By Maria Golovnina

  TRIPOLI (Reuters) - Forces loyal to Libyan leader Muammar Gaddafi withdrew from the centre of the western town of Zawiyah Saturday after a fierce battle with rebels, a rebel spokesman said.

  " They entered Zawiyah at six in the morning with heavy forces, hundreds of soldiers with tanks. Our people fought back ...We have won for now and civilians are gathering in the square," Youssef Shagan told Reuters.

  Shagan said earlier Gaddafi forces had fired high explosive rounds in the centre of the town, 50 km west of the capital Tripoli, and rebel forces had captured two tanks.

  " We see many people, many residents fleeing. There is heavy fighting right now," Youssef Shagan said by telephone.

  Rebel forces still controlled pockets of the city and captured two tanks from the army in a shootout Saturday morning, he said.

  " They (Gaddafi's security forces) are attacking people, civilians. There is a lot of shooting. They are taking people from their homes. People are escaping to nearby villages."

  He said many people had been killed, but was unable to give a total. Gaddafi's forces had used high explosive rounds, he said without specifying.

  Earlier, Shagan said the military had driven tanks and heavy weapons into the centre of the town, where people opposed to Gaddafi's 41-year rule have been fighting his forces for more than a week, and closed all the roads.

  Arabic satellite channels said pro-Gaddafi forces had fired from tanks at residential areas " Now with all the artillery, tanks and armoured vehicles, we're seeing battles and killings we haven't seen in Iraq. I consider it total genocide," said one witness who spoke to Al Arabiya television.

  The man said more than 15 armoured vehicles and a tank had entered the town. Mosques have announced 'jihad' (struggle) against them, the man told Al Arabiya.

  The channel cited witnesses saying several members of Gaddafi's forces had surrendered and said the rebels had blocked an attack by people they said were pro-Gaddafi mercenaries.

  One witness told al-Arabiyah he saw the corpses of members of the security forces killed in a battle in the central square.

  " My own eyes saw the bodies of seven dead who have been brought in from the square and four others have been imprisoned. The brigades were struck with terror and a sense of total failure and abandoned their equipment. The youth have flooded to Martyrs' square to celebrate this true victory."

  Al Jazeera carried similar reports about fighting in Zawiyah and said tanks had fired on homes.

  It later cited witnesses saying tanks were pulling out from the centre of the town but did not make clear how far they had gone.

  " We have brought down two tanks and now a third, after which they scrammed like mice," Ahmed Selim, a political activist, told the channel, referring to Gaddafi's forces.

  (Additional reporting by Shaimaa Fayed writing by Edmund Blair and Philippa Fletcher)

By Edward Krudy

  NEW YORK, March 4 (Reuters) - Stocks will take their cues from the oil market next week as unrest rumbles through the Middle East. But so far equity investors are sanguine, believing the economic recovery wins the day.

  Sentiment is driving large daily swings as traders vacillate between the fear oil prices will hit consumers and derail the recovery and the euphoria that the U.S. labor market is turning a corner.

  Reports of escalated fighting in Libya and protests in Bahrain, Yemen and top oil-exporter Saudi Arabia rattled investors on Friday: oil rose, equities fell.

  " We are in such a sentiment-driven market right now and everyone is watching the equity market with one eye and oil and commodity markets with the other," said Michael James, senior trader at Wedbush Morgan in Los Angeles.

  SHIFT TO OIL STOCKS

  Some hedge funds are trading the inverse correlations between oil and equities that have grown in recent weeks, while other investors are shifting their exposure to oil stocks and paring back in overvalued areas of the market.

  Through it all the S& P 500 is down less than 2 percent from a near 3-year high hit in late February, which even bears concede is a remarkably robust performance. For the week stocks ended flat.

  So far the trade seems to be a reallocation of risk within equities rather than a move out of stocks altogether.

  Zahid Siddique, a portfolio manager at the Gabelli Equity Trust, has used the turmoil as a chance to raise his exposure to energy stocks, which have surged with oil prices.

  The S& P energy sector has risen 10 percent since the middle of January when troubles in the Arab world broke out. Since then the wider market has crept up by just a fraction of that. Over the same period Brent crude oil rose nearly 18 percent to over $116 per barrel.

  " These type of crises make you refresh your portfolio and just take another look," said Siddique. " Near term we may have some volatility in the market ... although the markets could still trend higher within that."

  In the energy sector Siddique has added to positions in Suncor Energy, Marathon Oil, and Exxon Mobil.

  At the same time he has taken the opportunity to pare back positions that he believes are starting to look over priced. Those include Deere & Co and Caterpillar Inc.

  If oil prices spike higher, other areas of the market could start to look more vulnerable.

  STRONG ECONOMIC MOMENTUM

  Barry Knapp, managing director of equity research at Barclays Capital in New York, recently downgraded the consumer discretionary sector, a move he partly attributes to risks posed by higher oil prices.

  " If there is one sector that is particularly vulnerable, it would be the consumer discretionary sector," Knapp said.

  That sector is the only cyclical sector that Knapp has underweighted as he continues to believe the economy will strengthen.

  " On balance we do not think that this oil price supply shock is going to be strong enough to offset the economic momentum," he said.

  Spending, savings and jobs data during the week continued to inspire confidence in the consumer. Although Friday's payrolls report fell short of the fireworks the market expected, many investors feel the jobs situation has finally turned.

  That is feeding into general optimism that the recovery is becoming self sustaining and will continue after the Federal Reserve stops its stimulative asset purchases later this year.

  " The game changer for this market is and continues to be the consumer," said Douglas Cote, senior market strategist at ING Investment Management in New York. " The consumer, despite 9 percent unemployment, is setting records in not only in their incomes but their spending."

  That theory will be tested again next week when consumer confidence and retail sales data are published on Friday.

  The Reuters consensus forecast is that confidence will ease slightly in March. Any indication that consumers are less stalwart about rising energy and gasoline prices could be a warning sign.

  (Editing by Kenneth Barry)

* U.S. employment data reflect moderate improvement

  * Bonds relieved payrolls growth was not stronger

  * Treasury to sell 3-, 10-, 30-yr securities next week

  * Middle of the curve outperforms

  By Ellen Freilich

  NEW YORK, March 4 (Reuters) - The mid-range of the U.S. Treasury yield curve outperformed on Friday after government data reflected just gradual improvement in the labor market and traders prepared for supply next week.

