Iran threatens U.S. Navy as sanctions hit economy

Iranian Submarine

(Reuters) - Iran threatened Tuesday to take action if the U.S. Navy moves an aircraft carrier into the Gulf, Tehran's most aggressive statement yet after weeks of saber-rattling as new U.S. and EU financial sanctions take a toll on its economy.

The prospect of sanctions targeting the oil sector in a serious way for the first time has hit Iran's rial currency, which reached a record low Tuesday and has fallen by 40 percent against the dollar in the past month.

Queues formed at banks and some currency exchange offices shut their doors as Iranians scrambled to buy dollars to protect their savings from the currency's fall.

Army chief Ataollah Salehi said the United States had moved an aircraft carrier out of the Gulf because of Iran's naval exercises, and Iran would take action if the ship returned.

"Iran will not repeat its warning ... the enemy's carrier has been moved to the Sea of Oman because of our drill. I recommend and emphasize to the American carrier not to return to the Persian Gulf," army chief Salehi said.

"I advise, recommend and warn them over the return of this carrier to the Persian Gulf because we are not in the habit of warning more than once."

The aircraft carrier USS John C Stennis leads a U.S. Navy task force in the region. It is now in the Arabian Sea providing air support for the war in Afghanistan, said Lieutenant Rebecca Rebarich, spokeswoman for the U.S. 5th Fleet.

The carrier left the Gulf on December 27 on a "preplanned, routine transit" through the Straight of Hormuz, she said.

Forty percent of the world's traded oil flows through that narrow straight - which Iran threatened last month to shut if sanctions halted its oil exports.

Brent crude futures were up more than $4 Tuesday afternoon in London, pushing above $111 a barrel on the news of potential threats to supply in the Gulf, as well as strong Chinese economic data.

Tehran's latest threat comes at a time when sanctions are having an unprecedented impact on its economy, and the country faces political uncertainty with an election in March, its first since a 2009 vote that triggered countrywide demonstrations.

The West has imposed the increasingly tight sanctions over Iran's nuclear program, which Tehran says is strictly peaceful but Western countries believe aims to build an atomic bomb. After years of measures that had little impact, the new sanctions are the first that could have a serious effect on Iran's oil trade, 60 percent of its economy.

Sanctions signed into law by U.S. President Barack Obama on New Year's Eve would cut off financial institutions that work with Iran's central bank from the U.S. financial system, blocking the main path for payments for Iranian oil.

The EU is expected to impose new sanctions by the end of this month, possibly including a ban on oil imports and a freeze of central bank assets.

Even Iran's top trading partner China - which has refused to back new global sanctions against Iran - is demanding discounts to buy Iranian oil as Tehran's options narrow. Beijing has cut its imports of Iranian crude by more than half for January, paying premiums for oil from Russia and Vietnam to replace it.

THREATS

Iran has responded to the tighter measures with belligerent rhetoric, spooking oil markets briefly when it announced last month it could prevent shipping through the Straight of Hormuz.

It then held 10 days of naval exercises in the Gulf, test firing missiles that could hit U.S. bases in the Middle East. Tuesday's apparent threat to take action against the U.S. military for sailing in international waters takes the aggressive rhetoric to a new level.

Experts still say they do not expect Tehran to charge headlong into an act of war - the U.S. Navy is overwhelmingly more powerful than Iran's sea forces - but Iran is running out of diplomatic wiggle room to avert a confrontation.

"I think we should be very worried because the diplomacy that should accompany this rise in tension seems to be lacking on both sides," said Richard Dalton, former British ambassador to Iran and now an associate fellow at Chatham House think tank.

"I don't believe either side wants a war to start. I think the Iranians will be aware that if they block the Strait or attack a U.S. ship, they will be the losers. Nor do I think that the U.S. wants to use its military might other than as a means of pressure. However, in a state of heightened emotion on both sides, we are in a dangerous situation."

Henry Wilkinson at Janusian Risk Advisory consultants said the threats might be a bid by Iran to remind countries contemplating sanctions of the cost of havoc on oil markets.

"Such threats can cause market confidence in the global oil supply to wobble and can push up oil prices and shipping insurance prices. For the EU powers debating new sanctions, this could be quite a pinch in the current economic climate."

The new U.S. sanctions law, if implemented fully, would make it impossible for many refineries to pay Iran for crude. It takes effect gradually and lets Obama grant waivers to prevent an oil price shock, so its precise impact is hard to gauge.

The European Union is expected to consider new measures by the end of this month. A blockade would halt purchase of Iranian oil by EU members such as such as crisis-hit Greece, which has taken advantage of the discounted price of Iranian crude.

French Foreign Minister Alain Juppe said Paris wants new measures taken by January 30, when EU foreign ministers meet. President Nicolas Sarkozy has proposed freezing Iranian central bank assets and an oil embargo, Juppe said.

A German foreign ministry spokesman said Berlin was in discussions with other EU states on "qualitatively new sanctions against Iran" to "ensure the sources of funding for the Iranian nuclear program dry up."

Michael Mann, spokesman for EU foreign policy chief Catherine Ashton, said member states would discuss the issue this week in the hope of reaching an agreement on new steps before the January 30 meeting.

"The ball is still in the Iranians' court," he said.

Iran has written to Ashton asking to restart talks over its nuclear program that collapsed a year ago. The EU says it does not want talks unless Iran is prepared to discuss serious steps, such as halting its enrichment of uranium.

CHINA CUTS IRAN OIL IMPORTS

Although China, India and other countries are unlikely to sign up to any oil embargo, tighter Western sanctions mean such customers will be able to insist on deeper discounts for Iranian oil, reducing Tehran's income.

Beijing has already been driving a hard bargain. China, which bought 11 percent of its oil from Iran during the first 11 months of last year, has cut its January purchase by about 285,000 barrels per day, more than half of the close to 550,000 bpd that it bought through a 2011 contract.

The impact of falling government income from oil sales can be felt on the streets in Iran in soaring prices for state subsidized goods and a falling rial currency.

Some currency exchange offices in Tehran, when contacted by Reuters, said there was no trading until further notice.

"The rate is changing every second ... We are not taking in any rials to change to dollars or any other foreign currency," said Hamid Bakshi in central Tehran.

Housewife Zohreh Ghobadi, in a long line at a bank, said she was trying to withdraw her savings and change it into dollars.

Iranian authorities played down any link between the souring exchange rate and the imposition of the new sanctions.

"The new American sanctions have not materialized yet," Foreign Ministry spokesman Ramin Mehmanparast said.

The economic impact is being felt ahead of a nationwide parliamentary election on March 2, the first vote since a disputed 2009 presidential election that brought tens of thousands of Iranian demonstrators into the streets.

Iran's rulers put those protests down by force, but since then the "Arab Spring" revolts have show that authoritarian governments in the region are vulnerable to street unrest.

In a sign of political tension among Iran's elite ahead of the vote, a court jailed the daughter of powerful former President Akbar Hashemi Rafsanjani Tuesday and banned her from politics for "anti-state propaganda."

