By Maria Golovnina

  TRIPOLI (Reuters) - A son of Libyan leader Muammar Gaddafi tried on Friday to minimise the extent of fighting with rebels who have seized much of the country, and said he expected negotiated ceasefires in two flashpoint cities within a day.

  Speaking in English to foreign journalists flown to Tripoli under official escort, Saif al-Islam Gaddafi said rebels who surrendered would not be harmed and that Libya needed reforms.

  His account of the state of the country, however, seemed at odds with the control exercised for the past few days in much of the east by groups intent on ending Gaddafi's 41-year rule and with reports from residents in and around the capital itself.

  The London-educated younger Gaddafi said there was no violence outside two western cities and branded as " lies" media reports that troops bombed civilians or were using mercenaries.

  " We are laughing at these reports," he said, speaking amiably but with passion, dressed in a sweater and jeans and plainly at ease in a luxury hotel.

  " Apart from Misrata and Zawiya, everything is calm ... Negotiations are going on and we are optimistic," the 38-year-old Gaddafi said, while acknowledging trouble in the east. " Peace is coming back to our country," he said.

  " In Misrata, in Zawiya, we have a problem. We are dealing with terrorists. But hopefully they are running out of ammunition. Hopefully there will be no more bloodshed. By tomorrow we will solve this. The army decided not to attack the terrorists, and to give a chance to negotiation. Hopefully we will do it peacefully and will do so by tomorrow."

  Since revolt broke out last week following the toppling of veteran strongmen in neighbouring Egypt and Tunisia, the east of the country has slipped from the control of Gaddafi's forces and residents have reported fighting ever closer to Tripoli.

  " DESPERATE"

  Residents of Misrata, Libya's third largest city, and Zawiya in the west, have said opposition fighters have taken control and have beaten back counter-attacks by the army.

  As journalists from Reuters and other news organisations were driven by Libyan officials from Tripoli airport into the city late on Friday, the streets of the capital seemed unusually empty for what is normally a busy part of the weekend.

  Earlier in the day, residents spoke of fighting and of some areas appearing to be in the control of Gaddafi's opponents.

  In a characteristic show of defiance, the 68-year-old Gaddafi appeared before thousands of supporters in the central Green Square to vow he would " crush any enemy."

  His son said opposition leaders were in a weak position: " The top people in these groups are desperate. We are telling them -- lay down your arms and we will not harm you."

  Earlier, Turkish television aired comments Saif al-Islam made on Thursday, including the defiant statement: " We have plans A, B and C. Plan A is to live and die in Libya. Plan B is to live and die in Libya. Plan C is to live and die in Libya."

  On Friday, the younger Gaddafi, who was seen as a potential reformer before the revolt struck this month, told the news conference: " We believe we do need to reform our country. We need to introduce many reforms.

  " We are strong. We are united, all fighting for our country. We are all united against dark forces," he said. " There is a big conspiracy against our country. There are countries behind this campaign. This is what's happening in the east. They want to introduce an Afghan model to Libya ... It's not a secret. Al Qaeda issued a statement supporting these groups.

  " It was a mistake not to allow foreign journalists to visit," he said. " That gave a chance to hostile TV channels to say whatever they liked. We were the victim of the media.

  " They want to show Libya is burning, that there is a big revolution there. You are wrong. We are united."

  At several points, his remarks were interrupted by applause from journalists working for Libyan state controlled media.

  (Writing by Alastair Macdonald, editing by Alison Williams)

* U.S. Feb. jobs data, Bernanke, ECB meeting in focus

  * Divergent euro zone-U.S. rate view supports euro

  * Swiss franc hits record high vs dollar, more gains seen

  By Wanfeng Zhou

  NEW YORK, Feb 25 (Reuters) - The Swiss franc may extend its rally next week as tensions in Libya and fears of contagion prompt investors to seek safety, while the U.S. dollar's fate could hinge on the monthly U.S. jobs report.

  The Swiss currency on Friday posted its biggest two-week advance against the dollar in eight months as investors feared the uprising in Libya could spread to other oil-producing countries. A spike in energy prices could hurt U.S. consumer spending and crimp global economic growth.

  " So far the situation remains fluid. It doesn't look like it's going away anytime soon. So as long as it persists, the Swiss franc should benefit," said Mary Nicola, currency strategist at BNP Paribas in New York.

  U.S. jobs data for February, due next Friday, will also be a major focus for investors. Economists polled by Reuters are expecting an increase of 178,000 jobs, up sharply from a meager 36,000 gain in January. [ECI/US]

  A better-than-expected jobs report could boost optimism about the labor market, which has been a weak spot in the economic recovery, and benefit the dollar.

  The dollar fell 4.7 percent against the Swiss franc over the last two weeks, the largest decline since late June. It earlier hit a record low of 0.9229 < CHF=EBS> on trading platform EBS, before recovering to last trade at 0.9284, up 0.3 percent.

