The Run On Europe Begins As Global Investors Head For The Hills...

* S& P 500 posts worst week in two months

  * Benchmark index confirms drop below 1,225

  * Dow up 0.2 pct, S& P flat, Nasdaq down 0.6 pct (Updates to close, changes byline)

  By Rodrigo Campos

  NEW YORK, Nov 18 (Reuters) - The worst week for U.S. stocks in two months ended with traders mostly sitting it out on Friday as they waited for politicians in Europe and the United States to tackle festering debt problems.

  The Dow and S& P 500 were little changed and the Nasdaq composite index fell.

  Friday's directionless market showed more exhaustion than relief as Europe remained investors' primary worry. Stocks found support after Italian and Spanish bond yields fell thanks to buying by the European Central Bank.

  In the United States, doubts grew whether a bipartisan committee could come up with budget cuts and tax increases that Congress can agree on next week.

  Financial shares, which have been among the most sensitive to euro zone financial strains, rose on Friday. The S& P financial index was up 0.5 percent. Morgan Stanley shares edged up 0.6 percent to $14.21 but fell more than 13 percent this week.

  A major question has been whether the European Central Bank will find a way to act as a lender of last resort in the manner of the U.S. Federal Reserve. Speculation has grown the ECB could lend money to the International Monetary Fund to bail out some euro zone members.

  " It's hard to see the ECB changing roles, but on the other hand the powers to be have to be very aware of the consequences if this gets out of control," said John Manley, chief equity strategist at Wells Fargo advantage funds in New York.

  " I can't imagine it is allowed to go to a level that it causes serious harm to the marketplace."

  The Dow Jones industrial average gained 25.43 points, or 0.22 percent, to 11,796.16. The S& P 500 dipped 0.48 point, or 0.04 percent, to 1,215.65. The Nasdaq Composite lost 15.49 points, or 0.60 percent, to 2,572.50.

  For the week, the Dow fell 2.9 percent, the S& P dropped 3.8 percent and the Nasdaq lost 4 percent.

  The S& P failed to rise above 1,225 after a drop below it on Thursday triggered massive selling, and it is now strengthening as technical resistance.

  Little conviction characterized this week's market action as traders worried changes in governments in Greece and Italy failed to bring bond yields much lower.

  Spain's likely new leader, center-rightist Mariano Rajoy, pleaded with financial markets for breathing room to start tackling the country's economic crisis if he wins power in a parliamentary election this weekend.

  " If people don't see politicians standing behind change, markets are ready to force change," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

  While investors try to come to grips with how much of an impact the European crisis may have on the U.S. economy, data for the United States showed continued improvement.

  A gauge of future U.S. economic activity rose more than expected in October, according to the Conference Board.

  About 6.7 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq on Friday, below the current daily average of 8 billion shares.

  Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 13 to 10, while on the Nasdaq decliners beat advancers 1,259 to 1,226. (Reporting by Rodrigo Campos Editing by Kenneth Barry)

By Kevin Drawbaugh and Patrick Temple-West

  WASHINGTON, Nov 20 (Reuters) - Whatever happens to the U.S. Congress' deficit-fighting " super committee," world markets are increasingly concerned about several temporary tax breaks vital to the economy that are set to expire at year-end.

  One is the Obama administration's payroll tax cut. Another is a " patch" to prevent the alternative minimum tax (AMT) from hitting middle-class taxpayers. Still others include deductions for state and local sales tax and for college tuition.

  Corporations are anxious about business credits expiring on Dec. 31, such as one for research and development. In addition, unemployment insurance is a top worry in a sluggish economy that some say could easily tip back into recession.

  Here is a brief look at key items and what might happen:

  PAYROLL TAX CUT

  Payroll taxes - which fund the Social Security retirement system - were cut to 4.2 percent for employees at the start of 2011. The rate is due to revert to 6.2 percent at the beginning of 2012 if Congress takes no action.

  President Barack Obama's September jobs package would extend and expand the cut, dropping the rate for employees further to 3.1 percent for 2012.

  The rate for employers, which has remained at 6.2 percent this year, would fall to 3.1 percent on the first $5 million in payroll, under the president's plan, which would also exempt businesses from payroll taxes if they increase their payrolls.

  The president's payroll tax extension would cost $245 billion in foregone government revenues.

  RBC Capital Markets estimated that allowing the payroll tax cut to expire at year-end would reduce U.S. gross domestic product growth by 1 percentage point in 2012.

  This issue, like others below, could be included in whatever deal comes out of the super committee, though that seems unlikely given the panel's rapidly dimming outlook.

  The payroll tax question also could be dealt with later as part of a catch-all, end-of-year spending bill.

  " Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce paychecks starting on Jan. 1, withdrawing needed support from the still-weak economy," said a recent report from the Center on Budget and Policy Priorities, a Washington think tank.

  The tax cut is worth $934 a year to the average worker, the center estimated.

  UNEMPLOYMENT BENEFITS

  Unemployment insurance is a federal-state program that gives workers temporary pay substitution benefits. Through the recession and its aftermath, Congress has extended unemployment benefits up to 99 weeks.

  Beginning on Jan. 1, 2012, those collecting extended benefits will begin to roll off the federal programs. By mid-February, 2.1 million people will be unable to continue on extended federal benefits, said the U.S. Labor Department.

  The president has proposed more funding for unemployment insurance with reforms to the system.

  JPMorgan Chase economists estimated the loss of unemployment benefits, combined with an expiring payroll tax cut, would shave 0.75 percentage point from GDP growth.

  TAX EXTENDERS

  Congress traditionally passes an end-of-year " extenders" bill that renews tax breaks that have not been permanently written into law. These provisions include an AMT " patch," which would exempt middle-class workers from additional taxes.

  Businesses are set to lose " bonus" depreciation tax write-offs for new purchases, and the tax credit for research.

  Making the research credit permanent is an idea with bipartisan support in Congress and from the Obama administration. Some in Congress also want to expand it.

