* Aramco, Sinopec in initial deal for 400,000 bpd Yanbu plant

  * ConocoPhillips withdrew from refinery project last year

  * Sinopec's first major refinery outside China (Adds background, Sinopec executive's comments)

  By Reem Shamseddine

  KHOBAR, Saudi Arabia, March 17 (Reuters) - State-run Saudi Aramco signed an initial deal with China's Sinopec Group to jointly build a $10-billion Yanbu refinery on the Red Sea coast, a pact that further cements ties between the two energy giants.

  China, the world's No. 2 oil user, is surpassing the United States as Riyadh's largest crude oil buyer with volumes poised to touch an average of 1 million barrels per day this year, or roughly one-fifth of China's total crude imports. [ID:nL3E7CQ0M7]

  Aramco, the world's top crude oil exporter, said late on Wednesday it would hold a 62.5-percent stake in the Red Sea Refining Co formed to develop the 400,000 barrels per day refinery in Yanbu, while Sinopec would own the remainder.

  The venture would be the first refining project the Chinese state oil major, parent of top Asian refiner Sinopec Corp < 0386.HK> , builds outside China, putting it in a race against rival PetroChina < 0857.HK> , which has snatched a string of refinery deals beyond Chinese borders.[ID:nTOE70905Q]

  " This opens a new page of investment for Sinopec in Saudi's refining and petrochemical sector, enhancing a strategic relationship that complements each other's strength," Su Shulin, general manager of Sinopec Group was quoted as saying in a Sinopec statement.

  " The project will boost Sinopec's global competitive edge and expand the firm's supply channel for international resources."

  The refinery was to have been built by U.S. oil firm ConocoPhillips < COP.N> and Aramco. But Conoco pulled out of the plans in April 2010 as it shifted away from the refining business to focus on oil and gas explorations. [ID:nN21129738]

  The Yanbu plant, expected to start operations in 2014, accounts for just under a quarter of Saudi plans to add around 1.7 million bpd of refining capacity to the current 2.1 million bpd.

  Aramco has said it will push on with the project even after ConocoPhillips withdrew and in July awarded deals to build the refinery. [ID:nLDE66R0VP]

  The refinery is slated to process heavy crude from Saudi Arabia's project to pump 900,000 barrels per day from the Manifa oilfield.

  It is a sister project to another 400,000-bpd refinery Aramco is building with France's Total < TOTF.PA> at Jubail on Saudi Arabia's Gulf coast.

  Aramco has already partnered with Sinopec at the joint venture Fujian plant in southeast China.

  Sinopec signed on Wednesday a joint venture deal with state-run Kuwait Petroleum Corp (KPC) worth around $9 billion to build an oil refinery and petrochemical plant in southern China. [ID:nLDE72F1UT] (Additional reporting by Chen Aizhu in Beijing Editing by Ken Wills)

By Leika Kihara

  TOKYO, March 17 (Reuters) - Japanese markets have not become destabilised enough to warrant joint G7 currency intervention or government purchases of shares, Economics Minister Kaoru Yosano said, stressing that the damage from last week's devastating quake to the country's economy would be limited.

  " I don't think stock and currency markets are in a state of turmoil," Yosano said, when asked whether the G7 advanced nations should jointly intervene in the currency market to stem yen rises.

  " We would like to get psychological support from the G7," he told Reuters in an interview on Thursday.

  Group of Seven finance leaders are expected to hold a conference call this week to discuss the global market fallout from the 9.0-magnitude earthquake that hit northeast Japan last Friday. (Additional reporting by Shinji Kitamura Editing by Edmund Klamann)

(Refiles to fix link to Japan markets report)

  * Yen surges to record 76.25 per dollar before pulling back

  * Nikkei falls 2.1 percent, MSCI Asia ex-Japan off 1.2 percent

  * S& P erases gains for the year amid Japan nuclear crisis

  * Japanese government bond futures rise

  * Shanghai copper down 1 percent, oil lower

  By Alex Richardson

  SINGAPORE, March 17 (Reuters) - The yen surged to a record high against the dollar and shares in Japan and elsewhere in Asia fell on Thursday after U.S. officials said the risk of a catastrophic radiation leak from an earthquake-stricken Japanese nuclear plant was rising.

