benefits, relatively strong consumer spending and continued demand for manufactured goods offer hope the economy will avoid recession.

Analysts say the economy should pick up steam from here, although they warn the recovery is so weak that any fresh shock could send it tumbling. In the first half of the year, the economy expanded at less than a 1.0 percent annual rate.

(Editing by Neil Stempleman and Tim Ahmann)

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July payrolls rise soothes recession fears (Reuters)

WASHINGTON (Reuters) – U.S. job growth accelerated more than expected in July, tamping down fears the economy was sliding into a fresh recession and giving the Federal Reserve some breathing room.

Nonfarm payrolls increased 117,000 after slowing abruptly in the past two months, Labor Department data showed on Friday. The rise beat economists' expectations for an 85,000 gain.

The unemployment rate dipped to 9.1 percent from 9.2 percent in June, but that was because discouraged job-seekers gave up the hunt. Still, the report was heartening after a rush of disappointing data over the past week.

"This shows that the U.S. economy is not dead yet. We have potential to get back on track with moderate growth to a strong recovery next year," said Kurt Karl, head of economic research and consulting at Swiss Re in New York.

The payrolls count for May and June was revised to show 56,000 more jobs were added in those months than previously reported, helping to improve the tenor of the report.

High commodity prices and supply chain disruptions from Japan knocked the recovery off course in the first half of year and left the economy vulnerable to another downturn just two years after the worst U.S. recession since the 1930s ended.

Some economists have put the odds of a new slump as high as 40 percent.

U.S. recession fears and Europe's inability to tame its spreading debt crisis have roiled world financial markets. The data initially helped temper losses in global stocks, which were down for an eight straight day, before worry quickly took hold again.

Stocks on Wall Street opened higher, but gave up gains to trade lower by late morning. Prices for U.S. Treasury debt fell, while the dollar weakened broadly as investors showed a little more appetite for risk-taking. However, gold prices rose in a sign risk-aversion had far from fully dissipated.

UGLY DEBT FIGHT

While private employers showed a renewed appetite to hire last month, there are worries their enthusiasm might have been dampened by the ugly fight between Democrats and Republicans during talks to raise the country's debt ceiling.

Analysts fear this could hamper job growth in August.

"The fight over the debt ceiling created a new climate filled with uncertainty and anxiety that will cause businesses to change their clothes, so to speak, and either reduce hiring, freeze hiring, or cut payrolls," said Tony Crescenzi, portfolio manager at PIMCO in Newport Beach, California.

The private sector accounted for all the jobs created in July, with business payrolls rising 154,000 -- an acceleration from June's 80,000 increase and more than the 115,000 expected by economists. Government payrolls dropped 37,000, a ninth straight monthly decline.

The economy's poor health has eroded President Barack Obama's popularity among Americans and could hurt his chances of reelection.

Speaking to veterans at Washington's Navy Yard, Obama called on Congress to take steps to help the economy when lawmakers return from a summer break in September -- renewing his call for an extension of a payroll tax cut and emergency unemployment benefits.

"There is no doubt that this has been a tumultuous year. We are going to get through this, things will get better and we will get there together," he said.

Opposition Republican lawmakers renewed calls to cut government spending and ease the regulatory burden on businesses as a prescription for the economy's ills.

The nation's borrowing limit was raised this week in a deal that relied on spending cuts. The fiscal tightening comes at a time when the Fed has a limited arsenal to defend the economy.

The U.S. central bank has cut interest rates to zero and spent $2.3 trillion on bonds. Policymakers, who meet on Tuesday, have said they want to see how the economy fares before taking any further action, and the data fit with their forecasts for a pickup in growth.

Economists say the budget cuts and the scheduled expiration of the payroll tax cut and emergency jobless aid could cut more than a percentage point from GDP growth next year.

EYES ON FED

With looming budget cuts at the federal government level, and state and local governments still tightening their belts, the burden of job creation falls on the private sector.

"The public sector job cutbacks are a real drag on growth and the debt ceiling agreement makes it clear that belt tightening will continue to restrain activity for a long time," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

"Monetary policy will have to lean against that headwind and that means the (Fed) could signal next week that it is prepared to keep rates low for a longer period of time than had been expected."

With exception of government, job gains were spread across the board last month. Manufacturing payrolls rose 24,000 after increasing 11,000 in June. Most the gains came from the auto sector. Construction employment increased 8,000 after dropping 5,000 in June.