  Such tax extenders, some say, could help shape a deal in the super committee, though others have said extenders will lapse again, as they did in 2010, and will only be renewed retroactively by a lame-duck Congress in December 2012.

  Failure to approve tax extenders before the end of 2011 could hurt the economy. (Reporting by Kevin Drawbaugh, Patrick Temple-West, Stella Dawson, Donna Smith. Editing by Kevin Drawbaugh)

  * Money market mutual funds seen lacking safety net

  * Treasury guarantee program not renewable

  * Fed facilities used in 2008 unlikely to be reprised

  By Mark Felsenthal

  WASHINGTON, Nov 20 (Reuters) - When Lehman Brothers collapsed in 2008 and shattered the belief that U.S. money market funds would never " break the buck," Washington rushed to limit the damage.

  But as Europe's debt crisis threatens to put the U.S. financial system under strain again, U.S. policymakers are worried they cannot turn to those same, impromptu tools to shore up the $2.6 trillion money markets industry.

  " We've done a lot to prepare the banking sector," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said on Wednesday. " I'm less confident about the money market funds and their ability to weather major problems at European institutions."

  Senior U.S. officials are alarmed by the deepening of the European debt crisis. Its spread to Italy, the euro zone's third-biggest economy, is seen as inevitably leading to spillovers across the Atlantic, in part through the holdings of money market funds of European securities.

  Many investors believe money funds are as safe as lower-yielding bank accounts even though it is common knowledge that that they are not backed by the federal insurance that protects bank deposits.

  During the chaos of 2008, dozens of money funds struggled to maintain $1 per share, but only one, Reserve Primary Fund, reported a net asset value below that level.

  Less well known, and of concern to U.S. officials, is that the money funds cannot count on the protection measures that were pulled together to help them in 2008.

  NO EASY OPTIONS

  The Treasury Department is barred from reprising a guarantee program under the terms of the 2008 bailout of the U.S. banking system. Congress, which agreed to the bailout only reluctantly, prohibited renewing the program on grounds that it was providing a false sense of security to investors who might expect government protection again in the future.

  The Federal Reserve is also unlikely to dust off either of two facilities it set up in 2008 to ensure money market funds had cash to meet redemption requests -- the Asset-Backed Commercial Paper Money Mutual Fund Liquidity Facility and the less-used Money Market Investor Funding Facility.

  Today's rock-bottom interest rates and the fact that the government would need to charge fees for such guarantees mean that those types of emergency facilities would likely not be effective as a backstop.

  Limitations on the Fed's emergency authority -- it can no longer intervene to protect individual firms as it did in 2008, but must provide aid to an entire asset class -- may further cramp the central bank's nimbleness in responding to a crisis.

  Another Fed emergency liquidity facility dating from the U.S. financial meltdown depended on a promise that the Treasury would absorb some of the losses if the collateral financial institutions pledged lost value. U.S. lawmakers are now on a debt-cutting crusade and are unlikely to approve more bailout funds for the Treasury to use in that way any time soon.

  NERVOUS INVESTORS

  All this has left some investors nervous about their exposure to what they used to see as the safe havens of money funds, managers said.

  Such funds " breaking the buck are far and few between, but nowadays, everyone is looking at Europe, and they are seeing things they thought wouldn't happen now happening," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco.

  The firm manages about $750 million in assets.

  He said about 25 percent of the firm's investments are in money markets that had been carefully vetted.

  " We've had clients asking us to move to cash," Lip said. " We're getting more and more requests to move to cash entirely rather than invest in money markets."

  Top Fed officials have urged putting money funds on a tighter leash, saying they should be required to hold capital buffers to discourage clients from panic withdrawals.

  " Given the systemic importance of the money market mutual fund industry, it is critical that one way or another we make the industry less susceptible to credit shocks and liquidity runs," Boston Federal Reserve Bank President Eric Rosengren said in September.

  Strains in money funds re-emerged over the summer on concerns about their holdings of commercial paper issued by troubled European banks. Outflows spiked in July as investors worried about the fight in the U.S. Congress over raising the U.S. debt ceiling.

  In response, some of the largest funds cut their European bank holdings and shortened the weighted average maturities of the assets they owned. Outflows ultimately stabilized after a debt deal was reached in the U.S. Congress.

  Various academics and regulators have backed a shift to a share price that can fluctuate, as opposed to the current money fund practice of guaranteeing a stable $1 per share value. But many companies worry such a change would drive away customers.

  Some industry counterproposals involve building up extra capital in some type of " buffer" to backstop money funds that run into trouble. Asset management executives also say that changes put in place by the Securities Exchange Commission at the start of 2010 already have made the funds much more robust than during the crisis, including tightening credit quality standards and imposing liquidity requirements.

  Investors are watching the situation closely.

  Evensky & Katz, a registered investment adviser in Coral Gables, Florida, with $700 million in assets under management, is considering whether to pull out of money market funds. But for now, it is leaning toward staying in, said Harold Evensky, the firm's president.

  " We don't think any of the money market funds we use have significant exposure to Europe and if there was an issue, we have little doubt that they would cover it," he said. (Additional reporting by Ross Kerber in Boston Ann Saphir in Chicago and Ashley Lau and Jessica Toonkel in New York Editing by Dan Grebler)

BEIJING, Nov 20 (Reuters) - A long-term global recession is certain to happen and China must focus on domestic problems, Chinese Vice Premier Wang Qishan has said.

  " The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic," Wang was quoted by the official Xinhua news agency as saying at the weekend.

  Wang's comments were the most bearish forecast ever by a top Chinese decision-maker about the world economy, and Beijing's worry about a worsening global environment could translate into an impetus for pro-growth policies at home.

  China launched a massive fiscal stimulus package with a price tag of 4 trillion yuan ($650 billion) in late 2008 to avert a big impact from the global financial turmoil.

  According to Xinhua, Wang did not speak this time about any major policy change but reiterated that banks should be more flexible lending to the agricultural sector and small firms.

  " As for our country, which relies highly on external demands, we must see the situation clearly and get our own business done," Xinhua quoted Wang as saying, referring to exports.