Rafsanjani sided with reformists during the demonstrations following the 2009 vote. Daughter Faezeh Hashemi Rafsanjani went on trial last month on charges of "campaigning against the Islamic establishment," news agency ISNA said.

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Man with explosives stopped at Texas airport

Exclusive stopped in Texas

SAN ANTONIO Dec 31 (Reuters) - A man found to be carrying explosives in "military grade wrapping" was detained at a western Texas airport on Saturday, forcing the evacuation of the area, officials said.

The explosives were found during a routine inspection at a security checkpoint inside Midland International Airport, Midland city spokeswoman Tasa Watts said. The Transportation Security Administration evacuated the terminal and conducted a security sweep, she said.

The incident at the airport in Midland, which is about 280 miles northwest of San Antonio, came as many Americans set out on airplane trips for the New Year's Day holiday.

No details were immediately available about the man or why he had the explosives, which Watts said were "wrapped in military grade wrapping."

TSA spokeswoman Lisa Farbstein said the "suspicious item" was found in a carry-on bag.

"The checkpoint was closed for approximately one hour while officials investigated and removed the item from the checkpoint area," Farbstein said.

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Romney leads Paul in Iowa poll, Santorum surges

Romney

(Reuters) - Republican Mitt Romney narrowly leads rival Ron Paul in Iowa three days before the state kicks off the party's presidential nominating race, according to a Des Moines Register poll released on Saturday.

The closely watched poll, which has a strong track record in Iowa races, showed Rick Santorum surging past Newt Gingrich into third place in a fluid race where 41 percent of likely caucus-goers said they could still change their minds.

The newspaper's poll, conducted Tuesday through Friday, showed Romney with 24 percent support, Paul with 22 percent, Santorum with 15 percent and Gingrich 12 percent. In fifth place was Rick Perry with 11 percent while Michele Bachmann was sixth with 7 percent.

The poll was released as candidates launched the final stretch run for Tuesday's contest in Iowa, the first in the state-by-state battle to choose a Republican challenger to Obama, a Democrat, in the November election.

The results were a huge boost to Romney, who has resumed his front-runner's role in the Republican presidential race in the last few weeks after the slide of Gingrich.

A victory for Romney in Iowa, combined with a win in the next contest on January 10 in New Hampshire could put the former Massachusetts governor on a path to clinching the Republican nomination early.

But Santorum was the candidate with the momentum. The Register poll was taken over a four-day period and the newspaper said that in the final two days of that period, Santorum was in second place with 21 percent. Romney stayed the same at 24 percent.

The poll was more bad news for Gingrich, the former House speaker who led the race a few weeks ago but has faded under an onslaught of attack ads from Paul and an outside group that backs Romney.

At a stop in Iowa earlier on Saturday, Gingrich said he would adjust his campaign strategy to respond more forcefully to the attacks.

'NASTIER AND DISHONEST'

"We're learning a lot about what our opponents will do. They are nastier and more dishonest than I expected. So we'll have to make some adjustments," Gingrich said in Atlantic, Iowa.

But Gingrich said he would not respond directly to negative ads run by the group that supports Romney.

"We may go to a much more clearer contrast but we're not going to respond in kind," Gingrich said. "Those ads are dishonest and he knows it. They are factually false and he knows it. And we're not doing anything like that."

The candidates rolled across Iowa in buses on Saturday, stopping at coffee shops, restaurants and even a car museum to try to win over doubters and energize supporters to turn out to the caucuses.

In Iowa's quirky caucus system, voters gather to cast ballots in public meetings after listening to pitches on behalf of the candidates.

Paul, known for his libertarian views, is taking the holiday weekend off in Texas before returning to Iowa on Monday.

Santorum, a former U.S. senator from Pennsylvania with a strong social conservative message, is trying to unite Iowa's influential evangelical Christian voters behind him and score an upset with a surge in the final days.

"If you really want to transform America, it has to be about values, faith and freedom," he told a crowd in Knoxville, Iowa.

Gingrich, along with Santorum, Bachmann and Jon Huntsman, also joined a lawsuit already filed by Perry against Virginia's Board of Elections to qualify for the state's 2012 primary election.

Romney and Paul were the only candidates who managed to submit the required 10,000 verifiable signatures collected by registered voters in the state in order to get on Virginia's ballot for its March 6 primary.

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Japan relaxes decades-old arms exports ban

Japanese Fighter

(Reuters) - Debt-riddled Japan Tuesday relaxed its self-imposed decades-old ban on military equipment exports in a move that will open new markets to its defense contractors and help the nation squeeze more out of its defense budget.

The government's security council agreed to the relaxing of the ban to allow Japan to take part in the joint development and production of arms with other countries and to supply military equipment for humanitarian missions, Chief Cabinet Secretary Osamu Fujimura said at a news conference.

"The new standards (on weapons exports) are a result of the government considering measures that required attention amid recent changes to the environment surrounding international defense equipment," Fujimura said, referring to rising arms costs that could put strain on the government, with public debt twice the size of its economy.

The rule adopted in 1967 banned sales to communist countries, those involved in international conflicts or subject to United Nations sanctions.

It later became a blanket ban on exports and on the development and production of weapons with countries other than the United States, making it impossible for manufacturers to participate in multinational projects.

"The regulations on weapons exports are based on the concept that as a pacifist country Japan should aim to avoid fanning international conflicts, and we will keep a close watch on exports," Fujimura said.

The relaxing of the rules does not mean Japan will begin openly selling its military products to the world -- exports will be limited to strategic allies like the U.S.

The move could still allow companies such as Mitsubishi Heavy (7011.T) to join the development of Lockheed Martin's (LMT.N) F-35, which Tokyo picked last week as its next frontline fighter, planning to buy 42 machines at an estimated cost of more than $7 billion.

MORE THAN DOUBLE

Although Japan is the world's sixth-biggest military spender, it often pays more than double other nations for the same equipment because local export-restricted manufacturers can only fill small orders at a high cost.

Removing the ban would stretch its defense purse further as military spending in neighboring China expands.

This year, Beijing raised military outlays by 12.7 percent. That included money for its own stealth fighter, the J-20, which made its maiden flight in January.

In contrast, Japan's defense budget has been shrinking in past years as ballooning costs for social security and servicing its growing debt pile squeeze other spending.

Given fiscal restraints, Tokyo is keen to make its defense program more efficient to maintain its military capability in the face of China's rise and growing uncertainties in the region.

The relaxation of the ban, that has been modified in the past to allow sharing of military technology with the U.S., could also be a boon for Japanese manufacturers as the strong yen weighs on their civilian exports and weak domestic demand and budget constraints restrict growth at home.

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Congress punts hard payroll tax work to 2012

Barack Obama

(Reuters) - President Barack Obama signed into law a two-month payroll tax cut extension on Friday, capping a year of fierce partisan combat over taxes and spending that will resume in January and play heavily in the 2012 elections.

