(Adds background)

  NEW YORK, March 2 (Reuters) - Moody's Investors Service on Friday cut Greece's sovereign debt rating to the lowest possible level after a debt-restructuring deal that imposes hefty economic losses for private creditors.

  Moody's lowered Greece's local and foreign-currency bond ratings a notch to C from Ca, becoming the third credit rating agency to downgrade the country following the announcement of the swap deal to lighten its debt burden.

  Moody's says that bonds rated C " are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest." The rating agency added that it did not assign any future outlook.

  " The announced debt exchange proposal," the credit rating agency said in a statement, " implies that private creditors that participate will incur substantial economic losses on their holdings of the Greek government debt."

  On Monday, Standard & Poor's cut Greece's long-term ratings to " selective default," the second ratings agency to proceed with a widely expected downgrade after the country announced the bond swap. Fitch had announced a cut to its lowest rating above default last week.

  Greece formally launched the bond swap a week ago.

  Under the deal, which is part of a second 130-billion-euro rescue package to claw Greece back from the brink of a disorderly default, bondholders will take losses of 53.5 percent on the nominal value of their Greek holdings, with actual losses put at around 74 percent.

  According to Moody's, " the announced proposal for private sector involvement, a precondition for the provision of further financial assistance from the euro area, would constitute a distressed exchange, and hence a default, on Greek government bonds."

  The rating agency makes a distinction between a distressed exchange - where investors are losing money - and an outright default that is likely to happen when the exchange does not take place.

  " Both these conditions are met in this case," Moody's said.

  When the Eurogroup's assessment has been finalized and debt exchanges have been completed, Moody's will re-assess the credit risk profile and ratings of any outstanding or new securities issued by the Greek government.

  Moodys' concludes that " the risk of default even after the debt exchange has been completed remains high," and any upward movements in Greece's sovereign ratings after the debt exchange are likely to be small.

  (Reporting By Tiziana Barghini Editing by Andrew Hay and Jan Paschal)

By Parisa Hafezi and Mitra Amiri

  TEHRAN (Reuters) - Iran, under intense Western pressure over its disputed nuclear programme, on Saturday declared an initial turnout of 64 percent in a parliamentary election shunned by most reformists as a sham.

  Iran's Islamic clerical leadership is eager to restore the damage to its legitimacy caused by the violent crushing of eight months of street protests after President Mahmoud Ahmadinejad was re-elected in a 2009 vote his opponents said was rigged.

  Supreme Leader Ayatollah Ali Khamenei, who endorsed the 2009 result, has since turned sharply against Ahmadinejad. Some early results from Friday's vote suggested the divisive president's supporters were losing ground in the 290-seat parliament.

  His sister, Parvin Ahmadinejad, failed to win a seat in their hometown of Garmsar, the semi-official Mehr news agency said. Elsewhere, Khamenei loyalists appeared to be doing well.

  Interior Minister Mostafa Mohammad Najjar put the turnout at 64 percent after more than 26 million votes had been counted, telling state television the Iranian nation had disappointed its enemies by voting in such numbers.

  The figure was close to the 65 percent predicted for weeks by hardline conservative leaders and media.

  Najjar said 135 seats had been won outright so far, with 10 going to a run-off. Final results were not expected on Saturday.

  According to a Reuters tally of the results announced in 126 seats, 81 went to Khamenei supporters, 9 to Ahmadinejad's faction, 7 to reformists and 7 to independents, with the allegiance of the remaining winners unclear.

  The results are hard to compare with the outgoing parliament because hardline Khamenei and Ahmadinejad loyalists were united in the 2008 elections, taking about 70 percent of seats.

  Results declared so far were mostly from rural areas, Ahmadinejad's traditional strongholds. Khamenei's candidates were expected to do well in Tehran and other big cities.

  Khamenei, 72, had called for a high turnout to send a message of defiance to " the arrogant powers bullying us."

  British Foreign Secretary William Hague said Iran's election was not free or fair. " The regime has presented the vote as a test of loyalty, rather than an opportunity for people freely to choose their own representatives," he said.