Temporary help jobs rose marginally, breaking a string of three consecutive declines in a hint that more permanent hiring may be in store.

The average workweek was steady at 34.3 hours, but average hourly earnings rose a strong 10 cents.

(Additional reporting by Donna Smith and Jeff Mason in Washington; Editing by Andrea Ricci)

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Italy's Berlusconi seeks to calm fears over crisis (Reuters)

ROME (Reuters) – Prime Minister Silvio Berlusconi sought on Tuesday to calm fears that Italy could be swept into a full-scale financial crisis as the center-left opposition pledged to help parliamentary approval of debt-cutting measures.

"For us, for Italy, this is certainly not an easy moment," Berlusconi said in a statement that followed a chaotic morning on financial markets in which Italian 10-year bond yields climbed past 6 percent, their highest level in over a decade.

Economy Minister Giulio Tremonti left a meeting of euro zone finance ministers early to return to Rome to wrap up approval of a 40 billion euro ($56 billion) package of austerity measures expected to be passed in parliament in the coming days.

"The actions under discussion in parliament will accelerate the reduction of the debt. Already this year, we will bring the primary balance into significant surplus," Berlusconi's statement said.

"The crisis is pushing us to accelerate the process of correction extremely rapidly, to strengthen its content, to fully define further steps to bring the budget into balance by 2014."

Opposition parties said that despite objections to parts of the package, which cuts funding to local government and health services and delays retirement, they would support parliamentary approval of the bill by Friday so that it would be passed by the time markets open on Monday.

With Italy sitting on 1.6 trillion euros of outstanding government bonds, any increase in borrowing costs could severely disrupt efforts to cut a debt mountain equivalent to 120 percent of gross domestic product.

Earlier, the premium investors demand to hold Italian debt rather than benchmark German bonds widened to a record 350 basis points. Bank shares also dropped heavily before markets picked up following Tremonti's return home.

"SACRIFICES"

"Any delivery from the government on the austerity package, any good news in that respect, is very, very positive. So if politicians are getting their act together, it's absolutely good news," said Royal Bank of Scotland analyst Paola Biraschi.

As the morning panic on the markets eased, the 10-year Italian/Bund spread dropped back to 288 points, 15 basis points tighter on the day, after an auction of short-term bills (BOTs) passed off without any serious problems.

Italy, the euro zone's third largest economy, has largely avoided the turmoil hitting Greece, Portugal and Ireland, thanks to a relatively modest budget deficit, a conservative banking system and a high level of private savings.

But it has been targeted over worries about the sustainability of its mountainous public debt burden, raising the threat of a crisis which could potentially overwhelm the euro area and break up the single currency.

Tremonti has overseen a four-year, 40 billion-euro austerity package designed to keep the government on track to meet a target of cutting the public deficit from 3.9 percent of GDP in 2011 to bring it into balance by 2014.

With the opposition ready to support the package, a number of smaller amendments were discussed late on Tuesday, including easing rules on amortization of infrastructure assets held by private concessionaires and changes to tax and pension measures.

The changes would see planned tax hikes on holders of financial instruments eased for small investors, while rules on inflation adjustment for pensions would be weighted against higher incomes and in favor of lower and middle incomes.

The government was also working on a measure that would ensure that 15 billion euros of fiscal measures penciled into its austerity plan were cemented into the final package.

Tremonti has faced reluctance and even outright resistance from some in the government worried about the electoral impact of unrelenting austerity but this week's crisis appears to have overcome such resistance.

In a gravely worded statement, Berlusconi, who normally exudes optimism and who has hitherto boasted of his government's success in keeping out of the crisis, said Italy had overcome even more difficult moments in its past.

"We must be united, cohesive in our common interest, conscious that the efforts and sacrifices of a brief period will correspond to permanent and secure gains," he said.

Markets plunged on Friday after a newspaper interview in which Berlusconi criticized the sometimes abrasive Tremonti for not being a "team player," a remark which underlined persistent tensions in the government.

(Additional reporting by Francesco Guarascio in Brussels, Ian Simpson in Milan, Giuseppe Fonte in Rome; Editing by Alison Williams)

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Eurozone mulls Greek options, fears spread to Italy (Reuters)

BRUSSELS (Reuters) – EU finance officials will discuss a range of options for Greece's intractable debt crisis on Monday, galvanized by the growing threat of contagion to Italy, the euro zone's third-largest economy.