  The unfolding disaster in Japan has sent fear coursing through markets, hitting shares and other riskier assets such as commodities and boosting safe-haven government debt, as investors struggle to get a fix on the scale of the nuclear crisis and the size of the economic and human toll it might deliver.

  Operators of the Fukushima Daiichi nuclear complex, 240 km (150 miles) north of Tokyo, said they would try again on Thursday to use military helicopters to douse the plant's overheating reactors.

  " Fear is the only factor driving the market today and if you look at news about temperatures rising, things exploding, you're not going to trade calmly, right?" said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

 

  The yen spiked around 4 percent against the dollar, initially driven by speculation that Japanese insurers would have to repatriate funds to pay for massive claims following Friday's 9.0 magnitude quake and the devastating tsunami it triggered.

  That run-up set off a wave of stop-loss and options-related selling that sent the currency rocketing as far as 76.25 to the dollar on electronic trading platform EBS in increasingly chaotic trading, before easing to around 79.20.

  " It's mayhem out there," said one trader at an Australian bank in Sydney as liquidity evaporated and bids were pulled. " The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in."

 

  INTERVENTION ALERT

  Japan's Finance Minister Yoshihiko Noda blamed speculation for the spike in the yen and said he would closely watch market action. Markets usually interpret such comments as a reminder that the authorities could intervene to curb the currency.

  " There's a real possibility that authorities would intervene to calm the markets, though I don't think it will be heavy," said Junya Tanase, a foreign exchange strategist at JPMorgan Chase in Tokyo.

  Japan's Nikkei fell 2.1 percent, with big exporters such as industrial robot maker Fanuc and car maker Toyota , whose overseas earnings are eroded by a stronger currency, taking the most points off the index.

  Fanuc fell 3 percent and Toyota 3.6 percent.

  Japanese stocks had suffered their biggest two-day rout since the 1987 crash on Monday and Tuesday before rebounding nearly 6 percent on Wednesday.

  Asian shares outside Japan were down 1.2 percent, with Hong Kong's Hang Seng down 2 percent.

  Benchmark 10-year Japanese government bond futures rose 0.24 point to 139.96, following a surge in U.S. Treasuries the previous day, in thin, choppy trading.

  " Fast money accounts are making a killing in this volatile market moved by rumour after rumour," said a trader at a foreign bank in Tokyo.

  The CBOE Volatility Index or VIX , Wall Street's favourite measure of investor fear, rose 20.89 percent to close at 29.40 on Wednesday, its highest level since July 6. In the last two days, the VIX is up nearly 40 percent.

  " Volatility is a product of the uncertainty that lingers out there," said Jamie Spiteri, senior dealer and Shaw Stockbroking in Australia.

  " A lot of investment in the market is being pulled back because of the uncertainty attached to something that hasn't really got any recent or significant precedent."

  Gold fell more than $8 to $1,391 and oil prices eased, with Brent crude at $109.53 a barrel and the U.S. benchmark at $97.59, after rising 2 percent on Wednesday on fears of disruption to Middle East supplies.

  Shanghai copper shed 1 percent and three-month copper on the London Metal Exchange lost 0.7 percent.

  Worries about Japan and a spate of weak U.S. housing data sent key Wall Street stock indexes down 2 percent overnight, with the S& P falling into negative territory for the year. (Reporting by Hideyuki Sano and Antoni Slodkowski in Tokyo and Wayne Cole in Sydney Editing by Kim Coghill)

By Shinichi Saoshiro and Chisa Fujioka

  TOKYO (Reuters) - Operators of a quake-crippled nuclear plant in Japan again deployed military helicopters on Thursday in a bid to douse overheating reactors, as U.S. officials warned of the rising risk of a catastrophic radiation leak from spent fuel rods.