  No independent observers were on hand to monitor the voting or check the official turnout figures. An unelected Guardian Council, which vets all candidates, barred 35 sitting MPs from seeking re-election and nearly 2,000 other would-be candidates.

  The vote took place without the two main opposition leaders. Mirhossein Mousavi and Mehdi Karoubi, who ran for president in 2009, have been under house arrest for more than a year.

  BEATING WAR DRUMS

  Iran has been hard hit by Western sanctions over its refusal to halt sensitive nuclear activity and be transparent with U.N. nuclear inspectors. Israel, whose leader meets U.S. President Barack Obama on Monday, has talked of war.

  Obama also said military action was among the options to prevent Iran acquiring nuclear weapons. " As president of the United States, I don't bluff," he told Atlantic Magazine. But he also argued against a pre-emptive Israeli strike.

  The dispute over Iran's uranium enrichment programme, which Tehran says is purely peaceful, barely featured in an election dominated by debates over soaring prices and scarce jobs.

  The vote will have scant impact on Iran's foreign or nuclear policies, in which Khamenei already has the final say, but could strengthen the Supreme Leader's hand before a presidential vote next year. Ahmadinejad, 56, cannot run for a third term.

  The outgoing parliament has summoned him to answer questions next week about his handling of the economy in unprecedented hearings that could hamstring him for the rest of his term.

  But the combative Ahmadinejad may try to turn the tables on his critics, some of whom say he has inflicted higher inflation on Iranians by slashing food and fuel subsidies and replacing them with cash handouts of about $38 a month per person.

  Global oil prices have spiked to 10-month highs on tensions between the West and Iran, OPEC's second biggest crude producer.

  Israeli Prime Minister Benjamin Netanyahu said on Friday global powers would be falling into a trap if they pursued talks with Iran, saying Tehran would use dialogue to deceive the world and buy time to advance its nuclear programme.

  Netanyahu will press Obama, who is facing a presidential election in November, to stress publicly the nuclear " red lines" that Iran must not cross, Israeli officials say.

  (Additional reporting by Zahra Hosseinian and Ramin Mostafavi in Tehran, Matt Spetalnick in Washington Writing by Alistair Lyon Editing by Mark Heinrich)

BEIJING, March 3 (Reuters) - The official Purchasing Managers Index for non-manufacturing sectors fell to 48.4 in February from 52.9 in January, the National Bureau of Statistics said on Saturday, providing the central bank further reason to ease policy in an effort to bolster economic growth.

  The reason was soft demand for services after the early Spring Festival, the National Bureau of Statistics said in a statement on its website.

  The sub-index of new orders fell to 46.1 in February from 48.5 the previous month.

  The services PMI index is intended to provide a snapshot of conditions in the services sector, which accounts for less than 45 percent of China's economy, a much smaller share than in developed countries.

  China's factories grew more than expected in February as export orders for big firms bounced back, a government survey showed, while a private-sector report portrayed a different picture of smaller firms lagging behind the rebound.

  Still, China's economy faces formidable headwinds as exports falter due to weakening demand in the United States and Europe, alongside a downturn in the once red-hot property sector in response to tightening steps by Beijing.

  China's annual economic growth is widely expected to slow to just over 8 percent in the first quarter from 8.9 percent in the previous quarter, the fifth consecutive quarter of slowdown.

  Many analysts expect the central bank to continue its steady policy easing by cutting the amount of cash that banks must hold in reserve to crank up credit to ward off sharper growth slowdown.

  China announced a cut in its reserve requirement ratio by 50 basis points to 20.5 percent on Feb 18, releasing about 400 billion yuan ($63 billion) that could be used for bank lending. It was the second 50-bp cut in the RRR in three months.

  CFLP non-manufacturing PMI index: ---------------------------------------------------------------

  Feb Jan Dec Nov Oct Sep Aug Jul Jun May

  48.4 52.9 56.0 49.7 57.7 59.3 57.6 59.6 57.0 61.9 ---------------------------------------------------------------

  (Reporting by Melanie Lee Writing by Kevin Yao)

By Caroline Valetkevitch

  NEW YORK, March 2 (Reuters) - Stocks have proven the naysayers wrong so far in 2012. And the February jobs report could be just the ticket to keep the bulls going next week.