The Senate and the House of Representatives, by voice votes in chambers nearly emptied for the holidays, passed a $33 billion (21 billion pounds) bill to keep the payroll tax rate at 4.2 percent through February. It had been scheduled to increase on January 1 to 6.2 percent. Obama swiftly signed the bill.

"We have a lot more work to do," the president said at the White House. "This continues to be a make-or-break moment for the middle class ... There are going to be some important debates next year."

Obama heads to vacation in Hawaii with an important political win in his portfolio after he and fellow Democrats prevailed in the message war by backing lower taxes for middle-class Americans in the midst of a fragile economic recovery.

The battle took a toll on House Republicans led by Speaker John Boehner, who were forced to make an embarrassing retreat and agree to a short-term deal Thursday after getting hit by critics on all sides, include their colleagues in the Senate.

The temporary fix lets lawmakers lower the curtain, for now, on a year of political deadlock that in the end produced only a series of inconclusive truces. The fiscal policy debate is set to rage straight through the 2012 election season and beyond.

While Congress is on a long winter break now and does not return to full swing until late January, newly appointed negotiators are expected to begin work soon on figuring out how to pay for extending the payroll tax cut through 2012.

Republicans have sought a continued freeze on federal worker pay and cuts in Medicare benefits for the wealthy. Democrats have rejected both ideas while proposing a surtax on the wealthy to cover the extension's cost. Republicans reject this.

Both sides have been open to cutting federal workers' pension benefits. There also were last-minute Senate negotiations last week on possibly ending some tax breaks for the wealthy, such as a small one involving corporate jets.

Minutes after the bipartisan deal was passed by Congress, the bickering that has come to dominate Capitol Hill resumed.

Republican Representative Tom Price, a leader of House conservatives, immediately criticized the short-term extension, calling it a "two-month punt" and saying it would not have been needed if Senate Majority Leader Harry Reid, a Democrat, and Obama had "been willing to do their job today."

'NOTHING OFF THE TABLE'

In a sign that the battle is far from over, Reid signaled that Democrats could renew their push for a surtax on wealthier Americans. Democrats had dropped that demand during the year-end negotiations that produced the two-month deal.

"There is nothing off the table," he said.

Obama scored a victory in the payroll tax struggle over Tea Party conservatives in the House who tried to block the two-month extension. They backed down on Thursday in the face of bipartisan criticism, but they are not going away.

Representative Tim Huelskamp, a first-term Republican, said on CNN that he was disappointed with Republican leadership caving in to pressure and accepting the two-month deal.

Next year could be a rough one for Boehner, the top House Republican, said Norm Ornstein, a scholar at the American Enterprise Institute, a conservative think tank.

Boehner spent 2011 having to negotiate with many of his own party members on just about every major piece of legislation.

Now that House Republicans have had to go along with Democrats in the payroll tax debate, "the idea that this group of angry Tea Party Republicans, who feel betrayed, now will go along or that Boehner will be more capable of defying them is a little bit wrong-headed," Ornstein said.

Meanwhile, Democrats might be emboldened, believing "they've learned to play poker," he added.

Patrick Griffin, associate director Of American University's Center for Congressional and Presidential Studies, said House Republicans "overplayed their hand. How they interpret that lesson will be very interesting."

Any edge conferred on Democrats might be short-lived, however. The 2012 election cycle is just set to kick off with the Iowa Republican presidential caucus on January 3 and a long road lies ahead until voters go to the polls in November.

The payroll tax funds the Social Security retirement pension system. If it had been allowed to rise, the increase would have hit the wallets of 160 million working Americans.

The $33 billion needed to pay for the two-month extension will be raised by increasing fees charged by housing finance giants Fannie Mae and Freddie Mac for guaranteeing mortgages.

Analysts said the fee hike, which investors will likely pass along to borrowers, could raise financing costs for mortgages, but probably not enough to slow a housing market recovery.

Unemployment benefits set to expire soon were extended as well, while cuts in payments to doctors who treat patients in the government-backed Medicare health insurance program for the elderly were postponed, under the bill signed by Obama.

Also included in it was a Republican initiative aiming to force the administration into fast approval of an oil pipeline opposed by environmentalists and many Democrats. The provision gives Obama 60 days to either approve TransCanada's Keystone XL pipeline from Canada to Gulf of Mexico facilities in Texas, or declare it not in the national interest.

Obama wants more time to evaluate the environmental impact of routing the pipeline through sensitive areas of Nebraska. The White House has said that if pushed for a decision within 60 days, the administration would be forced to reject the project.

Not extending the payroll tax cut, analysts warned, could have jeopardized the recovery, even risking another recession.

The modest two-month fix drew fire from some businesses that said it will complicate payroll processing and tax planning.

The payroll situation "could get more confusing," said Robert Gard, an accountant with Gard and LaFreniere LLC in Alpharetta, Georgia. If the tax is not extended at the end of February, businesses will need to reprogram software, he said.

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Holiday sales strong, but still discounted

Holiday Shopping

(Reuters) - With six days until Christmas, the U.S. holiday shopping season is better than expected, with discounts deep enough to bring in shoppers who are searching for bargains but not showing the desperation seen in the recession.

Department stores like Macy's Inc are shaping up to be among the big winners, while apparel retailers are being hurt as mild weather limits demand for winter clothes.

"Some of the women's retailers that were doing well earlier in the year are getting hurt this holiday by the resurgence of the department store," said Craig Johnson, president of Customer Growth Partners, a retail consulting firm.

Customer Growth Partners, which has been one of the most bullish forecasters of sales heading into the holiday season, estimated that U.S. retailer sales on Saturday were $26 billion, just shy of the $27 billion spent on "Black Friday," the day after Thanksgiving, which traditionally kicks off the holiday shopping season.

Johnson was one of the most bullish forecasters coming into the holiday season. Now others are joining suit.

ShopperTrak, which monitors traffic at shopping malls, now expects sales in November and December to rise 3.7 percent, up from its September forecast of 3 percent.

Last week, the National Retail Federation raised its forecast, calling for holiday sales to rise 3.8 percent. In October, it forecast a gain of 2.8 percent.

To be sure, that NRF forecast is still less than the 5.2 percent increase reported for 2010. Unemployment was still 8.6 percent in November and lower-income shoppers have been making use of such plans as layaway to paying for holiday items.

So many analysts said sales are not exceptionally strong or exceptionally weak.

"There's more that's normal here than people want to let on," Edward Jones analyst Matt Arnold said.

ShopperTrak cofounder Bill Martin said that discounts were more in the 30 percent to 40 percent range, instead of the 50 percent to 60 percent seen last year.

On Saturday, he said it was hard to find parking spaces at the malls he visited and he saw lots of people with packages. In other words, it was a typical weekend before Christmas.

"It's been a typical shopping pattern," he said.

Overall, traffic to stores may be off a couple of percentage points. But that's because more people are shopping on line, he said.

IBM Benchmark, which tracks transactions on the websites of hundreds of the top retailers, said on Monday it now expects online sales to rise 9.5 percent to 10 percent in December from a year ago.

Trutina Financial Chief Investment Officer Patty Edwards said what she saw at Target this weekend was stocked shelves and normal discounts.