  China's central bank, which sometimes has to report to Wang, who is in charge of China's financial sector, said last week that it is ready to fine-tune monetary policy if needed.

  At a meeting of local government officials and financial executives in the central province of Hubei on Saturday, Wang said local financial institutions such as city commercial banks and credit cooperatives should not seek to expand their business beyond their regions.

  Wang also urged banks to pay close attention to the international financial situation. Xinhua did not give further details. (Reporting by Zhou Xin and Benjamin Kang Lim Editing by Paul Tait)

By Jeremy Laurence

  SEOUL (Reuters) - Secretive North Korea is expected to register the one millionth cellphone user on its new 3G network by the end of the year, barely four years after people were thrown into prison camps, or possibly even executed, for owning one.

  Most of the users are in the capital of Pyongyang, home to the impoverished country's elite and powerful who have the cash to splash out for a device and the calling fees.

  " There has been an astronomical increase since even two years ago," said Michael Hay, a lawyer and business consultant based in the capital for the past seven years.

  Two years ago, there were less than 70,000 users.

  " All the waitresses in coffee shops have them, as one example, and use them. Let's not even talk about businessmen. The are never off them, and conversations are frequently interrupted by mobile calls."

  The authoritarian government ended a ban on cellphones in 2008, inking a four-year deal with Egyptian company Orascom to build the 3G network in partnership with the government.

  A report this month by the Nautilus Institute for Security and Sustainability said 60 percent of people aged 20-50 use cellphones in Pyongyang, a city of around 3 million people who are strictly vetted by the state for residency permits.

  " Especially for the younger generation in their 20s and 30s, as well as the merchant community, a cellphone is seen as a must, and many youngsters can no longer see their lives without it," wrote Alexandre Mansourov in the report.

  Calling fees have fallen this year, driving the surge in demand, reports say. And the introduction of the " Euro pack" bundle provides the isolated government with some much-needed hard foreign currency.

  But you can't dial into or out of the country, and there's no Internet. The government still keeps a stranglehold on all news flows into the destitute state.

  While the 3G network covers 94 percent of the population, it still only covers 14 percent of the territory, according to Orascom, involved in a joint venture with the government.

  North Koreans who have defected to the South say the cost of buying a cellphone and the operating fees, mean owning such a 3G device is out of question for most. Phones cost about $350 in the country where the average monthly income is about $15.

  " The possession of cellphones was not limited by class, but not many people have cellphones because they are just too expensive," said Kim Seong-hu, 40, who defected to South in April. " Most commoners are satisfied with landlines we have."

  Cheap illegal cellphones tapping into Chinese networks are not uncommon, but their range is limited to just the border fringe.

  NO THREAT, YET

  Analysts say the 3G network does not pose a threat to the government in the way cellphones have fuelled uprisings around the Arab world this year.

  Cellphones and the Internet have been used to rally a revolutionary wave of protests and civil wars that have brought down iron rulers from Hosni Mubarak to Muammar Gaddafi.

  But analysts say this is unlikely to happen in North Korea because strict state media controls limit what the poor know about the outside world and there is no immediate sense of revolt.

  " In the long run, the growth of interaction between people is a problem for the regime, but it might take years, or even decades, before the situation will be ripe for an outbreak of internal discontent," said Andrei Lankov of Kookmin University in Seoul.

  The North banned the use of cellphones in 2004 after an explosion at the Ryongchon railway just a few hours after train carrying leader Kim Jong-il passed through it. Security officials suspect a cellphone was used to ignite the bomb.

  Pyongyang's lifting of the ban paved the way for Orascom's entry into the market. It threw some $400 million into developing the North's first and only 3G network.

  This week Orascom reported there were over 800,000 users on its network, compared to 300,000 at the same time last year.

  Despite its obsession with secrecy and control, North Korea's authoritarian leadership is opening up its telecommunication services and encouraging IT development.

  Ironically, its isolationist policy of Juche has made its drive to catch up a lot easier than for other countries that have travelled the path of IT development.

  " As a laggard in the global digital revolution, Pyongyang enjoys key advantages of backwardness -- dramatic savings on initial R& D costs in the IT sector, the opportunity to leap frog from exclusive reliance on obsolete and scarce landlines to world class 3G mobile communications," says Mansourov.

  " The DPRK (North Korea) mobile communications industry has crossed the Rubicon and the North Korean government can no longer roll it back without paying a severe political price."

By Sui-Lee Wee

  DAOFU, China (Reuters) - The Ganden Jangchup Choeling Nunnery stands hidden from view on an isolated mountain-top in southwestern China, accessible only by a twisting, rocky road. It was here, in a mud-brick hut, that Palden Choetso lived.

  The 35-year-old Tibetan Buddhist nun burnt herself to death on a public street an hour's drive away earlier this month, the latest in a string of self-immolations to protest against Chinese religious controls over Tibet.

  Palden was a quiet woman who had been with the nunnery in the Ganzi prefecture in Sichuan province for more than a decade, her friends said. A bright nun who studied Tibetan Buddhism, she was well-versed in reciting spiritual texts and was an ardent follower of the exiled Tibetan leader, the Dalai Lama.

  No one suspected, however, that Palden would sacrifice herself, writhing in flames on a dusty road lined with shops in downtown Daofu, or Tawu in Tibetan.

  " I want the Dalai Lama to return to China, I want freedom for Tibet!" she is said to have shouted as fire engulfed her body.

  " She had drunk several jin of gasoline," a senior religious figure at the nunnery told Reuters, referring to a traditional weight of measure that is about half a kilogramme. " We got a call that she had set herself on fire, and a few of us went down to try to save her. But it was too late."

  In China, eleven Tibetan monks and nuns -- some former clergy -- have resorted to the extreme protest since March this year. At least six have been fatal.

  The similarities are striking: All called for the return of the 76-year-old Dalai Lama, who fled to exile in India in 1959, and for freedom for Tibet.

  China's Foreign Ministry has branded the self-immolators " terrorists" and has said the Dalai Lama, whom it condemns as a supporter of violent separatism, should take the blame for the " immoral" burnings.