  The five-month stock rally has been built on a string of improving economic data that suggests U.S. corporate profit growth will remain intact, according to some analysts.

  Job growth is a big part of that picture. It has lagged most other parts of the U.S. economy, a point frequently raised by Republican presidential hopefuls.

  But strategists have been calling for a pullback, especially since indexes are hitting new milestones and the fourth-quarter reporting period is winding down.

  The Standard & Poor's 500 is up for eight of the last nine weeks. This week, the Dow closed above the 13,000 mark for the first time since May 2008, and the S& P 500 twice closed above 1,370, a closely watched technical resistance level. The Nasdaq at one point crossed the 3,000 level this week and is trading at its highest since 2000.

  Some say staying on this path may be possible with further supportive news on the economy.

  " The rally will continue as long as better economic information continues. The question is, 'Are we seeing some sustainable improvement in the economy?' I think the answer is 'yes,' so I think there is going to be some continuation in the rally," said Bryant Evans, investment advisor and portfolio manager at Cozad Asset Management, in Champaign, Illinois.

  The government's jobs report for February, due on Friday, is expected to show non-farm payrolls added 210,000 jobs last month, according to economists polled by Reuters, after gaining 243,000 in January.

  That would mark three straight months of solid job gains.

  The U.S. unemployment rate is seen steady at a three-year low of 8.3 percent.

  It would also be further proof the economy is on the upswing. Among recent upbeat data was this week's report showing gross domestic product expanded in last year's fourth quarter at an annual rate of 3 percent - the quickest pace since the second quarter of 2010.

 

  OIL RAISES A RED FLAG

  Investors are focusing more on economic data lately, with a bailout package for Greece in the works and U.S. earnings news winding down.

  But rising oil prices could create some anxiety.

  Concern about supply disruptions from Middle Eastern oil producers has kept Brent crude oil above $120 a barrel, and analysts said that could affect the longevity of the stock market's rally.

  " The economy has a pretty good head of steam, and a few data points here or there isn't going to derail that. But if you have some exogenous shock from oil, all bets are off. Things can and do change in the short run," said Doug Foreman, director of equities at Kayne Anderson Rudnick in Los Angeles.

  Higher oil prices mean higher costs for consumers and businesses, and an even tougher time for Europe, which appears headed for a recession.

  Greece's second bailout from the euro-zone countries will be in place once conditions are finalized. The first of the money can be paid out after the completion of a bond swap between Athens and private investors, which is to be concluded by March 9.

  Those concerns aside, stocks' gains year to date could be reason enough for investors to pull back. The S& P 500 has risen 9 percent for the year so far.

  " Once you start hitting targets, that tells you something," said John Kosar, director of research with Asbury Research in Chicago.

  " From a pure money-management standpoint, the S& P didn't make any money last year. If you're a manager and sitting on almost 10 percent profit as of March 1st, wouldn't you want to take a little bit off the table?"

  The S& P 500 ended 2011 virtually unchanged.

 

  THE ECONOMY IN THE DRIVER'S SEAT

  But it's hard to argue with economic data.

  A stronger U.S. economy will create jobs and improve profits. That is seen as the key driver for the stock market's gains.

  Even though the percentage of companies beating analysts' profit expectations is down from recent quarters, earnings growth for the fourth quarter is still at 9.4 percent, above a Jan. 3 growth estimate of 7.9 percent.

  Earnings growth is down from recent quarters as well, but analysts said an improving economy will keep that growth from slowing too quickly, and will help offset any negative effects from Europe's fiscal troubles.

  " In our view, so long as the employment situation continues to improve, we're on the right trajectory," said Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas.

  Besides Friday's jobs report, next week brings a private- sector employment report from ADP on Wednesday.

  On Monday, Wall Street will get a snapshot of the U.S. services sector for February from the Institute for Supply Management.

  The U.S. international trade deficit for January will be released on Friday, at the same time as the non-farm payrolls report. Economists polled by Reuters expect the country's international trade deficit to have edged up to $49 billion for January from December's $48.8 billion.