"There weren't any specific markdowns that were overly compelling, but conversely, there didn't seem to be any shortages of items at all," Edwards said

WANT A DEAL? BUY A COAT

Even with retailers managing their pace of discounts and avoiding desperation, higher costs for cotton and other materials are taking their toll. Many retailers' gross margins are likely to decline this holiday season, according to data from Thomson Reuters I/B/E/S.

Over the weekend, 40 percent discounts "seemed to be the cost of doing business," said Nomura Equity Research analyst Paul Lejuez, who follows apparel retailers, adding that "promos are likely to intensify this week."

Among the retailers offering such discounts were Abercrombie & Fitch Co, American Eagle Outfitters Inc, Ann Inc, Gap Inc and Wet Seal Inc, Lejuez said.

Mild weather has cut into sales of winter clothing, said independent retail analyst Brian Sozzi.

"Coats are offering some of the best deals in the mall right now," he said.

One of the featured items on Macys.com on Monday was women's coats for 40 percent to 50 percent off.

"Those cold temperatures that you typically experience in December just haven't been there," said Joe DeRugeriis, senior marketing manager at Planalytics, which provides weather consulting services for businesses.

"People are still going to spend the cash," he said, "but the cash is moving to things more like electronics and not those items that normally sell well this time of the year."

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Last U.S. troops leave Iraq, ending war

Last U.S. convoy leaves Iraq

(Reuters) - The last convoy of U.S. soldiers pulled out of Iraq on Sunday, ending nearly nine years of war that cost almost 4,500 American and tens of thousands of Iraqi lives and left a country grappling with political uncertainty.

The war launched in March 2003 with missiles striking Baghdad to oust President Saddam Hussein closes with a fragile democracy still facing insurgents, sectarian tensions and the challenge of defining its place in an Arab region in turmoil.

The final column of around 100 mostly U.S. military MRAP armored vehicles carrying 500 U.S. troops trundled across the southern Iraq desert from their last base through the night and daybreak along an empty highway to the Kuwaiti border.

Honking their horns, the last batch of around 25 American military trucks and tractor trailers carrying Bradley fighting vehicles crossed the border early Sunday morning, their crews waving at fellow troops along the route.

"I just can't wait to call my wife and kids and let them know I am safe," Sgt. First Class Rodolfo Ruiz said as the border came into sight. Soon afterwards, he told his men the mission was over, "Hey guys, you made it."

For U.S. President Barack Obama, the military pullout is the fulfillment of an election promise to bring troops home from a conflict inherited from his predecessor, the most unpopular war since Vietnam and one that tainted America's standing worldwide.

For Iraqis, though, the U.S. departure brings a sense of sovereignty tempered by nagging fears their country may slide once again into the kind of sectarian violence that killed many thousands of people at its peak in 2006-2007.

Prime Minister Nuri al-Maliki's Shi'ite-led government still struggles with a delicate power-sharing arrangement between Shi'ite, Kurdish and Sunni parties, leaving Iraq vulnerable to meddling by Sunni Arab nations and Shi'ite Iran.

The intensity of violence and suicide bombings has subsided. But a stubborn Sunni Islamist insurgency and rival Shi'ite militias remain a threat, carrying out almost daily attacks, often on Iraqi government and security officials.

Iraq says its forces can contain the violence but they lack capabilities in areas such as air defense and intelligence gathering. A deal for several thousand U.S. troops to stay on as trainers fell apart over the sensitive issue of legal immunity.

For many Iraqis, security remains a worry - but no more than jobs and getting access to power in a country whose national grid provides only a few hours of electricity a day despite the OPEC country's vast oil potential.

U.S. and foreign companies are already helping Iraq develop the world's fourth-largest oil reserves, but its economy needs investment in all sectors, from hospitals to infrastructure.

"We don't think about America... We think about electricity, jobs, our oil, our daily problems," said Abbas Jaber, a government employee in Baghdad. "They (Americans) left chaos."

GOING HOME

After Obama announced in October that troops would come home by the end of the year as scheduled, the number of U.S. military bases was whittled down quickly as hundreds of troops and trucks carrying equipment headed south to Kuwait.

U.S. forces, which had ended combat missions in 2010, paid $100,000 a month to tribal sheikhs to secure stretches of the highways leading south to reduce the risk of roadside bombings and attacks on the last convoys.

Only around 150 U.S. troops will remain in the country attached to a training and cooperation mission at the huge U.S. embassy on the banks of the Tigris river.

At the height of the war, more than 170,000 U.S. troops were in Iraq at more than 500 bases. By Saturday, there were fewer than 3,000 troops, and one base - Contingency Operating Base Adder, 300 km (185 miles) south of Baghdad.

At COB Adder, as dusk fell before the departure of the last convoy, soldiers slapped barbecue sauce on slabs of ribs brought from Kuwait and laid them on grills beside hotdogs and sausages.

Earlier, 25 soldiers sat on folding chairs in front of two armored vehicles watching a five-minute ceremony as their brigade's flags were packed up for the last time before loading up their possessions and lining up their trucks.

The last troops flicked on the lights studding their MRAP vehicles and stacked flak jackets and helmets in neat piles, ready for the final departure for Kuwait and then home.

"A good chunk of me is happy to leave. I spent 31 months in this country," said Sgt. Steven Schirmer, 25, after three tours of Iraq since 2007. "It almost seems I can have a life now, though I know I am probably going to Afghanistan in 2013. Once these wars end I wonder what I will end up doing."

NEIGHBOURS KEEP WATCH

Iran and Turkey, major investors in Iraq, will be watching with Gulf nations to see how their neighbor handles its sectarian and ethnic tensions, as the crisis in Syria threatens to spill over its borders.

The fall of Saddam allowed the long-suppressed Shi'ite majority to rise to power. The Shi'ite-led government has drawn the country closer to Iran and Syria's Bashar al-Assad, who is struggling to put down a nine-month-old uprising.

Iraq's Sunni minority is chafing under what it sees as the increasingly authoritarian control of Maliki's Shi'ite coalition. Some local leaders are already pushing mainly Sunni provinces to demand more autonomy from Baghdad.

The main Sunni political bloc Iraqiya said on Saturday that it was temporarily suspending its participation in the parliament to protest against what it said was Maliki's unwillingness to deliver on power-sharing.

A dispute between the semi-autonomous Kurdish region and Maliki's central government over oil and territory is also brewing, and is a potential flashpoint after the buffer of the American military presence is gone.

"There is little to suggest that Iraq's government will manage, or be willing, to get itself out of the current stalemate," said Gala Riani, an analyst at IHS Global Insight.

"The perennial divisive issues that have become part of the fabric of Iraqi politics, such as divisions with Kurdistan and Sunni suspicions of the government, are also likely to persist."

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Gold ends up, sets biggest weekly drop in 3 months

Gold Bar

(Reuters) - A weakening dollar and short covering drove investors back into gold on Friday, lifting prices to end a sharp four-session pullback that still yielded the biggest weekly decline in almost three months.