  The euro last traded at 1.2767 Swiss francs < EURCHF=EBS> , down 0.1 percent on the day and off 1.3 percent this week.

  Fed Chairman Ben Bernanke testifies to Congress on Tuesday and Wednesday, and analysts think he is unlikely to suggest much appetite within the central bank for scaling back a $600 billion government bond-buying program launched in November.

  " Fed Chairman Bernanke will likely repeat the logic underlying the Fed's comfort in his semi-annual testimony to Congress this week. It is a stance that will continue to undermine the USD relative to its more hawkish peers elsewhere," said Daragh Maher, deputy head of global FX strategy at Credit Agricole CIB in London.

  HAWKISH ECB?

  The European Central Bank is expected to leave interest rates at a record low of 1 percent next week. Investors will closely monitor comments by ECB head Jean-Claude Trichet for clues about the outlook for monetary policy.

  Recent inflation-fighting rhetoric from Bank officials have boosted expectations euro zone interest rates will rise more quickly than those in the United States.

  " With inflation rising, that could be a main concern, so we could see them pick up their hawkish rhetoric," BNP Paribas' Nicola said.

  The latest positioning data showed currency speculators boosted bets in favor of the euro in the latest week to the highest since October. They also increased long positions in the Swiss franc. [IMM/FX]

  The euro last traded down 0.4 percent at $1.3743 < EUR=EBS> , reversing earlier gains that had taken it to $1.3839, to the highest level against the dollar in more than three weeks.

  The next upside target lies around $1.3862, this year's high. A break above could see the euro rise toward the $1.3950 area, the 200-week moving average, followed by strong resistance at the $1.40 level.

  The dollar rebounded on Friday, helped by a retreat in oil prices after Saudi Arabia stepped up crude supply. The inverse relationship between the greenback and oil has strengthened this week.

  Against a basket of currencies, the dollar rose 0.3 percent to 77.281 < .DXY> , after earlier hitting a low of 76.945.

  Higher oil prices and expectations the Fed will lag other major central banks in tightening hit the dollar this week, sparking speculation the greenback has lost its safe-haven role despite tensions in the Middle East and Africa.

  But Adam Cole, global head of FX strategy at RBC Capital Markets in London, said risk appetite is playing " second fiddle" to interest rate expectations.

  To suggest that the U.S. currency has lost its safe-haven role, he added, " overlooks the upside risks to the dollar if unrest in the Middle East continues to spread beyond a small number of hot spots and hence spills over into a deeper and more broadly based sell-off in risky assets." (Additional reporting by Gertrude Chavez-Dreyfuss Editing by Dan Grebler)

  * Oil backs off highs Brent crude at about $112/barrel

  * CBOE Volatility Index down 9.9 pct

  * Dow up 0.5 pct, S& P up 1.1 pct, Nasdaq up 1.6 pct (Updates close with more context on Libya and oil)

  By Caroline Valetkevitch

  NEW YORK, Feb 25 (Reuters) - U.S. stocks rose on Friday, bouncing back from a three-day sell-off as oil prices stabilized, but unease over the Libyan rebellion could be enough to keep buying in check.

  The S& P 500 lost 1.7 percent for the week, breaking a three-week streak of gains. Friday's bounce followed a late recovery Thursday that showed buyers were ready to support shares after a bout of selling.

  Analysts have been calling for a correction in stocks, with the S& P 500 up 25.8 percent since the start of September. Much weaker-than-average volume on Friday cast doubt on stocks' ability to move higher.

  " It's going to be a bumpy ride. I don't think it's just one big correction and we're out of it. I think we'll see multiple, small corrections over the next few months before the market can really decide what the end game in the Middle East is," said David Kelly, the chief market strategist for JPMorgan Funds in New York.

  Brent crude futures for April rose 78 cents to settle at $112.14 barrel, easing from a 2-1/2 -year high of $119.79 on Thursday after a source said Saudi Arabia raised its oil output following days of bloody unrest in fellow producer Libya.

  As stocks rose, the CBOE Volatility Index, or VIX < .VIX> , Wall Street's fear gauge, dropped 9.9 percent to 19.22, falling below 20 after three days of sharp gains.

  The Dow Jones industrial average gained 61.95 points, or 0.51 percent, to end at 12,130.45. The Standard & Poor's 500 Index advanced 13.78 points, or 1.06 percent, to finish at 1,319.88. The Nasdaq Composite Index rose 43.15 points, or 1.58 percent, to close at 2,781.05.

  Volume was a low 7 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, well below last year's daily average of 8.47 billion.

  For the week, the Dow lost 2.1 percent and the Nasdaq declined 1.9 percent.

  WATCHING LIBYA AND OIL

  Stock investors have been pressured this week by worries that the turmoil in Libya could spread to other major oil-producing countries, causing gains in energy prices that could become problematic for the economic recovery.