  While officials were scrambling to contain the nuclear crisis with a patchwork of fixes, the top U.S. nuclear regulator warned that one reactor cooling pool for spent fuel rods may have run dry and another was leaking.

  " We believe that around the reactor site there are high levels of radiation," Gregory Jaczko, head of the Nuclear Regulatory Commission, told a House Energy and Commerce subcommittee hearing.

  " It would be very difficult for emergency workers to get near the reactors. The doses they could experience would potentially be lethal doses in a very short period of time."

  Health experts said panic over radiation leaks from the Daiichi plant was also diverting attention from other threats to survivors of last Friday's 9.0 magnitude earthquake and tsunami, such as the cold weather and access to fresh water.

  The head of the world's nuclear watchdog, meanwhile, said it was not accurate to say things were " out of control" in Japan, but the situation was " very serious," with core damage to three units at the plant, around 240 kms (150 miles) north of Tokyo.

  The latest images from the plant showed severe damage to some of the buildings after several blasts.

  A stream of gloomy warnings and reports on the Japan crisis from experts and officials around the world triggered a swoon in global financial markets, with the Japanese yen surging to all-time highs against the dollar and all three major stock indexes slumping on fears of slower worldwide growth.

  Japanese Finance Minister Yoshihiko Noda on Thursday blamed speculation for the yen's surge and repeated his warning that he would closely watch market action.

  Japan's Nikkei average slumped on opening on Thursday, and an hour after opening was down nearly 4 percent.

  G7 Finance ministers will hold a conference call later on Thursday to discuss steps to help Japan cope with the financial and economic impact of the disaster, a source said.

  Japan's government said radiation levels outside the plant's gates were stable but, in a sign that it was overwhelmed, appealed to private companies to help deliver supplies to tens of thousands of people evacuated from around the complex.

  " People would not be in immediate danger if they went outside with these levels. I want people to understand this," Chief Cabinet Secretary Yukio Edano told a news conference, referring to people living outside a 30-km (18-mile) exclusion zone.

  Tokyo Electric Power Co. (TEPCO) officials said bulldozers attempted to clear a route to the reactor so firetrucks could gain access and try to cool the facility using hoses.

  Company officials also said they had high hopes of getting limited power to the facility to help pump water needed to cool reactors and the spent fuel rods that have been overheating.

  High radiation levels on Wednesday prevented a helicopter from dropping water into the No. 3 reactor to try to cool its fuel rods after an earlier explosion damaged the unit's roof and cooling system, but they managed on a second attempt on Thursday.

  The plant operator described No. 3 -- the only reactor at that uses plutonium in its fuel mix -- as the " priority." Plutonium, once absorbed in the bloodstream, can linger for years in bone marrow or liver and lead to cancer.

  If cooling operations do not proceed well, the situation will " reach a critical stage in a couple of days," said an official with the government's Nuclear and Industrial Safety Agency.

  The situation at No. 4 reactor, where the fire broke out, was " not so good," TEPCO added, while water was being poured into reactors No. 5 and 6, indicating the entire six-reactor facility was now at risk of overheating.

  " Getting water into the pools of the No.3 and No.4 reactors is a high priority," Said Hidehiko Nishiyama, a senior official at Japan's Nuclear and Industrial Safety Administration.

  " It could become a serious problem in a few days," he said.

  UNPRECEDENTED CRISIS, SAYS EMPEROR

  Japanese Emperor Akihito, delivering a rare video message to his people on Wednesday, said he was deeply worried by the crisis which was " unprecedented in scale."

  " I hope from the bottom of my heart that the people will, hand in hand, treat each other with compassion and overcome these difficult times," the emperor said.