  Human rights activists and Tibet experts say, however, the string of self-immolations stems from desperation at Chinese religious controls and being left with few opportunities and little protection for their culture, without the Dalai Lama to provide hope.

  " In her heart, she's always wanted the Dalai Lama to return to China," said the senior religious figure at Palden's nunnery, some 425 km (265 miles) from Lhasa, capital of the Tibet Autonomous Region.

  The Dalai Lama, revered by Tibetans, has not condemned or condoned the burnings but said the desperate conditions Tibetans face under Beijing's rigid controls in what amounted to " cultural genocide" have led to the spate of self-immolations.

  " ALL HEROES"

  Burning oneself in public is not a new form of protest in China. The self-immolations are perhaps an uncomfortable reminder to the Communist Party of previous public protests such as those by five people in Beijing's Tiananmen Square in 2001. China said then the self-immolators belonged to Falun Gong, a banned spiritual group.

  But this year's self-immolations are notable for their frequency -- and the power with which they symbolise the pent-up frustration felt by many Tibetans in China.

  Just days before she burnt herself, Palden told her fellow nuns that she felt " so sorry for those who self-immolated themselves," Free Tibet, an advocacy group, told Reuters.

  Nicholas Bequelin, a researcher on China for Human Rights Watch, said that his interviews and reports among the monastic communities suggest that tensions are worse now than in March 2008, when deadly riots against the Chinese presence spread across Tibetan regions ahead of the Beijing Olympics.

  " So far, the escalation and the rise in tensions is unprecedented," he said. " One of the main concerns of the government is they don't exactly know how to respond to this."

  " Normally they rely on fear and intimidation," Bequelin said. " But how do you intimidate people who are ready to set themselves on fire?"

  Most of the people who Reuters spoke to in three Tibetan towns in Ganzi prefecture approved of the grisly act.

  " I think they are all heroes," said a woman shopkeeper selling Tibetan religious artwork in the heavily Tibetan town of Danba, giving the " thumbs up" as she spoke. " The central government says our policies on the Tibetans are good. But all they do is suppress the Tibetan people."

  " There will be more. This is just the beginning," she said. " There's no other way out."

  A monk at the Jingang Temple in Kangding town concurred: " Many Tibetans support it, and I support it too. They gave up their lives for the Tibetan race."

  In Daofu, a town of about 55,000 people and the site of a previous self-immolation by a monk from the Nyitso monastery in mid-August, Tibetan clergy appeared conflicted about the act.

  " No, absolutely not," said the senior religious figure from Palden's nunnery, when asked whether he supported self-immolation. " I can't support it because we're talking about people's lives. It's going against the principles of Buddhism."

  The Karmapa Lama, ranked third in the hierarchy of Tibetan Buddhism after the Dalai Lama and Panchen Lama, appealed last week for Tibetans not to set themselves on fire, saying he hoped they would find more constructive ways to advance their cause.

  Robbie Barnett, a Tibet expert at Columbia University in New York, said there has been no precedent for self-immolation as a political protest in Tibet, but added it would be " quite misleading to think that Buddhists disapprove of this" .

  " They disapprove of it from the point of view of the individual, but they admire the sacrifice that the person is making for what's seen as a greater ideal, for the greater good," Barnett said.

  The self-immolations have been concentrated in Ganzi and the neighbouring Aba prefecture. Most residents are Tibetan herders and farmers, many of whom have long resented Chinese rule.

  " This was not far from the areas where the first big battles began against the Chinese in the mid-1950s," Barnett said. " These are people who are not easily pushed around, especially now when their religious institutions are being interfered with in a way that is not seen by them as justifiable."

  All the monks who were interviewed by Reuters spoke of decades of " patriotic re-education" campaigns, during which they are forced to pledge allegiance to the Communist Party and occasionally denounce the Dalai Lama.

  In Daofu, where monks have been jailed for " splittist" activities, they say they live in fear of the police and are wary of arrest. All of them asked that their names not be used.

  The complaints are familiar: China has ruled Tibet with an iron fist since its troops marched in 1950. Experts say, however, that Beijing has compounded the problem by intensifying its security presence in monasteries in recent years.

  Monks and nuns are deeply respected figures in Tibetan society and have also often led resistance to Chinese Communist rule. Chinese security forces detained about 300 Tibetan monks from Aba's Kirti monastery for a month in May amid a crackdown sparked by a monk's self-immolation in March.

  Although there were no police roadblocks and no sign of a heavy security presence in Ganzi on a recent weekend, six buses of troops and paramilitary forces were seen leaving Daofu. Police told Reuters journalists to " leave immediately" and tailed them out of the town for about 200 km.

  RETURN OF THE DALAI LAMA?

  China, which has poured billions into Tibet, rejects accusations that it oppresses Tibetans, saying its rule has ended serfdom and brought huge economic benefits to what was a poor, feudal society.

  " Life was much harder before the Communists came," said Zhaxi Zhongka, a villager from Jiaju village in Danba, which has benefited from tourism money. She brushed off questions about Tibetan independence and the Dalai Lama.

  But many Tibetans remain resentful of Chinese rule. They have placed their hopes in the Dalai Lama, who stresses a non-violent movement for Tibetan autonomy but not outright independence.

  Khedroob Thondup, the Dalai Lama's nephew, said in a telephone interview the situation is unlikely to improve unless Chinese officials meet with his uncle. China has held on-off talks with the Dalai Lama's envoys for several years, without any sign of progress. Talks between the two sides last occurred in February 2010.

  The thorny issue of the ageing Dalai Lama's religious succession may also feed into tensions. Tibetans fear China will use the issue to split the movement, with one new Lama named by exiles and one by China after his death.

  " We cannot change anything without His Holiness, the Dalai Lama's return to Tibet," Palden was quoted as telling her friends in the nunnery, days before she burnt herself.

  Woeser, a Tibetan writer based in Beijing, said Tibetans in Ganzi have been sentenced to jail for merely shouting slogans. " Under these circumstances, you can only choose self-immolation to express your intentions," she said.