  U.S. employers hired more workers in February than in any month since May last year and the unemployment rate fell to 8.9 percent, a sign the recovery has become self-sustaining.

  But a sharp drop in jobless claims reported a day ago had inspired some talk of more robust February job growth than was evident when the payrolls report was actually released.

  " Bonds are a bit firmer, relieved. Fives and sevens are doing a bit better," said David Ader, head of government bond strategy at CRT Capital.

  The benchmark 10-year note was up 3/32, it yield easing to 3.55 percent from 3.56 percent on Thursday.

  Gains in the middle of the curve were more pronounced. Prices of five-year notes rose 6/32, their yields easing to 2.25 percent from 2.29 percent on Thursday, while prices of seven-year notes climbed 7/32, their yields easing to 2.95 percent from 2.99 percent.

  Trade was volatile after the government said 192,000 jobs were added to U.S. payrolls in February while the unemployment rate fell to 8.9 percent.

  The employment report " was a rather tough number to digest with the number actually close to the original consensus which we now deem 'friendlier than expected' given whisper numbers, revisions, and weather impact," Ader said.will sell short- and long-term maturities. These sectors underperformed the middle of curve.

  The Treasury will sell $32 billion in three-year notes, $21 billion in 9-year 11-month notes, and $13 billion in 29-year 11-month bonds on Tuesday, Wednesday and Thursday.

  Prices of two-year notes rose 2/32, their yields easing to 0.74 percent from at 0.77 percent on Thursday.

* Hannover Re hit from Feb quake 150 million eur at most

  * Other reinsurers, investors would take any higher claims

  * Q1 claims seen crimping reinsurers' full-year earnings

  * Shares gain, outpace Europe insurance index

  (Recasts lead, adds trader and analyst comment, background)

  By Jonathan Gould

  FRANKFURT, March 4 (Reuters) - Hannover Re forecast a 150 million euro ($209 million) hit from last month's devastating earthquake in New Zealand, driving its share price up as much as 4 percent on relief the loss was not larger.

  The world's third-biggest reinsurer said on Friday its estimate was based on an insured market loss of about NZ$10 billion ($7.42 billion).

  " Even if this figure rises, Hannover Re's loss expenditure will not increase on account of its retrocession structure," the company said, referring to its arrangements to cap its own loss by passing excess damage claims on to either other reinsurers or financial market investors.

  Reinsurer shares sagged this week after global No. 2 player Swiss Re announced on March 2 that it faces around $800 million in claims from the earthquake, pushing the reinsurer over its 2011 budget for natural catastrophes.

  Swiss Re and other insurance observers have said that the magnitude 6.3 earthquake, which struck Christchurch on Feb. 22 and claimed more than 160 lives, could entail insurance industry claims of up to $12 billion.

  " This is really good news as a lot of investors had feared costs would be higher, especially after Swiss Re's announcement earlier this week," a trader said of Hannover's loss estimate.

  Shares of Hannover Re, which is due to report its 2010 financial results on March 9, pared gains to trade 3.2 percent higher by 1412 GMT, outpacing a 1.5 percent rise in the Stoxx Europe 600 insurance index.

 

  EARNINGS EVENT

  Despite the investor relief on Friday, the financial hit is significant.

  The 150 million euro claims estimate is higher than the 113 million euro loss on an earthquake that struck the same area in September last year, though it does not match the 180 million in claims from an earthquake in Chile in February 2010.

  " The New Zealand quake without doubt will leave its mark on first-quarter results," NordLB analyst Constantin Rohrbach said in a note to clients.

  Claims from the quake as well as from flooding in Brisbane, Australia so far this year may have used up nearly half of Hannover Re's theoretical budget for natural disaster losses of 530 million euros for the full-year 2011, long before the start of the North Atlantic hurricane season in June.

  JP Morgan analyst Michael Huttner said the catastrophe budgets at major European reinsurers Swiss Re, Munich Re, Hannover and Scor had already taken a heavy hit for the year on the New Zealand quake, plus Australia's floods and cyclone Yasi.

  " We believe the earnings outlook for 2011 is reduced as there are still three quarters of potential natural catastrophe losses to come and we believe it is unlikely that there will be no more nat cats for the rest of the year," he said in a research note.

  But Huttner said his long-term outlook and price targets on the companies remained unchanged as the losses would have little effect on reinsurers' business models.

  The world's biggest reinsurer, Munich Re, is expected to give estimates of its first-quarter loss claims next week. ($1=.7170 Euro) ($1=1.347 New Zealand Dollar)

  (Editing by David Cowell)

By Samia Nakhoul

  LONDON (Reuters) - Anyone who thought that Libyan leader Muammar Gaddafi would go quietly like his fellow dictators in Tunisia and Egypt may have to think again.

  He has never shied from spilling blood, and his end may well prove a bloody affair.

  Gaddafi has shown this week that he clearly intends to fight on and leading Libyan analysts say regime change will only come if those close to him force him aside.

  The Libyan leader, experts say, believes so profoundly that he is the embodiment of his country that he is willing to bring Libya down rather than give in a two-week-long revolt against his 41-year autocratic rule.

  " There is a real danger that Libya is sliding towards a long, protracted civil war," said Fawaz Gerges, professor of Middle Eastern politics at the London School of Economics.

  " From everything we have seen so far Gaddafi is cornered, his back is to the wall and he has no exit strategy. He will most likely fight to the bitter end," he added.

  On the ground, Gaddafi appeared to have taken the initiative by launching a ground and air attack on rebels in control of the eastern oil terminal town of Brega. Both rebels and pro-Gaddafi forces are arming and positioning themselves for a longer fight and residents and tribes are being armed as well by both sides.

  SOMALIA-LIKE CHAOS?

  " In the last 48 hours Gaddafi seemed to have absorbed the first shock. He is consolidating his limited power base," said Gerges.

  " The Gaddafi regime is positioning itself for a prolonged fight. He has adequate military and financial assets to fight.

  Even though Gaddafi has lost control over large swathes of Libya he seems ready to reduce the country to Somalia-like ruins rather than surrender power, experts say.

  " Gaddafi reduced the Libyan people to his persona," said Saad Djebbar, a London-based Algerian lawyer who was involved in the negotiations over the Lockerbie bombing.