  Panic over the economic impact of last Friday's massive earthquake and tsunami knocked $620 billion off Japan's stock market over the first two days of this week, but the Nikkei index rebounded on Wednesday to end up 5.68 percent.

  The Tokyo Stock Exchange and the Financial Services Agency plan to keep the stock market open despite calls for a halt to trading, mainly from foreign financial institutions, the Nikkei business daily said.

  TSE President Atsushi Saito said the exchange " will continue to provide investors with an opportunity to trade," calling it " an important piece of social infrastructure."

  " If we put a stop to trading, it will be seen as a confirmation of the concerns among foreigners and could trigger panic," a TSE official was quoted as saying by the Nikkei.

  Estimates of losses to Japanese output from damage to buildings, production and consumer activity ranged from between 10 and 16 trillion yen ($125-$200 billion), up to one-and-a-half times the economic losses from the devastating 1995 Kobe earthquake.

  Damage to Japan's manufacturing base and infrastructure is also threatening significant disruption to the global supply chain, particularly in the technology and auto sectors.

  EMBASSIES URGE CITIZENS TO LEAVE

  Scores of flights to Japan have been halted or rerouted and air travellers are avoiding Tokyo for fear of radiation.

  On Thursday the U.S. Embassy in Tokyo urged citizens living within 50 miles (80 kms) of the Daiichi plant to evacuate or remain indoors " as a precaution," while Britain's foreign office urged citizens " to consider leaving the area."

  The warnings were not as strong as those issued earlier by France and Australia, which urged nationals in Japan to leave the country. Russia said it planned to evacuate families of diplomats on Friday.

  In a demonstration of the qualms about nuclear power that the crisis has triggered around the globe, China announced that it was suspending approvals for planned plants and would launch a comprehensive safety check of facilities.

  China has about two dozen reactors under construction and plans to increase nuclear electricity generation about seven-fold over the next 10 years.

  Russian President Dmitry Medvedev said nuclear power was safe provided power stations were built in the right place and designed and managed properly. Russia ordered checks at nuclear facilities on Tuesday.

  In Japan, the plight of hundreds of thousands left homeless by the earthquake and devastating tsunami that followed worsened following a cold snap that brought snow to worst-affected areas.

  Supplies of water and heating oil are low at evacuation centres, where many survivors wait bundled in blankets.

  About 850,000 households in the north were still without electricity in near-freezing weather, Tohuku Electric Power Co. said, and the government said at least 1.5 million households lack running water.

  " It's cold today so many people have fallen ill, getting diarrhea and other symptoms," said Takanori Watanabe, a Red Cross doctor in Otsuchi, a low-lying town where more than half the 17,000 residents are still missing.

  The National Police Agency said it has confirmed 4,314 deaths in 12 prefectures as of midnight Wednesday, while 8,606 people remained unaccounted for in six prefectures.

  INTERNATIONAL FRUSTRATION

  In another sign of international frustration at the pace of updates from Japan, Yukiya Amano, director general of the International Atomic Energy Agency, said he would fly to Japan on Thursday to glean first-hand information on the crisis.

  Several experts said the Japanese authorities were underplaying the severity of the incident, particularly on a scale called INES used to rank nuclear incidents. The Japanese have so far rated the accident a four on a one-to-seven scale, but that rating was issued on Saturday and since then the situation has worsened dramatically.

  France's nuclear safety authority ASN said on Tuesday it should be classed as a level-six incident.

  At its worst, radiation in Tokyo reached 0.809 microsieverts per hour on Tuesday -- 10 times below what a person would receive if exposed to a dental x-ray. Early Thursday, radiation levels were barely above average.

  But many Tokyo residents stayed indoors. Usually busy streets were nearly deserted. Many shops and offices were closed.