  The U.N. Security Council was to meet to discuss sanctions against Libyan leaders who are locked in a bloody battle for survival against a popular uprising.

  Late last month, protests in Egypt shook the market, but stocks quickly recovered.

  " The market has taken this (unrest in Libya) pretty well" so far, said Jim McDonald, Northern Trust's chief investment strategist in Chicago. Northern Trust has $643.6 billion in assets under management.

  " If we see oil prices normalize back down to where they were at the end of the year because of increased stability in the Middle East, that would be constructive to global growth and investors would love that," he said.

  McDonald, whose firm is " overweight" on energy shares, said as long as oil prices stay below levels that would force a recession, they are supportive for S& P 500 earnings growth.

  Adding to the day's positive tone, an index of consumer sentiment rose in February to its highest level in three years, according to the Thomson Reuters/University of Michigan Surveys of Consumers.

  Among top boosts to the Nasdaq were shares of Intel, up 2.7 percent at $21.86. Longbow started coverage of the company with a " buy" rating. A semiconductor index shot up 2.6 percent.

  In other company news, Boeing Co shares rose 2.2 percent to $72.30 and led the Dow higher after the U.S. aircraft maker won a $30 billion contract to build 179 U.S. Air Force refueling planes.

  Financial and material sectors led the S& P 500's gains,with shares of JPMorgan Chase up 1.7 percent at $46.68.

  Advancing stocks outpaced declining stocks on the NYSE by a ratio of about 4 to 1 on both the NYSE and the Nasdaq. (Reporting by Caroline Valetkevitch Editing by Jan Paschal)

By Mike Collett

  LONDON, Feb 25 (Reuters) - Arsenal fans feeling depressed about their team's failure to win a major trophy for six years will get little sympathy from supporters of Birmingham City who they play in Sunday's League Cup final at Wembley.

  Arsenal's drought since lifting the 2005 FA Cup has been well documented but Birmingham have won nothing of note for 48 years when they beat city rivals Aston Villa in the 1963 League Cup final.

  To put Birmingham's lack of success into even sharper perspective, the 136-year-old club have never won the league title or FA Cup and have not been close to a trophy since losing on penalties to Liverpool in the 2001 League Cup final.

  Expectations are far greater at Arsenal who start as the overwhelming favourites to end the barren spell and begin a new era of success like the one they enjoyed from 1998 until 2005.

  It could be the first of four trophies this season as they are just one point behind Manchester United in the Premier League title race and still involved in the Champions League and FA Cup.

  Manager Arsene Wenger guided Arsenal to two FA Cup and League Doubles in his first six seasons at the club and they have won two more FA Cups and reached the 2006 Champions League final which they narrowly lost to Barcelona.

  Arsenal face Birmingham without injured captain Cesc Fabregas and winger Theo Walcott.

 

  CONSISTENT TEAM

  " I don't know if not winning a trophy for a few years puts more pressure on us or not," Wenger said. " All I do know is that when you go into a final you desperately want to win it.

  " It does not matter who the favourites are, it depends on how you play on the day. There is nothing we can do about not winning a trophy since 2005, you have to accept it, but people should consider how consistent we have been."

  Arsenal have beaten Birmingham twice in the league this season and have not lost to them in eight meetings.

  Birmingham, who have flirted with the relegation zone this season and are currently 14th, have reserved their best football for the knockout competitions having also reached the FA Cup quarter-finals.

  Manager Alex McLeish is hoping to give Birmingham owner, Hong Kong businessman Carson Yeung who bought the club 16 months ago, the perfect 51st birthday present.

  " Carson has had a great run since he came in here," McLeish said. " The final will be momentous for him, not least because it is his birthday. We would all love to give him the best birthday present ever.

  " Arsenal have not won anything for five years and that has got to be at the back of their minds."

  Arsenal must find a way to cope with Birmingham's 6ft 8inches tall (2.03metres) striker Nikola Zigic, who has scored three times in his last four matches.

  Their main injury worry concerns Alexander Hleb who is battling to be overcome knee injury to face his former club.

  Central defender Martin Jiranek is fit after recovering from a thigh injury and striker Cameron Jerome should shake off an ankle strain.

  (Editing by Ed Osmond, To comment on this story email sportsfeedback@thomsonreuters.com)

* Advanced nations' easy policy seen fuelling commodity spike

  * Strong emerging economy growth key reason for rising costs (Adds quotes, background)

  By Leika Kihara and Rie Ishiguro

  TOKYO, Feb 25 (Reuters) - Advanced economies' easy monetary conditions are among factors accelerating commodity price rises, the Bank of Japan governor said, urging central banks to consider the repercussions on global growth in guiding policy.

  BOJ Governor Masaaki Shirakawa also said on Friday that strong growth in emerging economies was basically behind the spike in commodity costs, warning that some central banks in those countries have been behind the curve in tightening credit.