  " Gaddafi's aim will be to create chaos and put the country through civil war or Somalisation -- no central power, a divided country in which he will remain a force," said Djebbar.

  " Gaddafi has containers of dollars, he has guns to arm people and he has loyalists, the more chaos he creates the better (for him)," Djebbar added. " His message is: apres moi le deluge. You force me out of power and I will leave either a divided country or a country in civil war like Somalia."

  The uprising, the bloodiest yet against despotic rulers in the region, was sparked by the arrest of a human rights lawyer in Benghazi on February 14.

  Revolt quickly spread, with Libyans from all walks of life -- professionals, academics, tribesmen, former soldiers and students -- demanding an end to Gaddafi's repressive rule.

  Libyans have not experience democracy since he ousted King Idris and created a police state in 1969.

  The mercurial leader has managed to cling to power through a carefully constructed security apparatus. The press remains gagged, despite a slight easing of curbs in recent years, freedom of speech is unheard of and political parties are illegal.

  But 41 years of repression have brought simmering discontent to the boil.

  Added to that, for many Libyans and world leaders, the former army officer is the evil hand behind terrorism inside and outside his country. Gaddafi has spent much of Libya's oil cash financing terrorists responsible for hijacks and killings and groups seeking to kill dissidents and destabilise pro-Western governments in Africa.

  ETHNIC WAR

  The Libyan upheaval has not only proven to be bloodier and costlier but more protracted than Tunis and Egypt, raising the risks of ethnic war that could fragment the country, trigger a humanitarian crisis and further jeopardise oil supplies.

  In Egypt and Tunisia, powerful military elites ultimately decided the outcome of the revolutions, easing unpopular leaders Hosni Mubarak and Zine al-Abidine Ben Ali from office. But in Libya it is more opaque and complex tribal power structures could decide how events play out.

  Having risen through the military himself, Gaddafi emasculated the army to prevent its commanders from threatening him following periodic failed coup attempts.

  " He knows from his own experience that coup d'etats come from the army so he closed the way for any potential coup d'etat a long time ago. He dismantled the army and set up instead what he called the popular army," said Djebbar.

  He created well-armed and tightly knit brigades led by his own al-Gaddadfa tribe and by al-Magarha, another tribe headed by Abdullah Sanussi, Gaddafi's brother-in-law and chief enforcer.

  Experts agree that part of the explanation for Gaddafi's survival is linked to having his sons in charge of his security and his own tribe occupying the most important positions.

  " His units are die-hard loyalists, based on skin and kin, blood ties which for Gaddafi are more important than ideology. He has his son Khamis who is in charge of a special army unit," Djebbar said.

  Those familiar with Gaddafi say he is the only decision-maker, a man with absolute authority who does not delegate power to anybody, not even to his own sons.

  On the ground, the balance of power looks equal. Gaddafi and his forces control the capital Tripoli and some nearby towns as well as his birthplace Sirte further east, the site of large arsenals and bases designed to guard oil infrastructure.

  The rebels hold Benghazi, Misrata and Zawiyah and Jebel Nafusa southwest of Tripoli.

  " Gaddafi has not given up, the attack he launched on Brega is an indication that he intends to carry on, " said George Joffe, a Middle East expert at Cambridge University.

  GADDAFI " WON'T END NICELY"

  Despite the defection of large numbers of tribes some still support him including his own Gaddadfa community.

  " The forces on the ground might be quite well balanced. It really can go on for quite some time. If you control Benghazi you control (the eastern region of) Cyrenaica," said Joffe.

  " If you control Tripoli you control Tripolitania. In those circumstances you could have two forces relatively well balanced who can confront each other for a long time."

  On the table is a peace plan devised by from Venezuela's President Hugo Chavez, according to Secretary-General Amr Moussa. Venezuela says Gaddafi has accepted it, but there has been no confirmation. Rebels have said they would not negotiate with Gaddafi, and their reaction to the plan is not known.

  One scenario for a peaceful exit is to have some sort of tribal deal.

  This might see a combination of the sons of Gaddafi, his daughter and Sanussi push him aside and allow the Gaddadfa tribe and al-Magarha, former officers and dignitaries to enter into talks with tribes in the east to grant Gaddafi safe passage to retire in his hometown of Sirte.

  They in turn could make commitments to guarantee the security of the family.

  The other option is for him to go abroad with immunity from prosecution. But this option may not be possible after the International Criminal Court said Gaddafi and members of his inner circle could be investigated for alleged crimes committed against civilians by security forces.

  Joffe said he suspected Gaddafi would eventually be overthrown in a palace coup.

  " The way it will come to an end is if his domestic support ends from his family, tribes, his own battalion or army unit -- if they remove their support he is finished..."

  " It wont end nicely.

By Ed Cropley

  JOHANNESBURG (Reuters) - A ruling by South Africa's top court that lets lung-diseased miners sue their employers could cost the industry billions of dollars in damages and spell the end of deep-level gold mining, a lawyer said on Friday.

  The Constitutional Court decision opens the doors for up to 280,000 afflicted miners in South Africa, Botswana, Mozambique and Malawi to sue South African mining firms, said Richard Spoor, a human rights lawyer who worked on the case.

  " The ruling is very simple. It says mine workers with lung disease can sue their employers for damages," Spoor said. " The accepted wisdom of the last 100 years has been that you can't."

  The decision stemmed from a 2006 claim brought against AngloGold Ashanti, Africa's biggest and the world's third largest gold producer, by Thembekile Mankayi, a miner who worked underground from 1979 to 1995 -- a period when South Africa was under white-minority apartheid government.

  He alleged that AngloGold negligently exposed him to harmful gases and dust, as a result of which he contracted tuberculosis and chronic miner's lung.

  Mankayi, who was seeking 2.6 million rand in compensation, died shortly before the ruling.

  Previously, miners with lung disease had been treated as a distinct category in South African worker compensation laws drawn up at the start of the Johannesburg gold mining rush more than 100 years ago to limit the cost of paying for sick miners.

  Stephen Roelofse, a mining analyst at Metropolitan Asset Managers, said the cost to gold mining firms could be substantial but he did not expect any to go to the wall, even though the sector is already struggling with soaring costs and diminishing deposits.