  (Additional reporting by Nathan Layne, Linda Sieg, Risa Maeda, Isabel Reynolds, Dan Sloan, Terril Jones and Leika Kihara in Tokyo Chris Meyers and Kim Kyung-hoon in Sendai Taiga Uranaka and Ki Joon Kwon in Fukushima, Noel Randewich in San Francisco, and Miyoung Kim in Seoul Writing by David Fox Editing by John Chalmers)

By Lin Noueihed

  MANAMA (Reuters) - The United States said Bahrain was on the " wrong track" in trying to crush Shi'ite protests in the Sunni-ruled island, rare criticism that highlighted concern the crackdown could ignite a wider regional conflict.

  Bahraini forces used tanks and helicopters on Wednesday to clear a protest camp set up by youths from the Shi'ite Muslim majority which complains of discrimination by the Sunni royal family. Three police and three protesters were killed.

  The unrest has brought an influx of troops to Bahrain from fellow Sunni-ruled neighbours Saudi Arabia, Qatar, Kuwait and the United Arab Emirates, who fear the uprising that began last month could play into the hands of non-Arab Shi'ite power Iran.

  It has also prompted sympathy protests from Shi'ites across the region, including in Saudi Arabia's oil producing east.

  Earlier this week, Washington said it understood why Bahrain's Sunni rulers had called in reinforcements. On Wednesday, Secretary of State Hillary Clinton said force was not the answer.

  " We find what's happening in Bahrain alarming. We think that there is no security answer to the aspirations and demands of the demonstrators," she told CBS. " They are on the wrong track."

  LIVE BULLETS, PETROL BOMBS

  A medical source said dozens of people were taken to Bahrain International Hospital on Wednesday, hit by rubber bullets or shot gun pellets or suffering tear gas inhalation, all weapons used by riot police.

  One was hit by a live bullet in the clash, in which youths hurled petrol bombs at police.

  U.S. President Barack Obama called the kings of Saudi Arabia, a strategic ally of Washington in the Middle East, and of Bahrain, home to the U.S. Navy's Fifth Fleet and seen as a bulwark against Iranian influence, to urge " maximum" restraint.

  Political analysts say the Obama administration, which gave strong support to pro-democracy protests in Egypt and Tunisia, faced a new dilemma as violence in Bahrain appeared to dash hopes for quick political talks.

  U.S. Assistant Secretary of State Jeff Feltman went to Bahrain on Monday to push for talks to resolve the crisis. The U.S. State Department said on Wednesday he had already left.

  Gregory Gause, a Gulf expert at the University of Vermont, said Wednesday's events showed the intent was to quash a rebellion rather than restore order to allow political dialogue to resume as Washington has urged.

  Iran condemned Bahrain's response to the protests, the worst unrest there since the 1990s, and recalled its ambassador for consultations, Iranian state TV reported.

  " What has happened is bad, unjustifiable and irreparable," it quoted Iranian President Mahmoud Ahmadinejad as saying.

  On Tuesday Bahrain withdrew its ambassador for consultations to protest at Tehran's criticisms.

  Saudi Shi'ites held several demonstrations, including one in their main regional centre, Qatif, on Wednesday, demanding the release of prisoners and voicing support for Shi'ites in Bahrain, an activist and witnesses said.

  " In Qatif, security shot in the air to disperse the protest," a Saudi Shi'ite activist said.

  A witness said two police helicopters hovered above the demonstration. " People were demanding the withdrawal of the Peninsula force and called on Saudi Arabia to withdraw from Bahrain," the witness said, referring to Gulf states' forces.

  Leading Saudi Shi'ite cleric Sheikh Hassan al-Saffar voiced dismay over events in Bahrain and a member of parliament from Bahrain's largest Shi'ite opposition group denounced the assault as a war on the Shi'ite community.

  " This is war of annihilation. This does not happen even in wars and this is not acceptable," Abdel Jalil Khalil, the head of Wefaq's 18-member parliament bloc, said. " I saw them fire live rounds, in front of my own eyes."

