(Repeating column initially sent late Friday)

  By Edward Krudy

  NEW YORK, June 19 (Reuters) - The S& P 500's 200-day moving average marks the line in the sand as the bulls and the bears fight over the U.S. stock market's direction. It will face one of its stiffest tests this week with Greece's debt crisis appearing to reach a climax.

  After setting its closing high for the year on April 29, the Standard & Poor's 500 Index has lost about 7 percent. Wall Street typically defines a drop of 10 percent or more from a recent peak as a correction.

  The benchmark S& P 500 hit its lowest point right on its 200-day moving average in volatile trading on Thursday. The index then rallied 1 percent from that session low to close on Friday at 1,271.50. It also scored its first weekly gain in the last seven weeks.

  At Friday's close, the S& P 500's 200-day moving average was around 1,259. If the level holds, it could be a springboard for stocks to rally.

  " We seemed to have bounced off that level of concern that people were watching," said David Joy, chief market strategist at Ameriprise Financial, where he helps oversee $571 billion in assets. " At least for now, that is a little bit of evidence that these problems are solvable and markets could move higher."

  The Nasdaq, which often leads market moves, has not fared so well, and that is a worry to investors. It has closed below its 200-day moving average and it kept falling on Friday when other indexes stabilized. It ended the week down 1 percent. From its 2011 closing high on April 29, the Nasdaq has slid nearly 9 percent -- getting close to a correction.

  Bond markets remain anxious about a Greek default.

  Most economists are overwhelmingly skeptical that Greece can ever repay its mountain of debt, which has reached 340 billion euros -- or 150 percent of the country's annual economic output.

  Reuters' calculations using five-year credit default swap prices from Markit show an 81 percent probability of Greece eventually defaulting, based on a 40 percent recovery rate.

  SOME SAY IT'S TIME TO BUY

  But for now, it seems stock investors are sanguine. They believe the European Union will rescue Greece without major disruption to markets and are using the drop in equity prices as a buying opportunity.

  Bob Doll, chief equity strategist at BlackRock, says he has been using the pullback to reduce his underweight in cyclical stocks such as a Alcoa Inc, Applied Materials, and International Paper.

  He has also been cutting his overweight in defensive areas such as healthcare, trimming positions in stocks like United Health and Aetna.

  Doll believes the S& P 500 will rally to 1,350 by the end of the year.

  " We're going to find Band-Aids and we're going to muddle through these credit problems," Doll said. " The consequences of not following that route could be pretty dire, and I think the interested vested parties are going to step up."

  BlackRock is one of the world's largest money managers with $1.56 trillion in equity assets under management. Doll is also lead portfolio manager of BlackRock's Large Cap Series Funds and advises on $317 billion that is actively managed.

  TUNING IN TO THE FED

  A slew of data showing the United States is on the verge of a slowdown has already done its damage to the market. After the heavy selling of the past several weeks, it seems investors are taking a wait-and-see approach -- for now.

  Joy is waiting until after the summer before making big moves.

  " There is so much uncertainty that it is probably not wise to make big long bets, but I think that opportunity may well arise toward Labor Day," he said.

  In the meantime, any sign that fears may have been overblown could spur a rally. The final reading on first-quarter U.S. gross domestic product, due on Friday, is forecast at a 1.9 percent annual growth rate, a Reuters poll of economists showed. That's slightly above previous estimates. But investors will be on the lookout for a surprise.

  " People are not expecting a lot from GDP so should it come a little better than expected, you could see a pretty decent rally," said King Lip, chief investment officer of Baker Avenue Asset Management in San Francisco.

  Some analysts attribute much of the market's turmoil to the end of the Federal Reserve's asset-purchase program, known as quantitative easing, or QE2. That will come to a close at the end of the month.

  Investors will be looking to Chairman Ben Bernanke to reassure markets after the Fed's two-day meeting ends on Wednesday.

  " What investors are really looking for is not a QE3 but a QE2.5, where (the Fed) continues to reinvest the coupons they get from the bonds they purchased," Lip said. " If that's the case, investors will look well on that."

  The CBOE Volatility Index or VIX, a gauge of investor anxiety, spiked during the week, but it is still at relatively depressed levels. That could be a sign investors are still too complacent about the risks ahead.