  " There are so many people involved," Roelofse said. " For so many years people have been exposed to this. Twenty years ago these rules about wearing a mask underground didn't exist."

  Besides AngolGold, the major operators are Gold Fields and Harmony Gold.

  DEEP-LEVEL " DEATH KNELL" ?

  Most of the cases of lung disease in miners in South Africa are silicosis, Spoor said, an affliction that stems from the inhalation of particles of quartz, which is found in high concentration in gold-bearing rocks.

  South Africa's gold mines are the deepest in the world, with some going as far as 4 km (2.5 miles) underground where it is difficult and expensive to provide clean, cool air for workers.

  With the potential bill for compensating sick or dead miners now set to rise dramatically, the cost of such operations could well outweigh the benefits, jeopardising the future of the deep-level mining sector.

  " It has to do with the cost of ventilation versus the cost of killing and maiming workers. It has always been cheaper to kill and maim than it has been to ventilate. That's now changing," Spoor said. " It could be the deathknell of deep-level mining."

  AngloGold said the ruling " highlighted a number of occupational health challenges" but said it was working to address the problem in a way that did not threaten the viability of the industry.

  It also said it would challenge any claim for damages by Mankayi's representatives, or similar lawsuits from other affected miners.

  Spoor said he had yet to decide whether to launch a class action lawsuit, which has no precedent in South African law, or go with a more focused " group action" approach.

  The ruling is the latest blow to the mining industry in South Africa. This week, the Fraser Institute, a Canadian think-tank, ranked the country as 67th out of 79 countries in terms of the attractiveness of its minerals policies.

* U.S. non-farm payrolls data broadly meet expectation

  * Violence continues to simmer in Libya, supporting gold

  * Mkt digests implications of possible euro zone rate hike

  (Updates prices, adds comment, refreshes throughout)

  By Jan Harvey

  LONDON, March 4 (Reuters) - Gold rose towards $1,425 an ounce on Friday as U.S. February payrolls data supported expectations the Federal Reserve will hold off tightening monetary policy and as unrest in North Africa continued.

  Spot gold was bid at $1,424.70 an ounce at 1435 GMT, against $1,415.59 late in New York on Thursday. U.S. gold futures for April delivery rose $8.80 to $1,425.20.

  The U.S. Labor Department said non-farm payrolls increased by 192,000 in February, above market expectations for 185,000 jobs. Data for December and January was revised to show 58,000 more jobs created than previously estimated.

  While the numbers beat Reuters forecasts, many in the market had privately expected a still stronger number, leading to initial weakness in equities and the dollar.

  " Overall they indicate what Fed Chairman Bernanke already pointed out in his two testimonies this week," said Peter Fertig, a consultant at Quantitative Commodity Research.

  " The economy is improving, growth could surprise on the upside, but the economic recovery is not producing new jobs as it has in the past, given those growth rates."

  " Thus there is no indication from this labour market report that the Fed might think about terminating quantitative easing earlier than scheduled. That will be continued, and that is going to be a supportive factor (for gold)," he said.

  The Fed's easy monetary policy, in place since the financial crisis rocked the markets from 2008, has been a major reason for gold's rally to record highs, because it has undermined confidence in paper currencies.

  Comments from the European Central Bank on Thursday that stoked expectation euro zone monetary policy would tighten sooner rather than later knocked gold sharply lower.

 

  VIOLENCE FLARES

  Gold prices hit a record high at $1,440.10 an ounce on Wednesday as violence flared in Libya after weeks of unrest across the Middle East region. While they have since corrected, unrest in Libya in particular is continuing to support gold.

  Libyan rebels vowing " victory or death" advanced towards a major oil terminal on Friday, calling for foreign air strikes to set up a " no-fly" zone after three days of attacks by Muammar Gaddafi's warplanes.

  " Ongoing speculation that the conflict in Libya might come to an end weighed heavily on precious metals in yesterday's trade," said Standard Bank in a note.

  " This pressure has since faded on news of renewed attacks by Gaddafi forces and the outright rejection by opposition leaders of mediation offers from Venezuelan President, Chavez and the Arab league," it added.

  " With oil once again tracking higher, precious metals should follow suit on both safe-haven demand and inflation hedging."

  Interest in investment products such as gold-backed exchange-traded funds slackened, meanwhile. Holdings of the world's largest, New York's SPDR Gold Trust, fell to their lowest since mid-May on Thursday at 1,210.621 tonnes.

  Holdings in the world's largest silver ETF, the iShares Silver Trust, rose to 10,794.89 tonnes by March 3, their highest since early January.

  Spot silver was bid at $34.87 an ounce against $34.17. Among other precious metals, platinum was at $1,830.43 an ounce against $1,823.49, while palladium was at $811.30 against $812. (Reporting by Jan Harvey Editing by Alison Birrane and Jane Baird)

* Merkel says EU must deliver convincing crisis response

  * Papandreou warns of market backlash if EU falls short

  * Rehn says successful debt crisis outcome not guaranteed

  By Noah Barkin and Leigh Thomas

  BERLIN/PARIS, March 4 (Reuters) - European leaders must deliver a convincing response to the euro zone's debt crisis regardless of a European Central Bank threat to raise interest rates, German Chancellor Angela Merkel said on Friday. She was speaking after ECB President Jean-Claude Trichet shocked markets on Thursday by saying the central bank may increase rates as early as April due to inflation risks.

  After talks with Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro area finance ministers, on preparations for two crucial summits this month, Merkel said they had agreed to do everything to keep the euro strong.

  " Regardless of the question of the ECB and interest rates, we know that we need to put a joint package for the euro zone on the table," she told a joint news conference.

  She stressed Germany's priorities to strengthen fiscal discipline and boost economic competitiveness in the 17-nation single currency area, but did not rule out allowing the euro zone's temporary rescue fund to buy government bonds.

  Asked about letting the European Financial Stability Facility purchase bonds of vulnerable members states, Merkel said: " There is a lot of discussion going on about possible options and these need to be examined."

  Her centre-right parliamentary coalition parties and the Bundesbank have publicly opposed allowing the EFSF to buy bonds or lend money to fund debt buy-backs by states in difficulty.

  EU diplomats say Germany is waiting to see what commitments other countries are prepared to give at a March 11 euro zone summit before showing its hand on the rescue fund and whether to allows its full 440 billion euros to be lent out.