  " Emerging economies face strong inflationary pressures basically because they are achieving high growth on robust domestic demand and a favourable cycle between production, income and spending," Shirakawa told a parliamentary committee.

  " In addition, emerging economies have been slow to correct their monetary easing policies and are managing fixed currency exchange rates. This is one factor that has made it difficult to cap inflationary pressures."

  Inflation fears stemming from rising commodity prices have nudged several Asian central banks to raise interest rates, threatening to hurt demand in Japan's key export destinations.

  Some emerging economies have criticised central banks of advanced nations, notably the U.S. Federal Reserve, for exporting inflation by flooding global markets with cash through its ultra-easy monetary policies.

  Shirakawa said that both advanced and emerging economies need to consider how their own policies will affect the global economy, and how the fallout will influence their own economies.

  " Commodity prices have risen on the back of strong growth in emerging economies," Shirakawa said.

  " Advanced economies' continued monetary easing has also helped accelerate demand-driven rises in commodity prices." (Editing by Edmund Klamann)

By Jeff Mason and Amena Bakr

  WASHINGTON/RIYADH (Reuters) - The world can weather a spike in oil prices, U.S. President Barack Obama said, as Saudi Arabia offered some respite to fears over Middle East oil supplies by indicating it can cover export cuts resulting from Libya's civil war.

  After a surge in Brent oil prices to 2-½ year highs near $120 a barrel, South Korea, the world's fifth-biggest crude importer, warned that its inflation situation was getting tougher.

  Business executives fretted about rising prices and investment banks said oil was reaching an inflection point that could endanger the world's recovery from the global financial crisis.

  " We actually think that we'll be able to ride out the Libya situation and it will stabilize," Obama, referring to fuel prices, told a group of corporate chief executives.

  His Treasury Secretary said the world had plenty of oil reserves.

  " We have substantial capacity across the major economies in the strategic reserves," Timothy Geithner said.

  " Hopefully, by reminding people of that and calling attention to the fact that there's a fair amount of excess capacity in parts of OPEC ... hopefully that will make it less likely the market ... starts to build in higher prices over time."

  The key risk for the world economy is a sustained rise in the price of oil. But after shooting up to close to $120 a barrel in intraday trade on Thursday, Brent crude futures ended the day at less than $112, showing just how fraught investors nerves are.

  The sharp fall came after market rumours that Libyan leader Muammar Gaddafi had been shot dead and on news that top producer Saudi Arabia could cover any supply disruptions.

  On Friday, Brent crude was trading around $112. U.S. crude futures eased to $97.60 from a Thursday high of $103.41.

  In Libya, forces loyal to Gaddafi hit back in fierce gun battles with rebels holding towns near the capital but there were no signs they had broken the opposition momentum.

  The Organization of the Petroleum Exporting Countries (OPEC) has an estimated 4-6 million barrels per day of spare crude production capacity, more than enough on paper to cover Libya's output of 1.6 million barrels a day.

  But markets are worried that the unrest might spread to bigger producers in the region that would have a much bigger impact on the world economy.

  After public uprisings have already toppled leaders in Egypt and Tunisia, governments in the region are taking notice.

  Saudi Arabia this week unveiled a $37 billion package to try to insulate the kingdom from the wave of protests across the Arab world, while Algeria lifted a 19-year-old state of emergency as it tried to appease opposition groups.

  " When you start adding the potential number of barrels at stake, you can see why the market is tense and would rather be long oil than short," said Harry Tchilinguirian, chief commodity strategies at BNP in London.

  INFLECTION POINT?

  Deutsche Bank said oil above $120 a barrel would be an inflection point for global economic growth. At that price, oil as a share of global GDP starts to move above 5.5 percent, historically a point where global growth has come under pressure.

  Airlines are feeling the brunt of high oil prices as reflected in sharp falls in stock prices. Chinese flag carrier Air China Ltd has dropped 14 percent this week.

  " Unfortunately, oil prices have been rising like mad recently," said Li Jiaxiang, head of the Civil Aviation Administation of China.

  Emerging Asia, which led the world's recovery from the global financial crisis, is already trying to deal with escalating food prices. Higher oil prices will add to the dilemma for policymakers of how to contain inflation and support economic growth.

  Yet another complication is that while the crude price spikes this week reflect a supply-side risk, oil prices were already rising as economic activity around the world picked up pace.

  " The global recovery is ongoing, it is gaining more traction but the developments in the crude-oil sector as a result of the turmoil in the Middle East is putting to question the strength of that recovery," said Jose Mario Cuyegkeng, economist at ING in Manila.

  Since most countries have little control over the world price of oil, raising interest rates would not address the issue for their economies. But higher fuel prices could feed through to other prices, such as transport, and inflation expectations.

  " The environment influencing inflation is now much more difficult than what we had expected at the end of last year," said Yim Jong-yong, South Korea's vice finance minister.