  A protest called by Bahrain's youth movement, which played a leading role in the protest camp at Pearl roundabout, failed to materialise after the military banned all gatherings and imposed a curfew from 4 p.m. to 4 a.m. across a large swathe of Manama.

  A Reuters witness saw Bahraini tanks move in the direction of Budaya Street, where the protest was set to take place.

  " INTERNATIONALISED"

  Over 60 percent of Bahrainis are Shi'ites. Most say they want only the same treatment as Sunnis and a constitutional monarchy but calls by hardliners for the overthrow of the monarchy have alarmed Sunnis, who fear the unrest serves Iran.

  Analysts say the intervention of Sunni-ruled Gulf Arab states in Bahrain might provoke a response from Tehran, which supports Shi'ite groups in Iraq and Lebanon.

  " This was a major and a dangerous decision because this issue has been internationalised now. There are protests in Iraq, in Iran, in Lebanon," said Wefaq MP Jasim Hussein.

  " There was no reason when our demands were local demands and nothing to do with Saudi Arabia or the United Arab Emirates."

  The crackdown in Bahrain has galvanised Iraq's Shi'ite community, exacerbating sectarian tension that led to years of war in Iraq. Iraq's Shi'ite prime minister criticised the assault and Shi'ite cleric Moqtada al-Sadr called for protests.

  In Lebanon, supporters of Shi'ite group Hezbollah also came out in solidarity with their fellow Shia.

  The United Nations and Britain have echoed the U.S. call for restraint and the Group of Eight powers expressed concern.

  " When the Gulf states now send military units to the small... island state, there is a very critical risk that the situation will... be seen as part of a broader confrontation," Swedish Foreign Minister Carl Bildt said on his blog.

  " While there was most likely initially no Iranian interference, the opportunities for Iran to take advantage of the situation now undeniably grow."

  Gulf expert Gause said the latest developments had given Washington a serious dilemma. " This is a really sticky situation, there is no question about that."

  (Additional reporting by Frederik Richter in Bahrain, Andrew Hammond in Dubai and Robin Pomeroy in Iran, Caroline Cohn and Steve Slater in London, Andrew Quinn in Washington Writing by Philippa Fletcher Editing by Louise Ireland)

TOKYO (Reuters) - The operator of Japan's quake-stricken nuclear power plant was preparing on Thursday to spray water into the complex's No.3 reactor, Tokyo Electric Power said.

  The company is worried about the reactor unit's spent-fuel cooling pool, which has been overheating, threatening to send more radioactive steam into the atmosphere.

  (Reporting by Chisa Fujioka)

By Leika Kihara

  TOKYO (Reuters) - Japan's devastating earthquake and deepening nuclear crisis could result in losses of up to $200 billion (124 billion pounds) for the world's third largest economy but the global impact remains hard to gauge five days after a massive tsunami battered the northeast coast.

  As Japanese officials scrambled to avert a catastrophic meltdown at a nuclear plant 240 km (150 miles) north of the capital Tokyo, economists took stock of the damage to buildings, production and consumer activity.

  The disaster is expected to hit Japanese output sharply over the coming months, but economists warned it could result in a deeper slowdown if power shortages prove significant and prolonged, delaying or even scotching the " v-shaped" recovery that followed the 1995 Kobe earthquake.

  Most believe the direct economic hit will total between 10-16 trillion yen (77-124 billion pounds), resulting in a contraction in second quarter gross domestic product (GDP) but a sharp rebound in the latter half of 2011 as reconstruction investment boosts growth.

  " The economic cost of the disaster will be large," economists at JP Morgan said. " There has been substantial loss to economic resources, and economic activity will be impeded by infrastructure damages (like power outages) in the weeks or months ahead."

  Japanese stocks suffered their worst two-day rout since the 1987 crash on Monday and Tuesday, losing a whopping $626 billion in value, before rebounding 5.7 percent on Wednesday as hedge funds rushed to cover short positions.