* Deal seen as a victory for debt-laden EU governments

  * EU budget chief warns bloc may be unable to pay it bills (Adds UK comment, details)

  By Charlie Dunmore

  BRUSSELS, Nov 19 (Reuters) - European Union negotiators agreed to a two percent rise in the bloc's budget for next year to 129 billion euros ($174 billion), following more than fifteen hours of talks which ended in the early hours of Saturday morning.

  The deal was seen as a victory for cash-strapped capitals grappling with Europe's debt crisis, which had opposed demands by EU lawmakers to increase the budget by more than 5 percent.

  More than two thirds of the EU budget is spent on subsidies for farmers and regional aid funds, which finance road construction, environmental clean-ups and other projects.

  But some EU officials said limiting the budget rise to forecast inflation for next year could leave the bloc unable to pay its bills and threaten the EU budget's AAA credit rating.

  " This is clearly an austerity budget, as most member states are in the midst of a serious financial crisis," said EU Budget Commissioner Janusz Lewandowski, who had originally proposed a five percent rise in spending in 2012.

  " There is now a serious risk that the European Commission will run out of funds in the course of next year, and will therefore not be able to honour all its financial obligations towards beneficiaries of EU funds," he said.

  That is because while agreeing to limit their contributions to the EU budget to 129 billion euros next year, governments gave in to the European Parliament's demands to allow EU spending commitments next year to go up to 147 billion euros.

  " Today's commitments become tomorrow's payments, so they are playing a very dangerous game indeed," said one EU official.

  But Britain, which campaigned hard to contain EU spending, welcomed Saturday's deal, with financial services minister Mark Hoban, saying austerity at EU level was vital when member state governments struggle to tighten their belts.

  " This is an excellent deal for the UK. We have stopped the European Commission and parliament's inflation-busting proposals and have delivered on the government's promise to freeze the EU budget in real terms," he said.

  " Throughout this process, we have argued that with member states facing tough decisions on spending at home, we could not afford these unrealistic demands."

  Parliament won some concessions in the discussions, including an extra 100 million euro in aid for the Palestinian territories in 2012.

  Talks on the EU's spending in 2012 are seen as a prelude to a tougher fight on the bloc's next long-term budget for 2014-2020. ($1 = 0.74 Euros) (Reporting by Charlie Dunmore, editing by Justyna Pawlak)

* Economy minister advises against buying foreign cash, gold

  * Dollar rush pushes forex price 23 pct above official rate

  * Struggling to control rate, cen bank names new forex head

  TEHRAN, Nov 19 (Reuters) - The Iranian government has asked its citizens not to buy dollars, in an effort to stem a rush for hard currency that has sent the exchange rate plummetting in recent months.

  The official news agency IRNA quoted Economy Minister Shamseddin Hosseini on Saturday recommending Iranians " avoid for the time being buying foreign currency or gold coins due to their high rates" .

  " Considering that the forex and gold coin rates are to drop, consequently those who buy them at high prices should not complain later on," he said.

  Rising inflation and a reduction in bank deposit interest rates have spurred demand for foreign currency and gold among Iranians worried about the value of their savings and the central bank has struggled to support the value of the rial.

  Under its " managed floating exchange rate" the Central Bank of Iran's official dollar rate on Saturday was 10,880 rials, but the real amount it cost to buy a dollar at an exchange bureau was 13,380, 23 percent more.

  The Central Bank, which devalued the official rate by 10 percent in June in an attempt to narrow the gap between the official dollar rate and the market price, has appointed a new head of its foreign exchange department, Minoo Kiani-Rad, formerly head of its foreign affair section, according to its website.

  Iranian President Mahmoud Ahmadinejad has blamed Iran's enemies for undermining the currency, saying " ill-wishers keep buying up the dollar" , forcing the state to inject hard currency into the market.

  Economists say demand for dollars and gold is due to people seeking a safe haven as inflation rose steadily to 19.1 percent in October from a 25-year low of 8.8 percent in August 2010.

  Kayhan daily said the government had banned the import of foreign-made gold products in an attempt to combat smuggling.

  Economic sanctions aimed at pressuring Iran to curb its nuclear programme have had some impact on the economy but the biggest inflationary factor has been Ahmadinejad's policy to slash billions of dollars' worth of food and fuel subsidies.

  With wages not rising to match, amid economic growth the IMF has forecast as 2.5 percent this year, Iranians are increasingly complaining of a hit to their spending power. (Reporting by Mitra Amiri and Hashem Kalantari Writing by Robin Pomeroy)

By Ben Blanchard and Laura MacInnis

  NUSA DUA, Indonesia (Reuters) - President Barack Obama exerted fresh pressure on China on Saturday over a range of sensitive issues, from Beijing's currency policies to dealing with territorial disputes in the South China Sea, as he reasserted U.S. presence in the region.

  In a major diplomatic push, Obama has moved to open up new trade ties with the fastest-growing region in the world while increasing U.S. military presence, to counter the growing clout of China, the world's second-largest economy.

  Obama underlined in talks with Chinese Premier Wen Jiabao U.S. concerns about long-festering economic issues, such as China's currency policy. U.S. lawmakers have long argued Beijing keeps the value of the yuan down to help drive the country's exports engine, a stance they say costs American jobs.

  He also raised the thorny issue of how to resolve competing claims by Asian countries, including China, to the sovereignty of the South China Sea, the latest point of friction between the two countries.

  Obama told Wen, who indirectly warned Washington to stay out of the dispute, that the United States wanted to ensure the sea lanes were kept open and peaceful.

  Tensions flared earlier this year with often tense maritime stand-offs between claimants, including China, to a sea that carries some $5 trillion (3.16 trillion pounds) a year in world trade. An Australian think tank warned in June the tensions could spark a conflict that could draw in the United States and other powers.

  Obama and Wen met on the resort island of Bali, Indonesia, on the sidelines of the East Asia Summit, a gathering of 18 countries with diverse political and cultural backgrounds but which seeks to boost political and security cooperation.