  Indonesian central bank deputy governor Hartadi A. Sarwono said he expects a recent drop in food and commodity prices to push monthly inflation down in the country, but oil was a risk.

  " We have to be cautious on long-term inflation from rising oil prices," he told reporters.

  The combination of high oil prices undermining growth while fuelling inflation raises the prospect of stagflation that blighted economies in the 1970s.

  Westpac rates strategist Russell Jones said there was a risk of stagflation but there were economic differences now -- including less reliance on oil and better central bank credibility -- to suggest any outbreak would be mild and short lived.

  Still, it would still result in a pick up in the pace of monetary policy tightening, he said.

  " The longer that oil prices remain elevated, the more likely that the European Central Bank and Bank of England could hike in the second quarter. Emerging market central banks are also apt to tighten more aggressively.

NAIROBI (Reuters) - Kenya's central bank said on Friday it would buy 4 million pounds sterling, the third time it has come to the foreign exchange market this week.

  At 0901 GMT, commercial bank quoted the shilling at 82.15/35 to the dollar from 82.00/10 at Thursday's close.

  Central bank bought a total 8 million euros earlier in the week. Central bank has in the past said it buys foreign exchange to boost its reserves and not as an intervention.

* Oil prices coming off peaks lend dollar support

  * Divergent euro zone-U.S. rate view still supports euro

  * Swiss franc eases from record highs vs dollar (Adds comment, updates prices)

  By Gertrude Chavez-Dreyfuss

  NEW YORK, Feb 25 (Reuters) - The dollar rebounded against the euro on Friday, boosted by a retreat in oil prices after Saudi Arabia stepped up crude supply, and the greenback could reclaim its status as a safe-haven currency if Middle East tensions escalate.

  The correlation between lower oil prices and a higher dollar may be in place for now, but some analysts said that link could weaken. Although the dollar failed earlier this week to hold its traditional role as a safe-haven currency as the uprising in Libya stoked fears about unrest spreading to other oil producers, traders said the dollar could reclaim safe-haven status even if oil spikes anew.

  In midday New York trade, the euro was down 0.4 percent on the day at $1.3754. It hit session lows at $1.3724, reversing earlier gains that had taken it to the highest level against the dollar in more than three weeks.

  The euro's early session strength was helped by inflation-fighting rhetoric from European Central Bank policy makers, which added to expectations that euro zone rates will rise faster than those in the United States.

  A weekly euro close above this year's highs at $1.3862, hit in early February, leaves the single currency poised for further gains toward $1.40. This level was viewed as strong resistance, with traders reporting Asian central bank offers defending an option barrier at the $1.3840-50 area.

  " The fact that oil prices came off their highs was a slight benefit to the dollar," said John McCarthy, director of foreign exchange at ING Capital Markets in New York. " The oil-dollar correlation seems intact for now, but I don't know for how long."

  Higher oil prices typically undermine the dollar as the United States is a major oil importer.

  If the civil uprising in Libya worsens or unrest spreads to other parts of the Middle East, the dollar could revert to being a safe-haven currency even if oil spikes anew, McCarthy said.

  Top oil exporter Saudi Arabia said it was willing to step in to make up for any shortages resulting from tensions in Libya, pushing oil prices lower. U.S. crude futures on Friday were down at $96.96 per barrel, coming off their highs in more than two years.

  Adam Cole, global head of FX strategy, at RBC Capital Markets in London said the dollar's failure to rally in the face of rising tension in the Middle East does not reflect a change in the greenback's safe-haven status.

  Risk appetite is playing " second fiddle" to interest rate expectations, Cole said.

  " Rising crude price, combined with ever more ECB talk of guarding against second-round effects have led markets to price in much earlier and more aggressive ECB hikes," said Cole.

  To suggest that the U.S. currency has lost its safe-haven role, he added, " overlooks the upside risks to the dollar if unrest in the Middle East continues to spread beyond a small number of hot spots and hence spills over into a deeper and more broadly-based sell-off in risky assets."

  The dollar was up 0.3 percent against the Swiss franc at 0.9290 franc, after hitting a record low of 0.9229 franc on Thursday. Analysts said the franc may face some liquidation of longs, especially if oil prices stabilize.

  Against a basket of currencies, the dollar was up 0.3 percent at 77.284, not far from a 3-1/2-month low of 76.881. The euro is the largest component of the dollar index.

  Analysts said the euro's intraday-bias remained on the upside. Minor support was cited at $1.3704, Thursday's low. Below $1.3704, the euro's bias could switch to the downside for a slide to $1.3427, this week's low, or possibly lower.

  A break past $1.3862 would mark its highest level since early November. Beyond there, resistance lies at $1.3947, the 76.4 percent retracement of a November to January slide.