 

  MARKET BACKLASH

  Analysts said the ECB move raised pressure on EU leaders to agree on decisive action at two crucial summits this month.

  Failure would risk a savage market backlash, probably first against Portugal which is seen as the likeliest candidate to follow Greece and Ireland in needing a bailout.

  " Intentionally or otherwise... the ECB's change of stance would also appear to send a timely signal ahead of (the) summit that it is not prepared to set monetary policy purely to support the region's weaker economies while European policymakers dither over a solution to peripheral debt crisis," Jonathan Loynes of Capital Economics wrote in a research note.

  The ECB did though decide to keep offering banks unlimited liquidity until mid-year, something Portuguese banks have relied upon.

  Prime Minister George Papandreou of Greece, the first country to require a euro zone bailout, warned EU leaders of a bond market backlash against the euro zone if they fail to take bold decisions at this month's summits.

  " Only a coordinated policy can calm the markets," Papandreou said in a speech to his Socialist party's national council.

  " If our decisions in the EU are not brave and effective, markets will react very quickly and we will find ourselves at the negotiating table again."

  European Monetary Affairs Commissioner Olli Rehn also cautioned that a successful outcome to the sovereign debt crisis " is by no means guaranteed" .

  Speaking at a Bank of France conference in Paris, Rehn said EU fiscal reforms must ensure sanctions for " irresponsible behavour" were more automatic and less subject to political deliberation.

  He thanked the ECB for its support for stricter enforcement of the rules. France and Germany have led euro zone states in watering down the Commission's proposals by requiring an extra vote by finance ministers before sanctions are applied.

  Trichet said on Thursday the EU needed a " quantum leap" to tighten controls on public finances and encouraged the European Parliament, which much approve the new rules, to insist on a firmer stance.

 

  IRELAND TO SEEK CHEAPER LOANS

  Irish prime minister-in-waiting Enda Kenny was set to plead for easier bailout loan terms to Merkel and other centre-right European leaders at a meeting in Helsinki on Friday evening ahead of the two key summits.

  Invited by Finnish Finance Minister Jyrki Katainen, the dozen leaders will discuss the interest rate on emergency lending to Ireland and other debt issues.

  The meeting will take no formal decisions but is expected to shape thinking on the overall effort to contain the debt crisis.

  Merkel was cool on Wednesday to the incoming Irish leader's demands for a renegotiation of the terms of an 85 billion euro financial rescue agreed last November, saying the agreement was only recent and interest rates could not be cut artificially.

  Greece and Ireland are struggling with the same dilemma. Punitive interest rates imposed by the euro zone are higher than their projected economic growth rates, making it harder for them to service their growing debt burden in future.

  In a possible hint of German flexibility, a senior lawmaker in Merkel's Christian Democratic (CDU) party said Germany might be willing to support a cut in the cost of the Irish rescue package if Dublin raised its low corporate tax rate.

  " A small rise in Ireland's lower than average corporate tax rate" might help lower the country's risk profile and form the basis for a possible renegotiation, Michael Meister, the CDU's deputy parliamentary floor leader, told Reuters in Dublin.

  Another point of discussion in Helsinki is likely to be a German-French initiative for a " competitiveness pact" across the euro zone, including measures to put legal limits on deficits, encourage the gradual raising of retirement ages and work towards a common corporate tax base.

  The German and French plan raised hackles among euro zone member states when it was put on the table in early February, but a re-worked version drafted by Van Rompuy after wide consultations has gained more broad-based support. (additional reporting by George Georgiopoulos in Athens, Daniel Flynn in Paris, Terhi Kinnunen in Helsinki writing by Paul Taylor and Luke Baker, editing by Mike Peacock)

* LME stocks of copper and aluminium rise

  * Oil up, Brent holds on to gains

  * U.S. payrolls data slightly better than expected

 

  (Updates prices, add comments)

  By Rebekah Curtis

  LONDON, March 4 (Reuters) - Copper remained firm on Friday after slightly better-than-forecast U.S. jobs data reassured investors that economic recovery was intact, but strong oil prices stoked concerns inflation would hit growth.

  Three-month copper on the London Metal Exchange was $9,957 a tonne at 1415 GMT, up from a last bid of $9,910 a tonne on Thursday.

  " The numbers we got today were almost bang on expectations. The unemployment rate was a little bit lower. It continues to trend down, and it suggests things are improving," said Natixis analyst Nic Brown.

  U.S. February nonfarm payrolls rose by 192,000, slightly higher than expectations at 185,000.

  Friday's figures added to a recent spate of upbeat data from the world's biggest economy, including data on jobless claims and U.S. services sector on Thursday.

  " It's a cautious, slow trickle of better figures, but people are still cynical," a trader said.

  On Thursday European Central Bank President Jean-Claude Trichet said the bank might hike interest rates next month, far earlier than markets expected, though any rise would not signal a series of increases.

  " We got out of Trichet in Europe a very clear message when he started talking of strong vigilance, but so far we're seeing none of that coming out of the U.S., so it's pretty much business as usual," Brown said.

  Capping gains was a stronger dollar against the euro. A stronger U.S. currency makes dollar-priced commodities more expensive for holders of other currencies.

  Nonetheless, tensions have run high in markets since a wave of unrest has spread across the Middle East and North Africa this year.

  U.S. and Brent crude oil futures held on to gains after Friday's U.S. payrolls report.

 

  STOCKS CLIMB

  Also weighing on the market, stocks of copper in LME warehouses last rose 1,250 tonnes to 425,300 tonnes, their highest level since July last year as traders cited weakening physical demand.

  " We would argue that industrial metals may find it difficult to break higher in the near term as long as inventories do not register meaningful outflows again," Credit Suisse said in a note.

  " Spreads between Shanghai and London prices additionally hint at some moderation in Chinese demand," the note added.

  " However, we think that the fundamental backdrop remains broadly supportive and expect the uptrend to accelerate soon."

  The growing piles of metal have moved the copper curve into an $8.50 contango -- a discount for cash versus three-month material -- from a $70 backwardation, or the premium for cash over three-month material, in mid-December.

  Aluminium stocks climbed 7,250 tonnes to 4,606,200 tonnes, within reach of a record high 4,640,750 hit in January 2010.