  Vietnam, the Philippines, Taiwan, Malaysia and Brunei all have claims to parts of the South China Sea, while China claims large parts of the region, which might hold rich deposits of oil and gas.

  Southeast Asian countries, along with the United States and Japan, are pressuring Beijing to try to seek some way forward on the issue of sovereignty, prompting Wen on Friday to warn " outside forces" to stop interfering, a veiled reference to Washington and Tokyo.

  China wants to hold bilateral talks with other countries that claim parts of the South China Sea as their territory, but the Southeast Asian claimants, the United States and Japan are pushing for a multilateral approach.

  " It ought to be resolved through friendly consultations and discussions by countries directly involved. Outside forces should not, under any pretext, get involved," Wen told a meeting on Friday with Southeast Asian leaders, several of whose countries claim sovereignty to parts of the South China Sea.

  Wen's comments were carried on the Chinese Foreign Ministry's website (http://www.mfa.gov.cn).

  U.S. Secretary of State Hillary Clinton earlier this week urged claimants to the South China Sea not to resort to intimidation to back their claims, itself an indirect reference to China.

  Obama has been lower key as far as public comments are concerned. But he told the leaders of India, the Philippines, Indonesia and Malaysia in bilateral meetings in Bali that maritime issues should be discussed at the summit.

  The United States had been " quite direct with the Chinese about our strategy," said Tom Donilon, Obama's top national security adviser.

  Beijing understood that Washington was serious about sustaining a more active presence in the region to help its stability and peace, he said.

  " Our partners and allies look to us for that reassurance. They want to know that the United States is going to play the role it has played with respect to security and reassurance and balancing and stability here," he said.

  Still, he said Washington was pursuing deep engagement with China to manage a range of U.S.-Chinese issues.

  " We have a very complicated and quite substantial relationship with China across the board," he said, adding that while the United States does have " economic issues" with Beijing, " our relationship with China has in the main been productive and constructive."

  INFLUENCE

  Obama said in Australia on Thursday the U.S. military would expand its Asia-Pacific role, declaring America was " here to stay" as a Pacific power.

  Days earlier, as host of the Asia Pacific Economic Co-Operation forum in Hawaii, Obama had voiced growing frustration at China's trade practices. He declared " enough is enough" as he pushed for a new Asia-Pacific trade deal with some of Beijing's neighbours.

  The moves are seen as an attempt to reassert U.S. leadership in the face of China's rising influence around the Pacific Rim and reassure allies such as South Korea and Japan that it would remain a strong counterweight.

  However, China has adopted a largely restrained response to the expansive moves by Washington.

  " The U.S. has been an important player in Asia ever since the Second World War. We are looking forward to cooperating with them, with the U.S., in the region," China's Assistant Foreign Minister Liu Zhenmin told reporters in Bali.

  Obama also announced on Friday that he would send Clinton to Myanmar next month, which has drawn closer to China in reaction to Western sanctions. It will be the first such trip to the isolated country in half a century.

  That will add to some fears in Beijing of encirclement in the Asia Pacific as the United States increases its footprint in the region.

By Sonya Dowsett

  MADRID (Reuters) - Spaniards say they see only more hardship ahead after a parliamentary election on Sunday that is expected to bring in a new government charged with combating an economic crisis.

  A victory for opposition leader Mariano Rajoy of the conservative People's Party appears to be a foregone conclusion and the main question is exactly what austerity measures he plans to impose to steer Spain away from economic meltdown.

  A gloomy mood hung over the country on Saturday, with little apparent excitement for the election.

  High unemployment, cuts in public spending, and fears that Spain could become the next euro zone country to need a rescue package for its debt problems have sapped morale and dominated the election campaigns.

  Lines of people formed in central Madrid on Saturday morning -- not in anticipation of polling stations opening, but to buy tickets for the national Christmas lottery, known as El Gordo, which could make them instant millionaires.

  " We're going to buy lottery tickets to see if we win, that's

  the only way things will change," said Ana Maria Gomez, 42-year-old housewife. " Everyone is very pessimistic, there's no work there's no hope."

  Also standing in line at the Puerta del Sol, Madrid's main gathering ground, was Amparo Garcia, an 82-year-old retiree.

  " I hope things improve because I have two grandchildren without work - one of them a father of triplets. Jobs are essential, especially for parents of families," she said.

  Other elderly folk complained that their pensions had been frozen by the ruling Socialist government.

  FED UP

  Opinion polls give the People's Party an unassailable lead over the Socialists, widely seen by Spaniards as having mishandled the response to the growing euro zone debt crisis.

  Such is the unpopularity of Prime Minister Jose Luis Rodriguez Zapatero that he decided not to stand for office again.

  His chosen successor, Alfredo Perez Rubalcaba, has virtually given up in the past few weeks and his campaign has focussed on warning of the dangers of an over-powerful rightist government.

  Ana Maria Lopez, a 53-year-old chiropodist, poured scorn on the Socialists and said she intended to vote on Sunday.

  " This government is the worst, everything it touches it destroys. I want a change, I'm fed up with this," she said.

  " I'm self-employed, this government has never given anything to the self-employed they only want our money and our taxes."

  In his final rally on Friday evening, Rajoy told Spaniards bluntly that the road ahead would be difficult.

  " We are not fooling ourselves, we're not going to sort everything out from one day to the other," he told thousands of blue-flag waving supporters in traditionally PP-supporting Madrid.

  " We Spaniards know that it will take a lot of effort to get things done, and there is more effort ahead to take Spain forward. We know that nothing is free."

  Rajoy must not only lead Spaniards out of their plight but also appease financial markets, who see the euro zone's fourth-largest economy as in danger of following Ireland, Portugal and Greece in having to seek an international rescue package.

  The government sold bonds on Thursday with a yield of almost 7 percent -- a level of borrowing cost that led to bail-outs in other euro zone countries.

  In a glimmer of good news, the Spanish stock market closed higher on the last day of trade before the election. Investors saw Rajoy as winning the race with an absolute majority, giving him a strong mandate to carry out his plans.