Spot gold rallied as much as 1.7 percent to $1,600.49 per ounce, and steadied at $1,596.40 by 4 p.m. EST (2100 GMT,) up from a near 3-month low at 1,560.36 hit in the previous session.

U.S. gold rose 1.31 percent to close at $1,597.90 per ounce, after hitting a high at $1,598.10 per ounce.

David Lee, metals trader at Heraeus Precious Metals Management in New York said he thought gold's push higher on Friday was a function of the yellow metal being temporarily oversold after its nosedive from levels above $1,750 last week.

"Some people were taking the opportunity to scoop it up at lower levels. And, it's still up year to date. So, it wasn't surprising that people wanted to sell it off to raise cash for the year end," Lee said.

He warned, however, that the 1 to 2 percent rebound was not significant relative to the high priced of the yellow metal, adding that prices could come off again if the crisis in Europe worsens before year end.

"If comes back down to the day's low on Sunday night, for example, I'd say dump it really fast. I think it will continue to go down to around $1,550," said Lee.

A slightly weaker dollar against a basket of currencies also

helped boost precious metal prices .DXY. A softer U.S. currency makes dollar-priced commodities, such as gold, more affordable for holders of other currencies.

For the week, bullion lost around 6.60 percent, its biggest fall since late September. It remains vulnerable to a deepening euro zone debt crisis and rising funding stress.

"Gold took a beating this week and today bounced a bit as investors see this as a good moment to buy, but it is still vulnerable," Credit Agricole analyst Robin Bhar said.

"I expect gold will stay under pressure as the funding stress is increasing the need for liquidity, and gold is seen as one of the assets to liquidate."

The need for cash has overwhelmed gold's traditional status as a safe haven in the past few months, putting the metal on course for its first quarterly fall since end-September 2008 when the global credit crunch was at its worst.

Gold has, therefore, benefited recently from developments that have reduced risk aversion and the flight to cash.

It got a boost after Spain attracted solid demand for its bonds on Thursday, helping to ease concerns the country could be among the next to fall in the euro zone's debt crisis.

"At the moment a lot of people are resting their hopes on the fact that physical demand will pull gold back up again, but because of the amount of speculative investment that has gone into this market over the last years, it is obviously exposed on that basis," said Ole Hansen, a senior manager at Saxo Bank.

FUNDING STRESS

Gold benefits when central banks print money or cut interest rates or when money managers diversify assets.

"With access to liquidity being constrained, market participants have increasing problems to refinance," Credit Suisse said in a research note.

"As a result they have to sell their assets - including precious metals - to raise the much-needed cash. This is the main reason why gold prices fall on days of increasing funding stress."

In other precious metals, spot silver gained as much as 2.68 percent to trade at $29.97 an ounce, before pulling back to $29.64 per ounce late in the session.

Spot platinum rose to a high at $1,436.25, then changed hands at $1,415.24, up from $1,404 at Thursday's close.

Palladium climbed to a session high of $632.52 an ounce and then steadied around $620.72, higher than the previous close at $614.25 per ounce.

"As well as tracking gold, for platinum and palladium there are fears over weak industrial growth, and they may be hit harder as people look to liquidate risk," Bhar said.

"Some support however comes from costs. These metals are already trading very close to their costs."

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Motorola wins German patent case ruling vs Apple

iPad2

(Reuters) - Motorola Mobility won a preliminary injunction against Apple Inc in Germany, which could bar the sales of iPhones and iPads in the country.

A regional German court in Mannheim ruled on Friday that Apple Sales International -- European sales subsidiary of Apple in Cork, Ireland -- must stop selling or distributing mobile devices that infringe certain Motorola patents.

The ruling, which relates to cellular communications patents, could bar the sales of all Apple products that use the patents such as iPhone 4 and iPad 3G, Germany-based patent expert Florian Mueller said.

"The ruling targets Apple's European sales organization but relates only to that entity's sale to German customers," Mueller added.

Motorola Mobility said it has been negotiating with Apple and offering the company "reasonable licensing terms and conditions since 2007."

Motorola Mobility "will continue our efforts to resolve our global patent dispute as soon as practicable," it said in a statement.

To enforce the injunction, Motorola Mobility has to pay about 100 million euros ($133.8 million) as bond.

Apple, which has other patent infringement cases pending in Germany, said it plans to appeal.

"We are going to appeal the court ruling right away," Apple spokeswoman Kristin Huguet said. "Holiday shoppers in Germany should have no problem finding the iPad and iPhone they want."

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Hospital fire kills at least 84 in eastern India

Fire in Kolkata AMRI Hospital, India

(Reuters) - A fire tore through a seven-story private hospital in the eastern Indian city of Kolkata before dawn Friday, killing at least 84 people, most of them intensive care patients who were asleep and suffocated in the fumes.

Thick smoke engulfed the crowded hospital and fire-fighters smashed windows to evacuate people down ladders and with sheets from upper floors. Other patients were wheeled out on trolleys.

Rescue workers and locals criticised a lack of safety equipment and said staff fled the scene leaving windows and doors locked. The hospital had been warned there was a fire hazard months ago, state officials said.

"My sons and I rushed to the hospital and started breaking the windows so that some of the smoke would escape," said 35-year-old Saraswati Mondal, who lives in a crowded shanty town near the clinic in south Kolkata.

"As we broke the windows we could hear the patients crying out for help," said Mondal said.

The fire broke out in the basement and flames and smoke quickly spread through the building through air-conditioning shafts. Witnesses said the fire brigade took an hour to arrive. Police arrested six of the hospital's directors for negligence.

By mid-morning, the flames were under control and rescue workers had begun to bring the dead from the still-smoking building, including at least two children whose bodies were covered by green blankets, a Reuters witness said.

Kolkata's Joint Commissioner of Police Shivaji Ghosh said 84 people died in the incident, Indian news agency PTI reported.

West Bengal's fire service head Javed Khan said the hospital did not have proper fire-fighting equipment.

The vice-president of the AMRI hospital, in a mostly middle-income area of Kolkata, told reporters at least 73 people died in the blaze, all but three of them patients.

He said 90 more were evacuated and that the hospital complied with statutory safety rules.

"The fire was detected at 3.30 (a.m.)...we called the fire brigade within five to 10 minutes," S. Upadhyay told a news conference.

Angry local residents accused the hospital authorities of reacting too slowly and not helping patients to safety, and pointed out another fire had broken out there three years ago. That time there were no casualties.

Kolkata, formerly known as Calcutta, was for years the capital of British-ruled India. It is one of South Asia's largest cities, known as much for literary culture as for cramped slums. It is now the capital of West Bengal.

"It was horrifying that the hospital authorities did not make any effort to rescue trapped patients," Subrata Mukherjee, West Bengal's health minister told cable network NDTV.

The state's chief minister, Mamata Banerjee, immediately cancelled the operating licence for the hospital, part of a prominent chain of clinics in the city.

"Law will take its own course. Those responsible for so many deaths will be dealt with seriously," Banerjee told reporters.