  But traders remained skittish, swayed by each new development at the stricken Fukushima power plant and alert to signs Japanese companies and insurers could sell sizeable foreign assets and repatriate funds to cover the costs of the nuclear crisis, quake and tsunami.

  High-yield bonds and U.S. Treasuries top the list of vulnerable assets should the triple disaster of earthquake, tsunami and nuclear breakdown prompt Japanese investors to bring overseas funds back home, analysts say.

  YEN RISK

  Although the damage to infrastructure has been severe, some of the biggest risks to the economy may come from indirect market consequences of the disaster, such as a rise in the Japanese yen.

  The yen surged to an all-time high against the dollar after the Kobe earthquake in 1995 as Japanese firms pulled funds home. The dollar has fallen 3 percent against the yen since the disaster and is now close to the low hit after Kobe.

  The direction of the yen could have a big impact on Japanese carmakers like Toyota Motor Co, Nissan Motor and Honda Motor, which build between 22 and 38 percent of their cars at home.

  HSBC Chief Economist Stephen King said it was still too early to put a figure on the economic costs as the scale of the disaster was not yet clear.

  The area of Japan affected by the tsunami produces around 4.1 percent of the country's GDP, suggesting first-round economic effects could be limited, he said. But with the fate of the Fukushima nuclear reactors still unclear, Japan may not have felt the full force of the disaster yet.

  " At this stage, it's too early to come up with meaningful estimates of the overall impact of the terrible events in Japan," King wrote in a research note.

  " Knee-jerk economic and financial reactions to shocks and disasters often fall wide of the mark," he noted, pointing to erroneous predictions of a U.S. recession following the September 11, 2001 attacks and of a major hit from the 2004 Asian tsunami.

  The disaster is already disrupting the global manufacturing chain, hitting technology companies particularly hard as Japan accounts for one-fifth of the world's semiconductor output.

  However, reflecting the high degree of uncertainty about the global economic impact of the disaster, the U.S. Federal Reserve made no mention of Japan in a statement issued after its policy meeting on Tuesday.

  The European Central Bank, which warned earlier this month that it could hike rates in April, also appears to be in wait-and-see mode even as money markets scale back their expectations for monetary tightening this year.

  Fitch Ratings said it did not currently view the economic impact as sufficiently severe to warrant negative rating action, pointing to Japan's well-diversified economy and sovereign financing flexibility.

  Japan's public debt is twice the size of its $5.3 trillion economy, the highest ratio of any large developed country in the world. But unlike other high debt countries like Greece, only five percent of Japan's debt is held by foreign investors so the risks of a funding crisis are limited.

  FRANCE CALLS FOR G7 MEETING

  Still, in a sign European leaders may be nervous about their debt crisis spreading to Japan following the disaster, France said it had called a meeting of G7 finance ministers and central bankers to respond to the crisis, mentioning possible purchases of Japanese debt.

  Ratings agency Moody's warned earlier this week that the quake, tsunami and resulting nuclear crisis increased the chance of investors losing confidence in Japan's finances and eventually demanding higher rates on government bonds.

  For now the government is using 200 billion yen in emergency reserves to pay for anti-crisis efforts. The rapidly evolving disaster has prevented government officials from working on an emergency budget which could be in the range of 5-10 trillion yen.

  Some ruling party lawmakers have proposed a special tax to pay for disaster relief, but Finance Minister Yoshihiko Noda has told allies he is not considering tax increases.

  In a bid to reassure investors that fiscal conditions will not spin out of control, Japan has capped new bond sales at 44 trillion yen in recent years, but that ceiling is likely to be scrapped now.

  " Basically, the government needs to scrap the 44 trillion yen cap," said Seiji Adachi, an economist at Deutsche Securities in Tokyo. " It needs to compile an emergency budget as soon as possible, at least in the next one to two months."

  Huge fund injections from the Bank of Japan have kept borrowing costs low so far and there are no signs of strains in Japan's financial system.