  The U.S. dollar fell to a three-year low versus the Canadian dollar at C$0.9797, helped by elevated oil prices and as traders took out an option barrier at C$0.9800. (Editing by Leslie Adler)

* FTSE 100 index jumps 1.4 percent after delayed start

  * Miners rally from sharp losses caused by Libya

  * Banks mostly firmer Lloyds down after results

 

  By Simon Falush

  LONDON, Feb 25 (Reuters) - Britain's leading share index bounced higher on Friday in a shortened trading session after a severely delayed open, which the London Stock Exchange said was caused by a problem with market data.

  At the close, the FTSE 100 was up 81.22 points, or 1.4 percent at 6,001.20, with trading having begun at 1215 GMT.

  " Even without that interruption equities have had a much firmer tone today, with the FTSE pushing back above 6,000," said Michael Hewson, market analyst at CMC Markets.

  Miners provided the main support for the blue chips, rallying after recent sharp falls as concerns eased about the impact of unrest in North Africa and the Middle East.

  Platinum miner Lonmin stood out, up 4.5 percent.

  Oil prices retreated to around $111 a barrel, having hit highs of nearly $120 on Thursday, as a senior industry official said top exporter Saudi Arabia had increased output to make up for any shortages as a result of a disruption to oil supplies caused by the political turmoil in Libya.

  Banks were higher, recovering some of the sharp losses sustained earlier in the week, with global lender HSBC up 2.4 percent ahead of results due on Monday.

  However Lloyds Banking Group fell 4.5 percent after its results included a $4 billion pound hit from bad debts in Ireland and it said its margins would not improve this year.

  U.S. blue chips were 0.4 percent higher by London's close supported by a jump in the final February reading for the University of Michigan consumer sentiment index to 77.5, its highest level since January 2008.

  There was little reaction to revisions for fourth-quarter growth data in both Britain and the United States.

  British fourth-quarter 2010 GDP contracted by 0.6 percent, faster than previously thought, with analysts having expected an unchanged reading of down 0.5 percent.

  The U.S. economy grew at an annualised real rate of 2.8 percent in the final quarter of 2010, revised downward from an earlier forecast of 3.2 percent, the Commerce Department said.

  Chip designer ARM Holdings was the top FTSE 100 riser, up 6.0 percent, with traders citing sector consolidation hopes as well as the impact of a BofA Merrill Lynch upgrade to " neutral" from " underperform" .

  Satellite broadcaster BSkyB added 4.1 percent, after a report in the Financial Times said that Rupert Murdoch's News Corp is close to an agreement with regulators about its bid for the British satellite broadcaster.

  The UK blue chip index had a volatile week, dropping around 1.3 percent as the unrest in Libya and spiralling oil prices took their toll, but the total would have been double that without Friday's rally.

  " The weekend will come as a welcome respite from the increase in volatility, and the LSE will be happier than most to turn off their trading screens tonight," said Will Hedden, sales trader at IG Index. (Editing by Jon Loades-Carter)

BUDAPEST (Reuters) - NATO Secretary General Anders Fogh Rasmussen said he had called an emergency NATO council meeting for Friday afternoon to discuss the situation in Libya.

  " I have convened an emergency meeting in the NATO council this afternoon to consult on this fast-moving situation. So I will return to Brussels in a few hours," he told Reuters during a visit to Budapest Friday.

  " Before I do so, I will meet with EU defence ministers and discuss with them how we in a pragmatic way can help those in need and limit the consequences of these events."

  He said priority must be given to evacuation and possibly humanitarian assistance.

  " It's a bit premature to go into specifics but it's well-known that NATO has assets that can be used in a situation like this and NATO can act as an enabler and coordinator if and when individual member states want to take action," he said.

  Thursday, the United States said it was looking at all options, including enforcing a no-fly zone over Libya, and did not rule out military action in its response to the crisis.

  British Defence Secretary Liam Fox said Britain had been discussing with the NATO leadership how better to coordinate efforts to get people from a number of different countries out of Libya over the next few days.

  In Brussels, senior officials said the European Union was weighing a range of options to evacuate 5,000-6,000 EU citizens still in Libya, many of them oil company employees, and said one possibility was a military humanitarian intervention force.

  (Reporting by Gergely Szakacs editing by Andrew Roche)

By Khalid al-Ansary

  BAGHDAD (Reuters) - Thousands of Iraqis inspired by uprisings around the Arab world protested on Friday against corruption and poor basic services in nationwide rallies that provoked sporadic clashes with security forces.

  At least five people were killed and 75 injured in skirmishes during Iraq's " Day of Rage" when demonstrators tried to storm government buildings and security personnel fired shots in the air to try to disperse them.

  The most violent clashes occurred in the restive areas of Hawija and Mosul in the oil-rich north and the southern oil hub of Basra, but by late afternoon no insurgent attacks on the protesters had been reported. Prime Minister Nuri al-Maliki had warned that al Qaeda and others might attack them.

  Eight years after the U.S.-led invasion which ousted dictator Saddam Hussein, development remains slow and Iraqis complain of shortages of food rations, water, power and jobs.