Shares in the conglomerate that partly owns the AMRI chain, Emami Ltd, fell 2.3 percent to 390.95 rupees Friday.

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Russian police crack down on anti-Putin protests

Russian Police

(Reuters) - Hundreds of people took to the streets of Moscow for a second successive day on Tuesday to demand an end to Vladimir Putin's 12-year rule, defying a crackdown by tens of thousands of police reinforced by crack Interior Ministry troops.

Police said they had detained about 250 people in central Moscow when they tried to stage an unapproved rally and held about 200 more in St Petersburg, where opposition forces have also been emboldened by the prime minister's worst election setback since he took power in 1999.

After permitting the biggest opposition rally in Moscow for years on Monday evening, the police were out in large numbers. The Interior ministry said about 2,000 special troops were supporting almost 50,000 police, and some moved through the city centre in armored vehicles in a show of force.

Hundreds of pro-Putin youths also tried to spoil the rally, shouting "The people! Putin" and beating drums to drown out the opposition protesters' chants of "Russia without Putin" and "We want free elections!" A few minor scuffles broke out.

Boris Nemtsov, a liberal opposition leader, told Reuters he had been detained. Two opposition figures, blogger Alexei Navalny and Ilya Yashin, were jailed for 15 days for their role in Monday's opposition protest, the biggest in Moscow for years.

"We are not going to stop our struggle," Yashin said.

The protests are a further sign of pressure on Putin to make changes after his United Russia lost ground in a parliamentary election on Sunday, even though it was criticized by Washington and European monitors and the opposition say it was slanted in the ruling party's favor.

The election outcome highlighted growing unease with the 59-year-old leader as he plans to reclaim the presidency next year and pointed to a mood shift after years of political domination by the former KGB spy who has brooked little dissent and marginalized the liberal opposition.

"We want fair elections. Look at what they have done to our country, our Russia," said a man who gave his name only as Alexei as he was pushed by riot police into a waiting bus.

The organizers used social media such as Twitter and Facebook to attract new support from people who no longer consider Putin to be invincible.

"I had to come out today because I can't stay quiet about how they just spit on us," said Mikhail Torupov, a Muscovite who said he had hardly ever protested before.

But Maxim Mishenko, 34, said he did not want Russia to follow the same violent path as Libya and Syria.

"I don't want the same thing to happen here as in Libya or Syria. There will be no Slavic spring here in Russia if I have anything to do with it," he said.

ARAB-STYLE REVOLT?

U.S. Republican Senator John McCain said Russia could now face a revolt. In a message to Putin on Twitter, he wrote: "Dear Vlad, The Arab Spring is coming to a neighborhood near you."

But many Russian political experts have dismissed suggestions that Putin could face an uprising in a country which has little tradition of major street protests, despite the 1917 Bolshevik Revolution, and where dissent has often been crushed.

Putin, meeting United Russia representatives, said he would reshuffle the government after the presidential election he is contesting next March but promised no immediate action.

It was not enough to appease opposition leaders angered by the widespread reports that the ruling party's vote count was inflated by ballot stuffing, even though it barely held on to a majority of seats in the State Duma lower house.

Putin has high popularity ratings but has upset many people by saying he wants to swap jobs with President Dmitry Medvedev after the presidential election, opening the way for him to rule until 2024. He was booed at a sports event last month.

"It's clear that on the whole the legitimacy of the authorities is on the decline," Mikhail Prokhorov, a metals tycoon who fell out with the Kremlin, wrote in his blog.

"If nothing changes, the whole (political) structure could collapse. This system will not last five years more.

Monday's rally in Moscow attracted about 5,000 people -- a large number in a country where many protests are not allowed and demonstrators are often quickly hauled away by police. Police detained about 300 people after Monday's protest.

Putin's spokesman, Dmitry Peskov, said approved rallies could continue but added: "The actions of those who hold unsanctioned demonstrations must be stopped in the appropriate way."

The political uncertainty has affected Russians stocks and the ruble. The ruble-denominated MICEX index fell by 3.8 percent, the dollar-based RTS index dropped by 4.7 percent and the ruble was 1.3 percent down against the U.S. dollar.

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Travel Picks: Top 10 tips for holiday travel

Travel Month

(Reuters) - Silver bells, sleigh rides, menorahs and mistletoe are on the not-so-distant horizon.

But before the festivities get underway, there are flights to catch, security lines to endure and delays to tolerate. With that in mind, online travel adviser Cheapflights.com (www.cheapflights.com ) have come up with 10 top holiday travel tips to help you navigate the festive season. Reuters has not endorsed this list:

1. For procrastinators: Book last-minute

Typically we encourage travelers to book flights between 60 and 90 days before an anticipated date of departure. That ideal time-frame has now passed, leaving many fliers scrambling to find holiday fare deals. But all is not lost! Data shows that airlines this year were perhaps a bit too aggressive with pricing early on, leaving seats still to be filled. Lucky for procrastinators, flash sales are popping up left and right and - better yet - the best is possibly yet to come. Start scanning now, as early December bookers could save the most on holiday flights.

2. Travel alternatively

As ongoing advocates of both alternative airports and alternative destinations, our stance holds true with the season of cheer upon us. For fliers with a set destination in mind, taking the time to compare nearby airports based on affordability could mean major savings. Boston residents, for instance, should consider TF Green International in Providence or Manchester-Boston Regional in New Hampshire if fares out of Logan are too steep. And the same is true for arrival cities. Folks eager to get away for a beach vacation should look for the deal rather than the destination. Instead of Miami this Christmas, how about a beach town on the Gulf like Fort Meyers or Sarasota? The bottom line: do your homework.

3. Fly on the holiday

Flight searches by date often tell an interesting but consistent story: flying midweek, early in the day or late at night saves travelers cash. 'Tis true on holidays, too. Many times the lowest fares go to travelers willing to fly on the holiday itself, whether it's Thanksgiving, Christmas or New Year's Eve. Plus, the cheer can be felt 35,000 feet in the air for flexible fliers, as some airlines are particularly festive. Lufthansa in Christmases past has cooked traditional German meals and decked cabins with wreaths and decorations so passengers - and flight crews - can share in the celebration.

4. For gift givers: Shop online

In an era of ever-increasing baggage fees, it's best to show up to the airport with as little to check in as possible. Lucky for those with long wish lists, nearly everything nowadays can be found - and shipped - thanks to the glorious Internet. Evidence? Our recent list of travel gift ideas, all of which are available courtesy of the web. Order a Big Wheel-luggage hybrid for the junior traveler in your life or an airline gift card for your favorite frequent flier. No matter the choice, it means less to get through security and less on your credit card.

5. Ship gifts

If you've found a gift at a great rate or a specialty item during your holiday shopping sprees, then of course seize the deal. But if it doesn't fit in your carry-on, you may want to ship it via a courier company. Do the math a week before to see what will cost you less: a tracked package or an extra bag. If it's the latter, remember to leave your gifts unwrapped so security can easily access the contents.