  Aluminium traded at $2,620.25, from a last bid of $2,611 on Thursday.

  Zinc was at $2,505 a tonne from $2,512 at the close on Thursday, and battery material lead was at $2,648 a tonne from a close of $2,619 a tonne.

  Tin was at $32,025 from $31,650 a tonne. Nickel was $28,950 from $28,860 a tonne.

  Metal Prices at 1418 GMT Comex copper in cents/lb, LME prices in $/T and SHFE prices in yuan/T Metal Last Change Percent Move End 2010 Ytd Percent

  move COMEX Cu 451.50 3.25 +0.73 444.70 1.53 LME Alum 2618.00 15.00 +0.58 2470.00 5.99 LME Cu 9979.00 119.00 +1.21 9600.00 3.95 LME Lead 2653.00 34.00 +1.30 2550.00 4.04 LME Nickel 28905.00 45.00 +0.16 24750.00 16.79 LME Tin 31925.00 275.00 +0.87 26900.00 18.68 LME Zinc 2512.00 0.00 +0.00 2454.00 2.36 SHFE Alu 16990.00 45.00 +0.27 16840.00 0.89 SHFE Cu* 74720.00 580.00 +0.78 71850.00 3.99 SHFE Zin 19270.00 150.00 +0.78 19475.00 -1.05 ** Benchmark month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07 (Additional reporting by Sue Thomas and Silvia Antonioli editing by Jane Baird)

WASHINGTON, March 4 (Reuters) - The battle over federal spending cuts will reach the U.S. Senate floor next week for votes, with Republicans and President Barack Obama's Democrats far apart on a deal needed to avert a government shutdown, congressional aides said on Friday.

  Republicans, who made big gains in the Nov. 2 congressional elections, have proposed steep cuts to the federal government's budget to narrow its gaping deficit, while Democrats have agreed to only a fraction of the cuts.

  Failure to reach an agreement before March 18, when a temporary government funding bill expires, could force the government to shut down non-essential services and lay off hundreds of thousands of workers.

  The Senate is likely to vote next week on a new Democratic proposal for an additional $6.5 billion in cuts this year, and a bill passed by the Republican-led House of Representatives that would slash nearly ten times that much -- $61 billion, the aides said, asking not to be identified.

  Both measures seem certain to fall short of the needed 60 votes in the 100-member, Democratic-led Senate to clear a procedural hurdle, the officials said.

  The votes, however, would demonstrate the need for the House and Senate to focus on a compromise and perhaps spur lawmakers into more fruitful negotiations. No specific day has been set for a vote.

  Vice President Joe Biden met with top House and Senate Republican and Democratic leaders on Thursday in an opening round of White House-led talks.

  " We had a good meeting, and the conversation will continue," Biden said in a statement afterward.

  There was no word on when they would meet again, but a congressional official said much of the work, at least for now, would be done by staffers.

  Earlier this week, Congress approved an initial $4 billion in cuts that prevented a government shutdown this weekend.

  The bill that passed the House would cut $61 billion through September. But Obama and his Democrats say that is too much.

  The White House said on Thursday it made a counter offer of $6.5 billion in cuts in federal programs this year. But many Republicans have shown little willingness to soften their proposals for deep spending cuts.

  (Reporting by Thomas Ferraro Editing by Paul Simao)

* Libyan security forces fire shots at Tripoli protestors

  * Rebels clash with Gaddafi forces at key oil terminal

  * Shi'ites stage protests in Saudi oil province

 

  (Updates prices, protests, U.S. non-farm payrolls data)

  By Claire Milhench

  LONDON, March 4 (Reuters) - Crude oil rose on Friday, with Brent staying above $115 a barrel, as Libyan security forces began a violent crackdown on protesters in Tripoli and clashed with rebels near the major oil terminal of Ras Lanuf.

  By 1409 GMT, Brent crude futures for April delivery were up 71 cents to $115.50 a barrel, after earlier touching $116.30. U.S. crude futures for April rose $1.08 cents to $102.99 a barrel. The intraday high was $103.57.

  Investors and traders have been nervously tracking the civil unrest in North Africa and the Middle East for any sign that Saudi Arabia, OPEC's leading oil producer, would be affected.

  On Thursday Saudi Shi'ites staged protests in two towns in its oil-producing Eastern Province, demanding the release of prisoners they say are being held without trial.

  In Libya, security forces fired shots and used tear gas to disperse a protest against Muammar Gaddafi's regime in the capital Tripoli. Demonstrators began the protest in the city's eastern district after Friday prayers.

  Meanwhile, rebels advanced on the major oil terminal of Ras Lanuf, clashing with forces loyal to Gaddafi.

  The head of Libya's rebel National Libyan Council vowed " Victory or death" , in a short speech in the town of Al Bayda in the rebel-held east of the country.

  A rebel spokesman told Al Jazeera television that rebel forces will attack Tripoli once a " no-fly" zone is enforced by international powers. He added that rebel forces had repelled an attempt by Gaddafi forces to seize control of Brega airport in the rebel-held east.

  Barclays Capital analysts said in a note the chances of a swift resolution in areas of tension had reduced considerably.

  " Libyan oil is likely to be lost to the market for an extended period, tying up considerable amounts of replacement oil in much longer supply chains, and events in Nigeria, Iraq, Iran and Bahrain are likely to provide a continuing backdrop of headline risks," they said.

 

  SAUDI ARABIA

  While the market focuses on the Shi-ite protests in Saudi Arabia, Christophe Barret, global oil analyst at Credit Agricole Corporate and Investment Bank, said he thought the risks were exaggerated.

  " Saudi Arabia is the main risk in the region. It has all the spare capacity, and if there is unrest and production disruption, then it means an explosion in oil prices. But I think the risk is an exaggeration," he said.

  He argued there were always problems between the Shi-ites and the Sunnis. " I don't think it will go like Libya, but the Eastern Province is a significant oil-producing province of Saudi Arabia, so that is why everyone is looking at it."

  Unrest continues in other parts of the region. Iraqi security forces used water cannon and batons to disperse protesters in the southern oil hub of Basra as thousands of Iraqis rallied around the nation against corrupt officials and poor basic services.

  Shi'ite Muslim rebels in northern Yemen said the military had fired rockets at their anti-government protests. And in Bahrain several people were reported hurt in fighting between Sunni and majority Shi'ite Muslims.