ABUJA (Reuters) - Gunmen boarded two fishing vessels just off the coast of Nigeria and took two people hostage, security sources said on Saturday, the latest in a series of hijackings in the waters around Africa's largest oil business.

  The captains of the two boats were taken early on Friday, the same day eight pirates took three hostages from an oil supply vessel contracted by Chevron Corp, two security sources close to the incidents said.

  Chevron confirmed the attack on the vessel owned by its contractor, the second hijacking on ships hired by the U.S. major off the coast of Nigeria this month.

  Both attacks on Friday were in waters around President Goodluck Jonathan's home state of Bayelsa, where military security has been bolstered in recent days amid a fierce political row.

  Bayelsa has hundreds of kilometres of oil pipelines and other industry infrastructure crucial to Africa's largest crude exporter. Violence in the Niger Delta's vast swamps and waterways has in the past cut oil output, moving global prices.

  The political dispute began earlier this month when the ruling People's Democratic Party listed sitting governor Timipre Sylva as one of four people who failed to get through a screening process to stand in a leadership primary due to be held on Saturday.

  They gave no reason for his exclusion. One Western diplomat said Sylva may have " become unpopular with someone right at the very top of the party." A lot is at stake.

  State governors are among the most powerful politicians in Nigeria, wielding influence over national policy and in some cases controlling budgets larger than small African nations.

  Sylva has condemned the deployment of soldiers to a state he is still supposed to run but also publicly urged his supporters to remain calm and keep the peace.

  " Three ships taken in the same day. It could be a coincidence but elections in the Niger Delta can be volatile and this one particularly so," one security source said.

  Nigeria produces more than 2 million barrels per day of crude oil and is a key supplier to the United States, Europe and emerging markets in Asia.

  (Reporting by Joe Brock Editing by Sophie Hares)

(Adds details, background)

  SHANGHAI, Nov 19 (Reuters) - China will make the yuan more flexible in either direction and its recent reforms to make the currency more market-oriented have begun to achieve some results, Premier Wen Jiabao said on Saturday.

  Wen's comments underscored Beijing's intention to introduce two-way fluctuations in the yuan to dampen expectations that China's currency could only appreciate.

  Pointing to recent bets in overseas markets that had caused the yuan to hit the bottom end of its trading band a number of times, Wen said such fall in the yuan " could not have been engineered" .

  " China will continue to closely monitor the yuan's trading movements ... and will strengthen yuan's trading flexibility in either direction," Wen was quoted as saying in an evening news bulletin on state broadcaster CCTV.

  Chinese leaders have repeatedly rejected calls from the United States and other rich countries to allow faster yuan appreciation.

  Analysts said China appears to have quietly adjusted its currency policy in response to the deepening euro zone debt crisis, slowing the yuan's steady appreciation while trying to nip speculation of yuan depreciation.

  The balancing act comes as inflationary pressures come off the boil and economic growth slows in the world's second-largest economy, giving Beijing more room to fine-tune policy.

  The central bank allows the yuan to rise or fall 0.5 percent from its daily mid-point. Some analysts believe that China may opt to widen the yuan's trading band only when upward pressures on the currency ease in line with a narrower trade surplus and lower capital inflows. (Reporting by Fayen Wong Editing by)

* EU officials have discussed idea of ECB lending to IMF

  * World stocks slip, S& P 500 holds above key support level

  * Treasuries prices fall as European yields ease modestly (Updates with U.S. markets close)

  By Walter Brandimarte

  Nov 18 (Reuters) - The euro gained on Friday on hopes that the European Central Bank may get involved in a plan to help struggling euro zone countries, but world stocks fell as many investors continued to fear a spread of the region's debt crisis into core European economies.

  Wall Street indexes ended mixed, capping the worst week for U.S. stocks in two months.

  U.S. Treasury prices fell as the borrowing costs of troubled European countries declined slightly, reducing the appeal of safe-haven assets. Yields on Spain's bonds eased modestly before weekend elections.

  Reports that the ECB is considering lending to the International Monetary Fund to bail out troubled euro zone economies shored up investor sentiment.

  Speculation that the ECB could step up purchases of European sovereign debt also helped.

  Either approach would be satisfactory, said Andrew Busch, senior currency strategist at BMO Capital Markets in Chicago. " The broader point is that the ECB is finding a way to stabilize the European debt crisis," he said.

  Economists say only the ECB would have enough fire power to quell a confidence crisis spreading throughout the euro zone. But EU law forbids the bank to finance government borrowing directly, thus the possible arrangement with the IMF.

  " This third-party lending arrangement not only works around ECB laws, but also provides an avenue for the ECB to create enough funding to stabilize the crisis while maintaining its appearance of independence," Busch added.

  The euro zone common currency rose 0.4 percent to $1.3509, pulling away from a five-week low of $1.3420 struck on Thursday.

  Apparent disagreement between Germany and the UK about how to solve the European debt crisis kept investors on the edge, however.

  At a news conference in Berlin, the leaders of both countries sent out conflicting messages to markets, with British Prime Minister David Cameron calling for " decisive action" to stabilize the euro zone and German Chancellor Angela Merkel favoring a " step-by-step" approach.

  On Wall Street, the Dow finished higher but the Nasdaq slid. The S& P 500 finished nearly flat, holding above a key resistance level around 1,200, but still down 3.8 percent for the week.

  The Dow Jones industrial average edged up 25.43 points, or 0.22 percent, at 11,796.16. The Standard & Poor's 500 Index dipped 0.48 point, or 0.04 percent, to 1,215.65. The Nasdaq Composite Index was down 15.49 points, or 0.60 percent, at 2,572.50.

  In Europe, the FTSEurofirst 300 finished 0.7 percent lower. World stocks, measured by the MSCI All-Country World Index, declined 0.6 percent.

  " The (market's) skepticism comes from the realization that there is no magic bullet in place to solve this crisis," said Giancarlo Perasso, chief economist at Redux-Matrix.

  U.S. crude oil prices settled $1.26 down at $97.67.