6. Pack an empty suitcase

If the price is right, bringing an extra piece of luggage on your trip can be a frugal decision. Then, when it comes time to transport the gifts you've received home, you'll have an empty suitcase to fill. Either pack a fold-up duffel in your luggage or bring a separate bag if it means you won't get hit with high-priced baggage fees. First calculate what it will cost to ship your gifts home, then plan and pack accordingly.

7. Peruse duty-free

International fliers over the holidays have the opportunity to savor their layovers a bit in the duty-free shops, where high-end products go for everyday prices in airports around the globe. Hubs like Hong Kong International Airport, Amsterdam Airport Schipol and London Heathrow Airport offer shoppers a bounty of stocking stuffers and goodies for under the tree. Shop on your way - or way home - tax-free. A friendly reminder: If you're connecting Stateside from certain international locations, liquids purchased at duty-free have to be checked before the domestic leg of your flight.

8. For air mile collectors: Save the miles

Miles get tricky around the holidays, especially since "low points" seats for the most popular travel dates sell out even before the Halloween candy has hit the shelves. There's that, plus some airlines implement the never-popular blackout dates. Accumulated miles, whether through an airline or a credit card, are used most economically either when travel plans are booked early or a traveler has flexibility with their itinerary. Our advice: Save the points during the holidays unless you snag a great deal.

9. Health: Invest in hand sanitizer

The most wonderful time of the year is also the most sniffly time of the year for many travelers. Keep that in mind before you head for the airport, and pack plenty of hand sanitizer to help fend off germs. There's nothing worse than realizing during ascent that you're stuck in a cabin full of recycled air with a sickly seatmate. Fill your prescriptions, drink lots of water, wash your hands often - whatever it takes to guarantee your holidays will be spent both joy- and health-filled.

10. Plan ahead and expect delays

Flight delays are pretty much a guarantee this time of year, whether its crowded airports, bad weather or mechanical problems causing them. There's a way to plan ahead so that getting stuck behind infrequent fliers and families of five at airport security doesn't cause anxiety. First, avoid connections if you can when booking, even if it means paying a little more. If a connection is a must, then ensure there's a long enough layover in case your first flight is late to land. On the day of travel, get to the airport earlier - way earlier - than you typically would. Worst-case scenario: You spend extra time with your Kindle at the departure gate or relaxing at the airport bar.

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Wall St. rallies on central banks' help for Europe

Central Bank

(Reuters) - Stocks surged on Wednesday after major central banks agreed to make cheaper dollar loans for struggling European banks to prevent the euro-zone debt woes from turning into a full-blown credit crisis.

The Dow posted its best day since March 2009 after the Federal Reserve, the European Central Bank and other major central banks stepped in to head off escalating funding pressures that threaten the key arteries of the world's financial system.

The S&P 500 scored its best daily percentage gain since August.

The central banks' liquidity move touched off a buying frenzy in financial shares. The S&P financial sector index gained 6.6 percent, with Bank of America the most actively traded stock. The stock jumped 7.3 percent to $5.44 on more than 420 million shares traded.

The drama in Europe kept the U.S. stock market on a roller-coaster ride throughout the month. For November, the S&P ended down just 0.5 percent, but the month was marked by sharp daily swings.

"You don't have to fix everything, you have to be on a path towards fixing things," said Tobias Levkovich, chief U.S. equity strategist at Citigroup in New York.

"Markets will reward you for the efforts you are making as long as you are moving in the right direction. It's the carrot and the stick; you get rewarded when you do the right thing, and you get punished when you do the wrong thing."

The Dow Jones industrial average shot up 490.05 points, or 4.24 percent, to end at 12,045.68. The Standard & Poor's 500 Index jumped 51.77 points, or 4.33 percent, to 1,246.96. The Nasdaq Composite Index soared 104.83 points, or 4.17 percent, to close at 2,620.34.

The Dow scored its largest daily gain -- in terms of points and percentage -- since March 23, 2009.

The S&P 500 posted its best daily percentage advance since August 11.

For the month, the Dow gained 0.8 percent, while the Nasdaq slid 2.4 percent.

Other economically sensitive sectors, including energy, materials and industrials, also were strong performers for the day.

Copper and oil futures rose sharply, while the S&P materials sector index jumped 5.9 percent.

The central banks' actions were intended to ensure that European banks, facing a credit crunch, have enough funding amid the euro zone's worsening sovereign debt crisis.

The moves followed an unexpected cut in bank reserve requirements in China, intended to boost an economy running at its weakest pace since 2009.

Among the banks, shares of JPMorgan Chase & Co gained 8.4 percent to $30.97, its biggest daily percentage gain since May 2009.

The gains in financial shares came despite Standard & Poor's move to cut the credit ratings of 15 big banks, mostly in Europe and the United States, late on Tuesday.

Further encouraging investors, the latest U.S. data suggested the U.S. economy was moving more solidly toward recovery. The U.S. private sector added the most jobs in nearly a year in November, while business activity in the U.S. Midwest grew faster than expected in November.

The day's volume was high, with nearly 10 billion shares changing hands during the day on U.S. exchanges compared with the daily average of 7.96 billion shares.

Advancers beat decliners on the NYSE by nearly 7 to 1 and on the Nasdaq, by about 5 to 1.

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Iranian protesters storm British diplomatic compounds

Protesters in Tehran, Iran

(Reuters) - Iranian protesters stormed two British diplomatic compounds in Tehran on Tuesday, smashing windows, torching a car and burning the British flag in protest against new sanctions imposed by London.

Britain said it was outraged and warned of "serious consequences." The U.N. Security Council condemned the attacks "in the strongest terms." U.S. President Barack Obama said he was disturbed by the incident and called on Iran to hold those responsible to account.

The attacks come at a time of rising diplomatic tension between Iran and Western nations who last week imposed fresh sanctions over Tehran's nuclear program, which they believe is aimed at achieving the capability of making an atomic bomb.

Iran, the world's fifth biggest oil exporter, says it only wants nuclear plants to generate electricity.

The embassy storming is also a sign of deepening political infighting within Iran's ruling hardline elites, with the conservative-led parliament attempting to force the hand of President Mahmoud Ahmadinejad and expel the British ambassador.

"Radicals in Iran and in the West are always in favor of crisis ... Such radical hardliners in Iran will use the crisis to unite people and also to blame the crisis for the fading economy," said political analyst Hasan Sedghi.

Several dozen protesters broke away from a crowd of a few hundred outside the main British embassy compound in downtown Tehran, scaled the gates, broke the locks and went inside.

Protesters pulled down the British flag, burned it, and put up the Iranian flag, Iranian news agencies and news pictures showed. Inside, the demonstrators smashed windows of office and residential quarters and set a car ablaze, news pictures showed.

One took a framed picture of Queen Elizabeth, state TV showed. Others carried the royal crest out through the embassy gate as police stood by, pictures carried by the semi-official Fars news agency showed.

All embassy personnel were accounted for, a British diplomat told Reuters in Washington, saying Britain did not believe that any sensitive materials had been seized.