  Among the remaining S& P 500 companies to report results, tax preparation company H & R Block Inc is on next week's agenda as well as filtration equipment maker Pall Corp (Reporting by Caroline Valetkevitch Additional reporting by Lucia Mutikani and Chuck Mikolajczak Editing by Jan Paschal)

(Adds quotes and context from Q& A, news conference)

  By Peter Kennedy

  VANCOUVER, March 2 (Reuters) - St. Louis Federal Reserve Bank President James Bullard said on Friday the U.S. economic outlook is brighter and household confidence has improved , suggesting he sees no need for further steps to ease financial conditions.

  " I think the data is coming stronger on the U.S. economy. I think it's a good time to wait and see and gather more data, get a better read on what's going on in Europe, and see what is going to happen next," he told reporters after a speech at Simon Fraser University.

  Bond buying would be a potent tool, and it would have important effects on the economy, Bullard said.

  " But we already have a lot of things on the table," he said.

  However, Bullard said he would have reservations about any further Fed bond buying because it could accelerate an already sharp recent climb in energy prices.

  Some Fed officials believe high unemployment and sluggish growth demand another round of quantitative easing to kick the recovery into higher gear, while others, including Fed Chairman Ben Bernanke, have suggested renewed bond buying remains an option should the recovery lose steam.

  " I would be concerned that we not undertake a policy move like QE that would possibly feed into a global increase in oil prices," he told reporters after a speech at Simon Fraser University.

  After the Fed announced its second round of quantitative easing in November 2010, commodity prices around the world rose, in part because as the dollar's value fell, other assets rose in price.

 

  SEES U.S. JOBLESS RATE FALLING

  Bernanke told Congress this week there are reasons to question whether recent steep declines in the unemployment rate, which has tumbled from 9.1 percent in August to 8.3 percent in January, will continue because growth is slow and incomes have increased only modestly.

  But Bullard said he expects unemployment to continue to edge lower, and sees no inconsistency with modest growth and steady labor market gains.

  " I think unemployment will continue to get better," he said, in response to questions after a speech at Simon Fraser University. " I don't really have in my mind the idea that you've got to get the rapid growth in order to get the unemployment rate to come down."

  Bullard, who is not a voter on the Fed's policy-setting panel this year, said he expects unemployment to decline to 7.8 percent by the end of the year.

 

  A WARNING ON HOUSING

  While Bullard has in the past been seen as a centrist among Fed policymakers, he favors raising benchmark overnight rates in 2013, earlier than the consensus view that tightening will happen in late 2014.

  The Fed cut rates to near zero in December 2008, and it has bought $2.3 trillion in bonds to stimulate growth. At its January meeting, the Fed said the sluggish pace of growth and a high unemployment rate suggest the central bank won't begin to raise rates until almost three years from now.

  The Fed's next meeting is March 13. At that meeting, officials will have to weigh signs that the recovery is exceeding expectations against worries that rising oil prices will deal another setback to growth.

  Bullard warned against trying to prop up struggling housing markets. Several Fed officials have said taking steps to prevent home foreclosures and clear a backlog of unsold homes could stimulate faster growth.

  " It is not feasible or desirable to attempt to re-inflate the bubble," he said.

  Discussing the Federal Reserve's monetary policy tools, Bullard said that should the central bank determine it needs further monetary accommodation, it could decide to push back the date it expects to raise rates for the first time.

  Contributing to the more positive outlook, recent actions by the European Central Bank to provide liquidity to stressed financial markets through long-term financing appear to have calmed European markets, Bullard said. (Reporting by Peter Kennedy, writing by Mark Felsenthal Editing by Jan Paschal)

By Matt Spetalnick and Jeffrey Heller

  WASHINGTON/OTTAWA (Reuters) - President Barack Obama issued his most direct threat yet of U.S. military action against Iran if it builds a nuclear weapon, but in a message to Israel's leader ahead of White House talks he also cautioned against a pre-emptive Israeli strike.