  The Arab world has erupted in protests aimed at ousting long-standing rulers and holding free elections but Iraqis have focussed more on gripes over essential needs and corruption.

  " We are here for change, to improve the situation of the country. The education system is bad. The health system is also bad. Services are going from bad to worse," said 27-year-old Lina Ali, part of a protest youth group on Facebook.

  " There is no drinkable water, no electricity. Unemployment is growing, which can push the youth towards terrorist activities," she said.

  Frustration has been mounting in the war-torn state, which has vast oil reserves and the potential to be a major producer. 'Where's my share in the oil profits?' one banner read.

  " People are hungry. We ask the government to find job opportunities for the young. All my sons are unemployed, I'm here to express the injustice that we live in," said 52-year-old Um Safa, who walked from Baghdad's northeastern Sadr City slum to Tahrir Square in the centre to take part in the protests.

  SECURITY THREAT

  In Mosul, three people were killed and 15 wounded in clashes as protesters set fire to a government building and a percussion bomb exploded amongst the crowd, a police source said.

  Protesters also set fire to a local council building in Hawija, a restive area near Kirkuk. Two people were killed and 22 injured in scuffles, a police source said.

  A curfew was imposed in Basra until 6 am (0300 GMT) on Saturday after clashes between security forces and protesters that wounded 18 people. Basra Governor Shaltagh Abboud said he would resign in response to protesters' demands.

  " Security forces have endured a lot from demonstrators. Many military and police officers were injured by stones thrown by demonstrators," Ali Ghanim al-Maliki, head of the security committee at Basra's provincial council, told Reuters.

  Seven protesters and a soldier were hurt in Falluja, along with six people in Sulaiman Pek, three in Nassiriya and three in Khaldiya, authorities reported.

  In Baghdad's Tahrir Square, where the crowd swelled to thousands, minor clashes broke out after protesters stormed past concrete blast walls on the nearby Jumhuriya bridge leading to the fortified Green Zone of government buildings and embassies.

  A security official at the square said security forces had been ordered to avoid clashing with protesters. Late in the afternoon soldiers and police used percussion bombs and fired into the air to scatter the crowd.

  A vehicle curfew was in effect in the capital.

  Maliki had told Iraqis they had a right to protest peacefully but advised them to stay away from Friday's rallies because of possible violence by al Qaeda and members of Saddam's banned Baath party.

  A weakened but stubborn insurgency is still carrying out attacks in Iraq despite a big drop in overall violence since the peak of sectarian warfare in 2006-7.

  (Additional reporting by Muhanad Mohammed and Suadad al-Salhy in Baghdad, Sabah al-Bazee in Samarra, Aref Mohammed in Basra, Mustafa Mahmoud in Kirkuk, Khaled Farhan in Najaf, Jamal al-Badrani in Mosul, Fadhel al-Badrani in Falluja writing by Serena Chaudhry, editing by Tim Pearce)

By Tom Pfeiffer and Mohammed Abbas

  BENGHAZI, Libya (Reuters) - Government forces shot dead two protesters in the Libyan capital Tripoli on Friday, Al Jazeera television reported, as a popular uprising against Muammar Gaddafi closed in on his main power base.

  Pro-Gaddafi forces opened fire after hundreds of people in the Janzour district in western Tripoli started a protest march after Friday prayers, a resident, who asked not to be identified, told Reuters in an email.

  He said protesters were also shouting anti-Gaddafi slogans in Fashloum in the city's east, and another resident said security forces had fired into the air there.

  Al Jazeera said two people had been killed and several wounded in heavy shooting in several districts.

  Tripoli and the surrounding area, where Gaddafi's forces had managed to stifle earlier protests, appear to be his last main stronghold as the revolt that has put the east under rebel control has also reportedly advanced through the west.

  Zawiyah, an oil refining town on the main coastal highway 50 km (30 miles) west of Tripoli, has on successive nights fought off attempts by government forces to take control, said witnesses who fled across the Tunisian border at Ras Jdir.

  " There are corpses everywhere ... It's a war in the true sense of the word," said Akila Jmaa, who crossed into Tunisia on Friday after travelling from the town.

  Saeed Mustafa, who also drove through the town, said:

  " There are army and police checkpoints around Zawiyah but there is no presence inside."

  REBEL CONTROL

  Army and police in the eastern city of Adjabiya told Al Jazeera television they had gone over to the opposition.

  Other reports say the third city, Misrata, 200 km east of Tripoli, is also under rebel control. Such reports are hard to verify, with foreign correspondents unable to travel around western Libya, and telephone and broadband connections poor.

  But Gaddafi's son Saif al-Islam said the government was in control of the west, south and centre, and that his family had no intention of leaving.

  " We have plans A, B and C. Plan A is to live and die in Libya. Plan B is to live and die in Libya. Plan C is to live and die in Libya," he told Turkey's CNN Turk television.