  Benchmark 10-year U.S. Treasury notes fell 13/32, sending their yield up to 2.01 percent, as a decline in Italian government bond yields reduced their safe-haven bid.

  Yields on Italian 10-year bonds eased to 6.7 percent but stayed near levels investors consider unsustainable.

  Spanish 10-year bond yields fell to 6.4 percent from Thursday's 6.5 percent before weekend elections in which the center-right People's Party is expected to win a resounding mandate to slash public spending. (Additional reporting by Wanfeng Zhou in New York Editing by James Dalgleish and Dan Grebler)

By Angela Moon

  NEW YORK, Nov 18 (Reuters) - Wall Street is in for a volatile week as escalating problems in Europe's debt crisis continue to keep investors on their toes.

  With light trading volume expected next week due to the U.S. Thanksgiving holiday on Thursday, intraday swings are likely to be wide and frequent as traders instantly react to headlines out of Europe.

  In addition, a 12-member " super committee" in Congress has until midnight on Wednesday to strike a deal involving tax increases and spending cuts to rein in federal spending. Investors are concerned that failure to reach a deal would result in automatic reductions that would harm the fragile recovery.

  But with Wall Street poised for a technical rebound after finishing the worst week in two months, some say there are a lot of variables that could spark a rally.

  If the super committee can come up with a workable deficit-reduction plan and if progress can be made in Europe, " the stage could be set for a fourth-quarter rally that might surprise even the most bullish traders," said Randy Frederick, managing director of trading and derivatives for Schwab in Austin, Texas.

  " Of course, those are some mighty big 'ifs.'"

  GERMAN BUNDS

  European debt yields, an important risk barometer for investors these days, have shown exceptionally high correlation to equities. For the past several weeks, stocks have quickly reacted to moves in Italian, Spanish and French yields.

  Now, there could be a new worry in German Bunds.

  " We do have a new uncertainty that has gotten a bit of attention over the past few days and that is the selloff in the German Bund market. There has been heavy selling by Asian real money investors in Bunds the last few days," said Chuck Retzky, director of the futures division of Mizuho Securities USA in Chicago.

  " The Bund market is considered to be one of the safe havens for investors' money in the world and if that should show a significant crack and the selling pressure continues, then people will worry if U.S. Treasuries will see a similar selloff in the future," he said.

  On Friday, the Dow and S& P erased losses as the yield on Spanish 10-year bonds eased.

  Spanish elections set for Sunday could help support a rise in the euro against the dollar in the very near term because the opposition party, which is seen as favoring austerity measures, is expected to win.

  TECHNICALLY SPEAKING

  The S& P 500 fell 3.8 percent on the week, ending its worst week in two months, but the index closed above its 50-day moving average near 1,200, showing signs of strength to move up higher.

  " Our expectation is that the recent market selloff is not the beginning of a whole scale, multimonth downside collapse, but rather is likely the latter stages of a pause following a surge in October, and another upside rally attempt will develop shortly," said Robert Sluymer, analyst at RBC Capital Markets in New York.

  " The overall technical set-up has not materially changed in the past few weeks."

  For the week, the Dow Jones industrial average fell 2.9 percent and the Nasdaq lost 4 percent.

  Next week's economic data includes existing home sales for October on Monday and third-quarter preliminary GDP report on Tuesday. On Wednesday, durable goods orders, personal income and outlays and weekly jobless claims are due. The markets will be closed on Thursday for Thanksgiving. (Wall St Week Ahead runs every Friday. Questions or comments on this column can be e-mailed to: angela.moon@thomsonreuters.com) (Reporting by Angela Moon Additional reporting by Doris Frankel in Chicago Editing by Kenneth Barry)

(Corrects headline and lead to six weeks of gains)

  * Oil sees first losing week since early October

  * Grains, cocoa and sugar also down for the session

  * Metals up on the day, giving optimistic investors solace

  * Coming up: US existing home sales data for Oct (Monday)

  By Barani Krishnan

  NEW YORK, Nov 18 (Reuters) - Most commodities fell again on Friday, with U.S. oil prices finishing their first week lower since early October on worries over Europe and selling by investors taking profit from six weeks of gains.

  Agricultural markets from corn to cocoa and sugar joined oil on the downside as burgeoning crop stockpiles and weak demand outlooks pushed investors to sell.

  Only metals markets offered some solace to optimistic investors as gold and copper rebounded from Thursday's beating, although both were sharply down on a weekly basis.

  For the coming week, investors braced for more shocking headlines from the euro zone debt crisis and possible surprises from a surfeit of U.S. economic data, including home sales, inflation and job indicators.

  A lot of investors " are sitting on the sidelines, scared to death," said Roy Huckabay, grains analyst for The Linn Group in Chicago.

  The 19-commodity Reuters-Jefferies CRB index settled Friday's session down 0.7 percent. The index has lost more than 3 percent over the last two days.

  Oil closed down after a bout of profit-taking on this week's big moves in the spread between the U.S.-based West Texas Intermediate crude and London's Brent.

  The market was initially up on Friday on speculation that the European Central Bank may start lending to the International Monetary Fund to bail out major euro zone economies.

  It fell as euro zone worries reemerged later in the session and investors began cashing in their WTI-Brent spread positions. Selling of the expiring December U.S. contract of WTI to buy the pricier new benchmark, January, also pushed the market lower.

  " Liquidations on the December contract and profit-taking ahead of the Thanksgiving holiday (next) week pulled down U.S. crude futures," said Phil Flynn, analyst at PFGBest Research in Chicago.

  WTI's December contract slid $1.41 to settle at $97.41 a barrel, while the one for January fell $1.26 to settle at $97.67 a barrel.

  Brent crude dipped 66 cents to settle at $107.56 a barrel.

  In metals, the benchmark U.S. copper futures contract, December settled the session up half a percent at $3.4020 per lb. For the week, it was down 2.5 percent.

  U.S. gold futures for December settled up $4.90 at $1,725.10 an ounce. For the week, the contract was down 3.6 percent, its biggest drop since the first week of October.