  " As president of the United States, I don't bluff," Obama warned Iran in an magazine interview published on Friday, three days before he will host Israeli Prime Minister Benjamin Netanyahu in Washington.

  With the meeting expected to be dominated by stark differences over what Washington fears could be an Israeli attack on Tehran's nuclear sites, Netanyahu said he wanted to preserve the " freedom of action of the State of Israel in the face of threats to wipe us off the map."

  Monday's talks are shaping up as the most consequential encounter of U.S. and Israeli leaders in years, with tensions further magnified by Republican presidential candidates slamming Obama over his Middle East policy.

  Further complicating the talks is a trust deficit between the two men, who have had a rocky relationship.

  There is mounting speculation that Israel, which fears that time is running out to stop Iran's nuclear advance, could act militarily on its own in coming months unless it receives stronger reassurances from Washington.

  Netanyahu is trying to convince Obama to more forcefully define the nuclear threshold that Iran must not cross, while the U.S. president wants to convince Israel to hold off on any unilateral strike and give sanctions and diplomacy more time to work.

  Both leaders talked tough ahead of their meeting.

  " I think both the Iranian and the Israeli governments recognize that when the United States says it is unacceptable for Iran to have a nuclear weapon, we mean what we say," Obama said in an interview with the Atlantic magazine.

  Obama repeated the U.S. refrain that " all options are on the table" but spoke in his most direct terms yet of a possible U.S. military response if sanctions and diplomacy fail to curb Tehran's nuclear ambitions.

  " It includes a military component. And I think people understand that," Obama said when asked about U.S. intentions on Iran, which insists it is not trying to develop nuclear weapons.

  While acknowledging Netanyahu's " profound responsibility" to protect the Israeli people, Obama cited " potential unintended consequences" as he made clear that it would be unwise for Israel to go ahead with any attack on Iran.

  " At a time when there is not a lot of sympathy for Iran and its only real ally, (Syria) is on the ropes, do we want a distraction in which suddenly Iran can portray itself as a victim?"

  Obama cannot afford to be too tough on Netanyahu, with Republican presidential candidates ready to pounce on any sign of a rift with close U.S. ally Israel. But Obama's aides are also worried that a new war in the Middle East could sow chaos and bring further spikes in global oil prices.

  It was unclear, however, whether Obama's sharpened rhetoric on Iran would be enough to placate Netanyahu, who was visiting Canada on Friday before flying to Washington on Sunday.

  Netanyahu on Friday ruled out the idea of international talks to prevent Iran from gaining nuclear weapons, a possibility has raised in recent weeks as sanctions have started to take a heavier toll.

  " I think the international community should not fall into this trap," he told reporters in Ottawa after talks with Canadian Prime Minister Stephen Harper.

  (Additional reporting by Caren Bohan Editing by Anthony Boadle)

By Annika Breidthardt and Matthias Sobolewski

  BERLIN, March 2 (Reuters) - Having convinced Europe to embrace Berlin-style fiscal discipline, Germany still needs to get its 16 federal states on board or it could risk slipping the debt brake it has pressed on its EU peers.

  Germany has had a commitment to reduce new debt anchored in its constitution since 2009 and the European version, which Berlin insisted on as part of a fiscal pact which all but two European Union leaders signed in Brussels on Friday, is modelled on that law.

  However, under the German version of the law, states were given until 2020 to get their finances in order. The new European rule has target dates for Germany's combined federal and state budgets which kick in four years earlier and, for some aspects, as soon as next year.

  Either the states will have to ramp up their savings efforts or Berlin - which has no direct power over state finances - will have to compensate for regional shortfalls to meet the new European goal.

  The dilemma has already triggered a blame game between Berlin and the states, or " Laender" .

  " It's embarrassing that the states constantly hide behind the federation, even though together with the communities, they have more tax income than the federal government," said Otto Fricke, an MP and budget expert in the junior coalition party, the Free Democrats. " The reduction of the deficit is a task for Germany as a whole."

  How did Germany get itself into this bind? After all the EU debt-brake law, approved by Finance Minister Wolfgang Schaeuble in December, was essentially German-made.