  People in Benghazi, under rebel control, said friends in Tripoli had told them protesters had demonstrated at mosques throughout Tripoli and planned to converge on Green Square.

  " At around 14:10 pm (1210 GMT), hundreds of protesters at the Slatnah Mosque in the Shargia district of Janzour were chanting anti-Gaddafi slogans, such as 'With our souls, with our blood we protect Benghazi!'," the Tripoli resident said.

  Hadar, a businessman who declined to give his full name, told Reuters by telephone: " I saw two men fall down and someone told me they were shot in the head."

  Ali, another businessman who declined to give his full name, told Reuters by phone that he was standing with a crowd near a mosque on a road leading to Green Square.

  " They just started shooting people. People are being killed by snipers but I don't know how many are dead," he said.

  U.N. High Commissioner for Human Rights Navi Pillay said " thousands" may have been killed or injured by Gaddafi's forces in the uprising, and called for international intervention to protect civilians.

  OIL FACILITIES

  The rebels who have seized Libya's east said they controlled almost all oil facilities east of the Ras Lanuf terminal. A Reuters reporter saw that the other main terminal, Marsa el Brega, was in rebel control, with soldiers securing the port.

  Industry sources said oil shipments were near standstill.

  Prosecutor-general Abdul-Rahman al-Abbar became the latest senior official to resign, and told al Arabiya television he was joining the opposition.

  In the first practical attempt to enrol the support of Libya's 6 million citizens since the uprising began, state television announced the government was raising wages and food subsidies and ordering special allowances for all families.

  Gaddafi's four decades of totalitarian rule have stifled any organised opposition or rival political structures, but in the east, ad hoc committees of lawyers, doctors, tribal elders and soldiers appeared to be filling the vacuum left by Gaddafi's government with some success.

  There was little sign of the radical Islamists whom Gaddafi has accused of fomenting the unrest.

  The turmoil, inspired by successful revolutions in neighbouring Tunisia and Egypt, has caused particular global concern because Libya supplies 2 percent of the world's oil, the bulk of it from wells and supply terminals in the east.

  Abdessalam Najib, a petroleum engineer at the Libyan company Agico and a member of the Feb 17. coalition that says it is running Benghazi on an interim basis, said the rebels controlled nearly all oilfields east of Ras Lanuf.

  But industry sources told Reuters that crude oil shipments from Libya, the world's 12th-largest exporter, had all but stopped because of reduced production, a lack of staff at ports and security concerns.

  Benchmark Brent oil futures were steady at around $111 on Friday, after a Saudi assurance that it would replace any shortfall in Libyan output brought prices back from Thursday's peak of nearly $120.

  INTERNATIONAL STEPS

  U.S. President Barack Obama consulted the French, British and Italian leaders on Thursday to discuss coordinated steps.

  The U.N. Security Council was to meet on Friday to discuss a French-British proposal for sanctions against Libyan leaders, although a vote is not likely until next week.

  French Foreign Minister Michele Alliot-Marie said the draft would ask for an arms embargo, financial sanctions and a request to the International Criminal Court to indict Libyan leaders.

  A German diplomatic source said the European Union was likely to agree its own sanctions early next week.

  Switzerland said it was freezing any assets owned by the Gaddafi family.

  But NATO Secretary General Anders Fogh Rasmussen said NATO members had not yet discussed trying to impose a no-fly zone to protect rebel-held areas from air attacks.

  Foreign governments mostly focussed on evacuating thousands of their citizens trapped by the unrest.

  Chinese official media said Beijing had so far evacuated 12,000, or about one third, of its citizens from Libya. A U.S.-chartered ferry that had been trapped in Tripoli for two days by bad weather finally set off for Malta.

  Britain said it was sending a naval destroyer and drawing up plans to pull out British oil workers stranded in desert camps.

  Gaddafi appealed for calm on Thursday in a telephone call to state television, blaming the revolt on al Qaeda leader Osama bin Laden.

  State television said on Friday that each family would get 500 Libyan dinars ($400) to help cover higher food costs, and wages for some public sector workers would rise by 150 percent.

  Gaddafi's grip on power could depend in part on the performance around Tripoli of an elite military unit led by one of his younger sons, U.S. and European officials and secret diplomatic cables obtained by Wikileaks showed.

  The 32nd Brigade, led by Gaddafi's son Khamees, is one of three last-ditch " regime protection units" totalling 10,000 men. They are better equipped and more loyal than the rest of the military, which has seen heavy desertion, officials said.

  A witness told Reuters the unit had attacked anti-government militias controlling Misrata, although residents said the forces were beaten back by lightly armed local people.

  (Additional reporting by Alexander Dziadosz, Ali Abdelatti in Cairo, Amena Bakr in Riyadh, Michael Georgy on the Tunisian border, Stephanie Nebehay and Robert Evans in Geneva Writing by Kevin Liffey Editing by Andrew Roche)