  " Tension in the Middle East is like a runaway train," said Michael Hewson, an analyst at CMC Markets. " Once it starts it's very difficult to stop. And if there is a danger that it impacts the supply chain, people will understandably get nervous."

  Libya's oil output has fallen to 700,000-750,000 barrels per day (bpd) from normal levels of 1.6 million bpd as most foreign oil workers have taken flight, according to Shokri Ghanem, the head of Libya's state-owned oil company.

  The U.S. dollar traded flat against a basket of currencies as the euro strengthened following the European Central Bank's hawkish comments about rate rises on Thursday. A weaker dollar is supportive for oil prices.

  February U.S. non-farm payrolls rose by 192,000, beating forecasts of 185,000. Private sector jobs rose 222,000, more than expected, and the February jobless rate fell to 8.9 percent.

  Although the numbers confirmed that the economy is improving, Gene McGillian, an analyst at Tradition Energy in the United States, said the overnight rally had taken some steam out of the reaction to the jobs report.

  " As long as people keep reading about fighting in Libya and protests in the Middle East, it keeps the geopolitical risk premium in the forefront," he said. (Additional reporting by Florence Tan and Robert Gibbons, editing by Jane Baird)

By Mohammed Ghobari

  SANAA (Reuters) - President Ali Abdullah Saleh on Friday rejected an opposition plan for him to transfer power by the end of 2011, as crowds demonstrating against his rule swelled into hundreds of thousands.

  Saleh, who has ruled the poverty-stricken Arab country for 32 years, is sticking to his earlier offer to step down when his term ends in 2013.

  However, he agreed to a reform plan proposed by religious leaders earlier this week which would revamp elections, parliament and the judicial system.

  " The president rejected the proposal and is holding on to his previous offer," the opposition's rotating president Mohammed al-Mutawakil said on Friday.

  Yemen, a neighbour of Saudi Arabia, was teetering on the brink of failed statehood even before the protests, with Saleh struggling to cement a truce with Shi'ite rebels in the north and quell a budding secessionist rebellion in the south.

  " Oh God, god please get rid of Ali Abdullah," protesters chanted in the capital Sanaa, where protests stretched back for more than 2 km in the streets around Sanaa University.

  Political analysts say the growing protests, inspired by unrest that has toppled the leaders of Egypt and Tunisia, may be reaching a point where it will be difficult even for Saleh, a clever political survivor, to cling to power.

  Saleh is also an important U.S. ally against al Qaeda's Yemen-based wing.

  Earlier on Friday, Shi'ite rebels accused the Yemeni army of firing rockets on a protest in Harf Sufyan in the north, where thousands had gathered. Two people were killed and 13 injured.

  " During a peaceful protest this Friday morning ... demanding the fall of the regime, an end to corruption and political change, a military post fired rockets at a group of protesters and hit dozens of people," a statement from the rebels said.

  The government said armed men had fired on a military post in Harf Sufyan, wounding four security men, but denied having fired on the protest.

  The rebels complain of discrimination by the government and announced their support for the protests in early February. They have been in an uneasy truce with the government since February 2010 to end a war that has raged on and off since 2004.

  CLERICS CALL FOR PROTESTS

  A plan proposed by clerics this week calls for changing the constitution and rewriting election laws to ensure fair representation in parliament, opening up voter registration and making politics more democratic, and guaranteeing the right to peaceful protest.

  The opposition had proposed a mostly identical plan but with the added requirement that Saleh hand over power this year, but he rejected that condition outright on Friday.

  Clerics sympathetic to the opposition, whose ranks have grown with the defection of Saleh allies, joined protesters in Sanaa for Friday prayers and called on Yemenis to take to the streets to demand Saleh step down.

  Tens of thousands of protesters, and possibly more than 100,000, rallied in Sanaa in what was among the largest demonstration yet, a Reuters journalist said. Similar numbers demonstrated in Taiz, south of Sanaa, with tens of thousands in Ibb and Aden.

  Opposition leaders put the combined number of protesters at more than 500,000 in Sanaa and Taiz, but that could not be independently verified.

  " This is a corrupt and oppressive regime, and God is calling on us to get rid of it," one preacher shouted to the crowds in Sanaa, telling them to pray that they, and Libyan rebels fighting against Muammar Gaddafi, succeed in toppling their governments.

  Protesters say they are frustrated with widespread corruption and soaring unemployment in a country where 40 percent of its 23 million people live on $2 a day or less and a third face chronic hunger.

  Saleh loyalists, in a sign that he still has significant support, organised a counter-protest on Friday attended by about 100,000 people, a Reuters reporter said.

  " No to sedition. No to chaos. Yes to stability," they chanted. Police using loudspeakers called on Yemenis joining anti-government protesters to return home, and the demonstrators shouted to the police to join them.

  (Additional reporting by Mohamed Sudam Writing by Erika Solomon Editing by Andrew Dobbie)

By Suleiman al-Khalidi

  AMMAN, March 4 (Reuters) - King Abdullah faces a growing challenge from protests against economic hardship and political stagnation, but Jordan's defining faultline between its " East Bank" and Palestinian citizens could pose a graver threat.

  Trying to prevent contagion from the uprisings sweeping the Arab world, Abdullah sacked his prime minister last month and promised political reform. Authorities also announced a $650 million package of state subsidies for Jordanians.

  The moves took some of the steam out of protests which broke out across the resource-poor kingdom in January and February, but did not address underlying tensions between indigenous East Bankers and Jordanians of Palestinian origin.

  East Bank Jordanian tribes, who form the bedrock of support for Abdullah's Hashemite monarchy, felt threatened by falling state benefits brought about by the global financial crisis and economic reforms of previous governments, as well as any prospect for political empowerment of Palestinian Jordanians.

  Palestinians dominate Jordanian businesses but are sharply under-represented in politics. Electoral laws ensure that urban centres where most of them live return far fewer parliamentarians per voter than rural tribal areas.

  The extra spending on social aid has pushed up the projected 2011 budget deficit half a percentage point to 5.5 percent of GDP and forced the government to cut capital spending.

  PROTESTS

  Protests have broken out in East Bank tribal strongholds as well as around Amman, where Palestinians -- and Islamists, who form the most popular political force -- are concentrated.