  " If the economy is slowing as much as people are thinking, should there be more risk to second-quarter earnings? That's a real question we have to ask," Doll said. " There is risk of complacency -- no question." (Wall St Week Ahead appears every Sunday. Questions or comments on this column can be e-mailed to: edward.krudy(at)thomsonreuters.com) (Reporting by Edward Krudy Additional reporting by Angela Moon and Rodrigo Campos Editing by Jan Paschal)

  2011-06-19 17:37:12

* FTSEurofirst 300 index down 1.1 percent

  * Italian underperforms after Moody's threat

  * Banks drop after Greek decision delay

  * For up-to-the minute market news, click on

  By Joanne Frearson

  LONDON, June 20 (Reuters) - European shares fell on Monday, led by banks after euro zone finance ministers delayed a decision on extending emergency loans to Greece and ratings agency Moody's threatened to cut Italy's credit rating.

  Investor appetite for riskier stocks fell, with the Euro STOXX 50 volatility index , one of Europe's main gauges of investor anxiety, rising 11 percent to its highest level in three months.

  Banking stocks, which have been declining since February, featured among the worst performers after the ministers said Greece would need to introduce harsh austerity measures before it received a 12 billion euro ($17.07 billion) loans tranche.

  The STOXX Europe 600 Banks index was down 1.5 percent, while the Thomson Reuters Peripheral Banks index lost 2.8 percent.

  A Moody's threat that it might cut Italy's credit ratings over increased borrowing costs as a result of the Greek crisis, intensified fears that the problems of the euro zone's peripheral countries would spread.

  Italy's benchmark index dropped 2.4 percent, significantly underperforming the other peripheries Spain's IBEX 35 was down 1.5 percent, and Portugal's PSI 20 was 1.3 percent lower.

  Italian banks were among the worst performers, with Banca Popolare di Milano down 6.5 percent, and Banca Monte dei Paschi di Siena SpA , also affected by the first day of trading of its rights issue, fell 4.9 percent.

  By 0846 GMT, the pan-European FTSEurofirst 300 index of top shares was down 1.1 percent at 1,075.13 points, extending losses in early trade after Euronext opened late after a technical glitch.

  " They want to make sure Greece is adhering to the package. It is going to be quite a close call if they get the money in time before the country needs funding," said Richard Batty, Global Investment Strategist, Standard Life Investments, which has 157 billion pounds of assets under management.

  Investors were also awaiting a confidence vote on Tuesday called for by Greek Prime Minister George Papandreou in a bid to push through the reforms.

  " It is not a helpful backdrop we are underweight European equities," Batty said.

  DEATH CROSS

  The index's 50-day moving average was also poised to break below the 200-day moving average, seen as a strong bearish technical signal called a 'death cross', but the index was likely to find support at around 1,065, its low hit in March.

  Nomura analysts said in a note the market could be ripe for a rally, with a potential upside of 18 percent for the rest of the year if Greece avoided a near-term default and the recent soft patch of economic data failed to translate into earnings downgrades.

  " If the soft economic data is not followed by EPS (earnings-per-share) downgrades and Greece does not default, the upside for stocks is substantial, 18 percent on our projections to the end of 2011," Nomura analysts said.

TOKYO (Reuters) - Japanese Prime Minister Naoto Kan may announce on Monday that he will resign on condition of key bills passing a divided parliament, Kyodo news agency reported, as the government struggles with a prolonged nuclear crisis.

  Kan, already Japan's fifth premier in as many years, survived a no-confidence vote earlier this month after promising critics in his own party he would quit but declined to say when. Opposition parties have declined to cooperate on key bills unless the prime minister keeps his pledge.

  Kyodo said that Kan, who has come under fire for his handling of his response to the world's worst nuclear crisis in 25 years, could announce that he would quit on condition of parliament passing a second extra budget and a bill to issue bonds for this year's budget, Kyodo said.

  Hopes have risen that Kan's departure would clear the way for a coalition between the DPJ and its rival Liberal Democratic Party that could break the parliamentary logjam as Japan tries to rebuild from the March 11 quake and tsunami that triggered the nuclear accident at Tokyo Electric Power Co's (Tepco) Fukushima Daiichi plant.