  Some officials say the federal government, frustrated with lack of progress made by the Laender to fix their balance sheets, intended to raise the pressure on them with a more ambitious European law.

  One said Schaeuble simply miscalculated, forgetting that the German law set different target dates for federal and state budgets, while the EU law combines the two.

 

  SCHADENFREUDE

  The two-year-old euro zone sovereign debt crisis has highlighted a split between northern European countries focused on budget discipline and austerity and peripheral peers, such as Greece, which struggle to survive under their debt piles.

  Germany, the paymaster of the euro zone, with its conservative Chancellor Angela Merkel has pursued a relentless drive to get all countries to adhere to the traditional German goal of fiscal discipline, leading to reforms that have gone straight to the bone of ordinary people across Europe.

  That has made her a target for many seeking a scapegoat, so Germany's potential struggle to stick to the EU debt brake could be greeted with 'Schadenfreude' elsewhere in the bloc.

  For now, Germany has little to worry about. A strong economy helped its 16 states to a deficit of just 9.4 billion euros in 2011, much less than a projected 23.7 billion.

  And the overall German structural deficit - that part which exists regardless of the economic cycle and which includes the 16 states, communities, social insurance and federal budgets - came in at 0.8 percent of gross domestic product last year.

  It is expected to shrink further to 0.5 percent this year.

  So far, a slowdown at the end of 2011 appears to have been just a blip and analysts expect Europe's largest economy to return to healthy growth in the second half of this year, though concerns remain that it could take a hit from a prolonged euro zone crisis.

  The trouble is that even though Berlin's federal government has no legal sway over the states' budgets, for EU purposes the overall budget is what counts.

  The German federal government has until 2016 to cut its structural deficit to no more than 0.35 percent - a line it plans to cross two years early - but its Laender have until 2020 to present balanced budgets.

  The EU's existing Stability and Growth Pact as well as the new fiscal compact also dictate that the overall structural deficit should not rise above 0.5 percent of GDP by 2013 in case of the former and by a so far unspecified deadline in case of the latter treaty. If it does rise above the threshold, sanctions await.

  " In order for Germany as a whole to fulfill the debt brake of the fiscal compact, the Laender and communities also have to reduce their structural deficits," Norbert Barthle, a budget expert in Merkel's conservatives, told Reuters.

 

  MIXED PICTURE

  Some Laender are already doing well and carry most of the 16 states' weight on their shoulders.

  Last year, Bavaria had a budget surplus of 950 million euros and the eastern state of Saxony a surplus of 2 billion euros.

  But in the city-state of Berlin the deficit was 1.1 billion euros, Lower Saxony's gap was at 2.4 billion euros and Germany's most populous state of North-Rhine Westphalia (NRW) posted a deficit of 2.9 billion last year.

  That, however, does not bother some states. NRW finance minister Norbert Walter-Borjans, whose state represents the finance ministers in the Bundesrat upper chamber of parliament this year, says he sees no need for the Laender to act.

  " Germany's rules on the limitation of new debt go far beyond what the other EU member states have fixed so far," Borjans told Reuters. " Therefore the Laender see no changed need to act."

  Others, such as the northern state of Schleswig-Holstein, look to the federal government, saying it has to do more to ease their pain.

  Schleswig-Holstein's finance ministry would like the federal government to come up with a fund to redeem old debt or the option of joint federal and state bonds that would allow the states to benefit from cheap rates the federation can get on international bond markets, a concept similar to common euro zone bonds which Merkel has long opposed.

  Opposition parliamentarian Gerhard Schick, finance expert for the Greens in the lower house, or Bundestag, also sees the ball in the court of the government.

  " I don't see how the Laender can achieve this without an improvement of their income situation," said Schick.

  Yet the federal government's budget can only go so far. Finance Minister Schaeuble already needs to fill a hole of 2 billion euros a year expected income from a financial transaction tax, which has been budgeted for but not yet agreed.

  He also has to adjust for about 4 billion euros less income from planned tax cuts in 2013 and 2014 and 4.8 billion euros that are meant to be saved from 2014. (Writing by Annika Breidthardt, editing by Noah Barkin/Gareth Jones)