  But although all demonstrators have been chanting for reform, East Bank protests are motivated largely by concerns over state jobs and benefits, while demonstrations in Amman are fuelled by a sense of injustice in Jordan's electoral laws.

  Divisions between the two camps were highlighted in a February statement by 36 tribal figures, ostensibly calling for political reform in Jordan, which sharply criticised the monarch's Palestinian-born wife, Queen Rania.

  Even before the wave of protests inspired by the uprisings in Tunisia and Egypt, Jordan witnessed an escalation of violence in provincial regions that are strongholds of East Bank tribes, fuelled partly by competition for the dwindling number of jobs provided by the state and perceptions of corruption.

  What to watch:

  -- Possible clashes between Islamist and pro-democracy supporters on one hand and conservative tribal elements, who fear that any significant political reforms would benefit Jordanians of Palestinian origin.

  -- Widening scale of sit-ins and protests, by mostly public sector employees demanding higher wages.

  -- Reaction of the mainstream Muslim Brotherhood Islamists, who have so far not thrown in their full weight behind street demonstrations, to any communal tensions.

  -- Response of a government-appointed dialogue committee mandated to present proposals for a new election law and the reaction of Islamist and liberal groups if -- as expected -- they fall short of addressing political grievances.

 

  ARAB-ISRAELI PEACE TALKS

  Jordan hosts the largest number of Palestinian refugees and when the kingdom made peace with Israel in 1994 it got no guarantee of right of return for its Palestinian citizens.

  Analysts say the issue would come to the fore if the breakdown in Middle East peace talks raises the prospect of a permanent settlement of Jordanians of Palestinian origin, who form a majority of the country's 7 million population but are marginalised in government posts, the army and security forces.

  Bakhit's government is expected to stall some of the economic liberalisation policies that appear to have benefited the largely Palestinian business class, alienating many East Bank Jordanians whose power base has been in large state-run industries and the bureaucracy.

  What to watch:

  -- Aggressive or defiant comments by ultra-nationalist Jordanians that further polarise the two communities.

  -- A tougher policy towards Israel if peace talks sour and prospects for a two-state Israel-Palestinian solution dim, leading to fears of an Israeli " transfer policy" that expels West Bank Palestinians to Jordan.

  -- Retreat from privatisation and a bigger role for the state in the economy as policies seek to funnel more funds to cushion East Bank Jordanians dependent on subsidies and pensions.

 

  RECORD DEFICIT/SLUGGISH ECONOMY

  To head off the unrest that has swept the Arab world, the government introduced social aid in January ranging from salary hikes for civil servants to a freeze in gasoline price rises.

  Although the finance minister has said the impact of the extra spending on already cash strapped public finances will be minimised by cuts in capital spending, analysts believe lack of fiscal prudence could raise the deficit to higher than the projected 5.5 percent of GDP.

  Expansion of spending on civil service salaries and pensions -- which form 80 percent of the budget -- will push debt levels beyond a legally permissible 60 percent of GDP, analysts say.

  The appointment of a premier who favours a bigger state role in the economy has sent negative signals to the vibrant private sector, which the treasury relies on to generate jobs and taxes.

  Foreign aid that has traditionally covered budget shortfalls to underpin the stability of the pro-U.S. country is expected to reach $620 million this year but with the extra social spending this will not be sufficient to ease the fiscal strain.

  What to watch:

  -- Whether policy makers resort to higher levels of domestic borrowing from banks and abroad to finance growing social needs and the budget deficit.

  -- Signs of donor fatigue over pace of political and economic liberalisation and lower aid levels from the United States, the country's biggest donor.

  -- Whether the government tackles corruption in state-owned enterprises that wastes tens of millions of dollars.

  * For political risks to watch in other countries, please click on (Editing by Jon Boyle)

* Feb payrolls rise by 192,000, above expectations

  * Crude gains as Libyan rebels near major oil terminal

  * Wal-Mart edges higher in premarket after raised dividend

  * Futures down: Dow 2 pts, S& P 1.1 pts, Nasdaq off 2.2 pts (Updates with payroll report)

  By Ryan Vlastelica

  NEW YORK, March 4 (Reuters) - U.S. stock index futures pointed to a flat open on Friday as February's jobs report came in better than expected but fell short of the most optimistic expectations.

  Payrolls rose by 192,000 in the month, above the 185,000 gain expected by a Reuters poll, and the jobless rate unexpectedly dipped to 8.9 percent from 9 percent. Strong data earlier in the week fed optimism that the number would be above 200,000.

  " This is an on-par reading, enough to satisfy those who were looking for a stronger number but not enough to placate those who were looking for something well ahead of consensus to make up for the weather-related weakness last month," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

  Bets on big gains in payrolls pushed Wall Street to its best one-day rally in three months on Thursday.

  S& P 500 futures fell 1.1 points and were under fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 2 points and Nasdaq 100 futures fell 2.25 points.

  " My suspicion is the activity you saw yesterday was to make up for the money flow that usually comes in on the first of the month that waited in anticipation of a much stronger whisper number out there," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont. " So the market as we get into the day may be a little bit disappointed."

  The ongoing strife in Libya and its impact on oil prices will be another focus for investors as fighting intensified and rebels advanced toward a major oil terminal. U.S. April crude rose 1.5 percent while Brent crude futures added 0.9 percent.

  Equities recently have had an inverse relationship with oil prices on the concern that high energy costs could weigh on economic activity.

  Data on January U.S. durable goods and factory orders will be released at 10 a.m. (1500 GMT), with factory orders seen rising 2 percent from December.

  Dow component Wal-Mart Stores Inc raised its annual dividend by 21 percent late on Thursday. The stock rose 0.8 percent to $52.44 in premarket trading.

  Robert W. Baird upgraded Intel Corp and other semiconductor stocks, expecting order trends for semiconductors in personal computers and wireless infrastructure to rebound in the second half of 2011. Intel, a Dow component, edged 0.6 percent higher to $21.92 before the bell.

  Optimism ahead of the payrolls report gave Wall Street its second straight day of gains on Thursday, though on weak volume, and the put-to-call ratio in the options market didn't change much as traders continued to hedge against a potential drop. (Additional reporting by Chuck Mikolajczak Editing by Padraic Cassidy)