  In theory, a coalition could also make it easier to tackle longer-term policies including social security and tax reforms, including a sales tax rise, needed to rein in public debt already twice the size of Japan's $5 trillion economy.

  But obstacles to any such coalition remain high, and momentum for the tie-up appears to have diminished of late.

  Japanese media have said that Finance Minister Yoshihiko Noda, who backs Kan's calls for fiscal discipline, was a frontrunner to replace Kan in a DPJ leadership race that would be held after the premier steps down.

  Other potential contenders include former foreign minister Seiji Maehara, a conservative expert on security issues.

* Hang Seng Index gives up gains, off 0.4 pct as property stocks drag

  * Tencent rebounds from two-week slide

  * Shanghai shares extend decline on liquidity crunch, down 0.8 pct

  * RBS analysts recommend buying the dip on China shares (Updates to close)

  By Vikram Subhedar

  HONG KONG, June 20 (Reuters) - Hong Kong shares fell to a nine-month low on Monday as the property sector slid on fears of more government tightening measures, pushing the benchmark deeper into oversold territory and raising the risk of a short squeeze.

  Optimism over a possible resolution to Greece's debt woes faded and was offset by bearishness on the property sector, by far the biggest underperformer on the day after a top city official warned of growing risks of an asset price bubble.

  The Hang Seng fell 0.4 percent, led by property bellwether Cheung Kong Holdings , controlled by billionaire Li Ka-shing, which dropped 3.8 percent.

  The property sub-index fell 2.2 percent to its lowest since July last year after Financial Secretary John Tsang's warning.

  " Hong Kong's housing sector is unusually strong because of loose monetary policy in advanced markets such as Europe and the United States, ample liquidity, super-low interest rates and strong economic growth," Tsang said in his latest blog.

  " The risk of a bubble is increasing by the day."

  The weak property sector pushed the Hang Seng's relative strength index down to 15.1, the lowest level since January last year and well below the threshold level of 30 that indicates whether a security is technically oversold.

  " If you look at the short selling ratio in Hong Kong, you're sitting at 9.6 percent on a four-week average. That's the highest level we see in two years so there's clearly risk of a short squeeze in the Hang Seng market," said Laurence Balanco, a technical analyst at CLSA in Reuters television interview.

  " That should provide some relief from these oversold conditions," said Balanco.

  Bucking the weaker trend were shares of China's dominant Internet firm Tencent Holdings which ended 4.3 percent higher, recouping some of their slide in recent weeks.

  Tencent shares are still down 11.5 percent this month on concerns around its e-commerce payment platform Tenpay following uncertainties over the " variable interest entity" ownership structure used by many Chinese Internet firms.

 

  SHANGHAI WEAK AS TIGHT LIQUIDITY CRIMPS STOCKS

  On the mainland, the Shanghai Composite continued to slide, dropping 0.9 percent as tight conditions in the interbank market continued to trump attractive valuations.

  The index's close for a second day below a cluster of supports around 2,660-2,680 from where it staged a sharp rally in January suggested it could face overhead resistance at those levels.

  Short-term money market rates spiked to 8 percent, primarily as a result of the latest hike in banks' reserve requirements that was effective on Monday.

  The liquidity squeeze in China's money market makes brokerages, fund managers and wealthy personal investors unable to obtain sufficient cash for investments in stocks.

  A Hong Kong-based trader said that rates are likely to stay elevated for a little while longer, partly due to quarter-end demand for funds from institutions as well as strict monitoring of loan-to-deposit ratios.

  That could be negative for smaller, leveraged banks such as China Citic Bank , which lack fee income, said the trader. China Citic Bank fell 1.5 percent.

  The extended slide in Chinese shares that have seen the benchmark retreat about 15 percent in the past two months have pushing valuations to attractive levels, prompting analysts to recommend that investors position for a rebound.

  " After the two, short-lived rallies in the MSCI-China in Sept-Oct 2010 and March-Apr 2011, investors are a bit gun-shy, in our view," said Wendy Liu, head of China and Hong Kong research at RBS in Hong Kong.

  But Liu, who projects a strong rebound in July on the back of easing worries about a hard landing in China, suggested investors raise exposure to China " to the max" over the remainder of June.