  Sources told Reuters that the central bank, which eased monetary policy on Monday by doubling funds available for asset purchases to 10 trillion yen, was likely to take further steps as soon as next month.

  (Writing by Noah Barkin, editing by Mike Peacock)

* Brent rebounds from 3-wk low to touch $111.09 a barrel

  * Violent clashes in Bahrain, Yemen, Syria

  * Japan crisis solutions seen as last-ditch efforts

  * API crude stocks up less than expected, EIA at 1430 GMT

 

  (Updates lead, adds quote, updates prices)

  By Jessica Donati

  LONDON, March 16 (Reuters) - Oil prices rose by over $2 on Wednesday, with Brent topping $111 a barrel and rebounding from 3-week lows a day earlier as escalating violence in the Middle East renewed fears about oil supply in the region.

  After an earlier crackdown on protesters in Bahrain resulted in at least four deaths according to hospital sources, violent clashes erupted in Yemen and Syria.

  Iran chimed in with President Mahmoud Ahmadinejad quoted by state television condemning Bahrain's crackdown on mainly Shi'ite protesters as unjustifiable.

  " Saudi is not happy about what is going on in Bahrain... The situation in Bahrain is potentially destabilising for Saudi Arabia," said David Morrison, a strategist at GFT.

  Brent for April was up $1.61 at $110.13 a barrel by 1320 GMT, rebounding from its sharpest tumble in 13 months on Tuesday to a near three-week low of $107.35.

  U.S. crude futures were up $1.17 at $98.35 a barrel around the same time.

  Saudi intervention in Bahrain has been taken as a mark of concern that Bahraini protests could inspire Saudi Arabia's own Shi'ite minority.

  The island state lies less than 100 kilometres from the hub of the Saudi oil industry around Dhahran, including the world's largest oil fields, terminals and processing facilities

  Saudi protests have mostly taken place in the Eastern Province, where the oil industry is based and which is home to most of the Shi'ites that make up around 15 percent of the population in the kingdom.

  Muammar Gaddafi's advance in Libya added to uncertainty on Wednesday, as traders speculated whether the West would take measures resulting in prolonged loss of Libyan oil supplies.

  " The question is, if the government is regaining power what should the West do - that is putting some geopolitical risk back in," said Rob Montefusco, an oil trader at Sucden Financial.

 

  JAPAN EYED

  Oil prices have yet to benefit from an expected increase in Japanese demand for gasoil and fuel oil for power generation to replace some of the nuclear capacity lost following Friday's earthquake and tsunami.

  Reconstruction efforts and the increased need for non-nuclear fuel is forecast to boost Japanese oil burning by around 500,000 barrels per day, a report published by the JBC Energy Research Centre showed.

  But oil shipments to Japan so far have not been significantly affected, a top shipping industry group said on Wednesday.

  " It remains unclear whether the earthquake in Japan will ultimately result in an increase or decrease in oil demand," said Christopher Bellew, an oil trader at Bache Commodities in London.

  US STOCKBUILD SLOWS

  U.S. crude oil futures were supported by a smaller-than-expected 91,000 barrel stockbuild at the Cushing storage hub, data released by the American Petroleum Institute (API) showed late on Tuesday.

  Analysts polled by Reuters had on average expected a 1.8-million-barrel build.

  " The weekly API oil inventories report was fairly bullish after showing a small build in crude oil stocks and a strong rebound in the U.S. refinery utilisation," according to a report by Sucden Financial Research.

  A U.S. Energy Information Administration report due at 1430 GMT on Wednesday is forecast to show higher crude inventories on increased imports, while gasoline stocks are expected to fall 1.8 million barrels.

  Distillate supplies, which include heating oil and diesel, are expected to have dropped 1.3 million barrels according to the poll.

 

  (Additional reporting by Alejandro Barbajosa editing by Jason Neely and Jane Baird)