A senior European Union source told Reuters the Eurogroup of 17 euro zone finance ministers meeting later would discuss the possibility of buying back Greek debt or the private sector swapping holdings for longer-dated maturities.

If so, it suggests a French plan that would have involved private sector creditors rolling over around 70 percent of their Greek debt into 30-year bonds and other AAA-rated securities is losing favor and other options are back under the microscope.

Germany, the Netherlands, Austria and Finland are determined that banks, insurers and other private holders of Greek government bonds should bear a chunk of the costs of a second Greek bailout, which is expected to total 110 billion euros.

But after weeks of negotiations with bankers, there has been next to no progress on agreeing a formula acceptable to all sides.

As the French plan has faltered, Berlin has revived a proposal to swap Greek bonds for longer-dated debt that would extend maturities by seven years. Proposals to buy back Greek bonds and retire them have also been floated.

"We need to find a way to have some guidelines today on the private sector involvement and the solution for Greece," Belgian Finance Minister Didier Reynders told reporters. "That's the real issue today, I'm sure."

The senior EU source said the Eurogroup would task technical groups with working on the two options -- bond buybacks and a debt rollover.

"There is a strong possibility that a new Eurogroup meeting will be called at the end of July, to sign off on the solutions," the source said.

Both those schemes would likely be regarded by ratings agencies as a default, or at best a selective default, which could have profound repercussions for global financial markets.

The European Central Bank insists it will not accept anything that is termed a default, a position Germany also holds even if some policymakers may be edging closer to effectively condoning a default to achieve a write-down in the value of Greek debt to make its debt mountain more sustainable.

"We do pursue a voluntary basis but it has to be substantial private sector involvement. That's our commitment and also our parliament that demands it," Dutch Finance Minister Jan Kees De Jager said.

In a buy-back, the bloc's European Financial Stability Facility (EFSF) bailout fund might buy Greek bonds from the market, or lend Greece money to do so. Officials say that would require changes to the EFSF's rules which would need the backing of national parliaments -- a further potential obstacle.

ITALY FOCUSING MINDS

Policymakers have been seized with a new sense of urgency after Italy came under market attack last week, fearing any further delay in putting together a second Greek package could poison investor confidence in weak economies around the region.

After talking by phone to Italy's Silvio Berlusconi, German Chancellor Angela Merkel said Rome needed to demonstrate it was undertaking the budget reforms needed to restore confidence and she was confident that it would do so.

Herman Van Rompuy, the president of the European Council, met ECB President Jean-Claude Trichet and Jean-Claude Juncker, the chairman of the Eurogroup, for talks in Brussels ahead of the euro zone finance ministers' gathering.

Van Rompuy's spokesman described the meeting, which European Commission President Jose Manuel Barroso and EU economic and monetary affairs commissioner Olli Rehn also attended, as a "coordination, not a crisis meeting."

He said Italy was not on the agenda but senior EU sources said it would be impossible not to discuss it following a large sell-off in bonds and stocks that the Italian media have dubbed "black Friday."

The cost of insuring Italian debt against default jumped to a record high on Monday, the 10-year yield spread over German debt widened to a euro-era high of 268 basis points and bond yields neared the 5.5-5.7 percent area which bankers say will start putting heavy pressure on Italy's finances.

The sell-off has increased fears that Italy, with the highest sovereign debt ratio relative to GDP in the euro zone after Greece, could be next to get dragged into crisis. If that came to pass, the euro zone's existing rescue mechanism, the EFSF, would have insufficient funds to help.

Austria's Finance Minister Markia Fekter said ministers wanted to quiz Italy about how it was handling the situation.

"We have a Eurogroup meeting today and tomorrow Ecofin. We will (discuss) the IMF decisions and we will also have questions for the Italian minister there," she told reporters.

The market pressure is due in part to Italy's high sovereign debt and sluggish economy, but also due to concern that Prime Minister Silvio Berlusconi may be trying to push out his long-time finance minister, Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit.

"We can't go on for many more days like Friday," a senior ECB official told Reuters. "We're very worried about Italy."

German newspaper Die Welt quoted an unnamed ECB source as saying the EFSF may have to be doubled in size to 1.5 trillion euros if it is to be capable of coming to the aid of Italy.

(Additional reporting by John O'Donnell in Brussels, Silvia Westall in Vienna, Stephen Brown in Berlin and Milan/Rome bureaus, writing/editing by Mike Peacock)

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