Demonstrators waved flags symbolizing martyrdom and held aloft portraits of Supreme Leader Ayatollah Ali Khamenei who has the final say on matters of state in Iran.

Another group of protesters broke into a second British compound at Qolhak in north Tehran, the IRNA state news agency said. Once the embassy's summer quarters, the sprawling, tree-lined compound is now used to house diplomatic staff.

An Iranian report said six British embassy staff had been briefly held by the protesters. British Foreign Secretary William Hague said the situation had been "confusing" and that he would not have called them "hostages."

"Police freed the six people working for the British embassy in Qolhak garden," Iran's Fars news agency said.

A German school next to the Qolhak compound was also damaged, the German government said.

BRITAIN OUTRAGED

Police appeared to have cleared the demonstrators in front of the main downtown embassy compound, but later clashed with protesters and fired tear gas to try to disperse them, Fars said. Protesters nevertheless entered the compound a second time, before once again leaving, it said.

British Prime Minister David Cameron chaired a meeting of the government crisis committee to discuss the attacks which he said were "outrageous and indefensible."

"The failure of the Iranian government to defend British staff and property was a disgrace," he said in a statement.

"The Iranian government must recognize that there will be serious consequences for failing to protect our staff. We will consider what these measures should be in the coming days."

The United States, alongside the European Union and many of its member states also strongly condemned the attacks.

There have been regular protests outside the British embassy over the years since the 1979 Islamic revolution that toppled the U.S.-backed shah, but never have any been so violent.

The attacks and hostage-taking were a reminder of the 1979 takeover of the U.S. embassy in Tehran carried out by radical students who held 52 Americans hostage for 444 days. The United States cut diplomatic ties with Iran after the hostage-taking.

All British embassy personnel were accounted for and safe, a British diplomat, who spoke on condition of anonymity, told Reuters in Washington.

The diplomat said the attack likely flowed from Britain's November 21 decision to impose new sanctions on Iran because of its nuclear program, including a ban on British financial institutions dealing with their Iranian counterparts.

"It's impossible, really, not to reach that conclusion," the diplomat said, suggesting that the protests may have been sparked by the Iranian authorities.

"In the past we have certainly had demonstrations that have ... been sanctioned, if not encouraged, by the government. I don't know about this one. I don't think we'd put it past them," said the diplomat.

"It's hard to imagine, in a place like Iran, that these were some kind of spontaneous (event)," said a State Department official who declined to be identified.

INFIGHTING

The demonstrations appeared to be a bid by conservatives who control parliament to press home their demand, passed in parliament last week and quickly endorsed by the Guardian Council on Tuesday, for the government to expel the British ambassador in retaliation for the sanctions.

A lawmaker had warned on Sunday that angry Iranians could storm the British embassy.

"Parliament officially notified the president over a bill regarding degrading the ties with Britain, obliging the government to implement it within five days," Fars news agency quoted speaker Ali Larijani as saying.

Ahmadinejad's government has shown no willingness to compromise on its refusal to halt its nuclear work, but has sought to keep channels of negotiation open in an effort to limit the worst effects of sanctions.

An Iranian official told Reuters the storming of the British compounds was not planned by the government.

"It was not an organized measure. The establishment had no role in it. It was not planned," said the official, who declined to be identified. Iran's Foreign Ministry said it regretted the attacks and was committed to ensuring the safety of diplomats.

Police arrested 12 people who had entered the north Tehran compound, Fars said, quoting a police chief as saying they would be handed over to the judiciary.

Protesters said they planned to stage a sit-in at the gates of the north Tehran compound and would not move until they were told to do so by Iran's religious leaders.

Britain, along with the United States and Canada, imposed new unilateral sanctions on Iran last week, while the EU, France and Italy have all said financial measures against Tehran should be strengthened.

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At least Two killed, hundreds hurt in Egypt protest clashes

Clash in Egypt

(Reuters) - Protesters demanding an end to army rule and angered by rough police tactics battled with police on Sunday, presenting Egypt's ruling generals with their biggest security challenge yet, a week before parliamentary elections.

Two people were killed and hundreds wounded in clashes on Saturday night reminiscent of some of the worst violence during the 18-day uprising that toppled Hosni Mubarak in February.

Youths in Cairo chanted "The people want to topple the regime" as they rushed at police, who fired rubber bullets and teargas. Protesters clashed with police in two other cities.

Egypt holds its first parliamentary election since Mubarak's overthrow in a staggered vote that starts on November 28. Many Egyptians are worried that police will not be able to secure the polls, although the army insists that it can.

Presidential powers remain with the army after the vote. A row has erupted between political groups and the army-picked cabinet over ground rules for drafting the constitution that could leave the military free of civilian control. Parliament is to pick the assembly to draw up the constitution.

There was sporadic violence on Sunday after the worst overnight clashes subsided. More than 5,000 protesters were still gathered in Tahrir on Sunday afternoon, many saying they would not to leave until their demands were met.

Demonstrators wore masks to protect against teargas and showed off spent gas canisters and bullet casings. Metal barricades had been set up on approach roads to Tahrir Square, where Egyptians gathered to bring down Mubarak.

Many Egyptians are angry that nine-months after ousting Mubarak, the army remains in charge and police are still using the same heavy-handed tactics against demonstrators.

"DO NOT LEAVE THE SQUARE"

"We are on the brink of danger. Those asking for the government to fall are asking for the state to fall," Egyptian army General Mohsen Fangary told a television channel.

He said the election would go ahead on time and the army and Interior Ministry would maintain security. He also said the army, in line with a timetable previously announced, aimed to return to barracks by the end of 2012. Presidential elections could be held by then.

The army-backed cabinet had outraged many Egyptians by presenting proposals for the new constitution that would have shielded the army's budget from civilian oversight and given it a broad national security remit.

It had amended the proposals to give civilian powers more say but not enough to prevent Friday's protest.

After a cabinet meeting on Sunday, Deputy Prime Minister Ali al-Silmi said: "We will not back down from the last proposed amendments to the constitutional document."

As police fired round after round of teargas at protesters near the Interior Ministry, closer to Tahrir the demonstrators laid sheets of metal to block roads into the square.

"I tell you, do not leave the square. This square will lead the way from now on," presidential candidate Hazem Salah Abu Ismail, a hardline Islamist, told a group of protesters early on Sunday. "Tomorrow the whole of Egypt will follow your lead."

During Saturday's clashes, protesters broke chunks of cement from pavements and hurled them at police.

"We don't expect anything from the military council, they will ignore us like what used to happen during Mubarak's days," said Abdallah Belal, a 21-year-old student in Tahrir.

The state news agency quoted the Health Ministry as saying 942 people had been wounded and two people were killed. It said a man, 23, was killed in Cairo by a gunshot to the chest and a man in the second city Alexandria had a gunshot to the head.

A security official said police had not used live rounds and had used lawful methods to deal with "troublemakers." The army stayed away from fighting.

The army won popular backing during Mubarak's overthrow for maintaining order and pledging to hand power to an elected government, but support has ebbed over its use of military trials for civilians and suspicion that it wants to continue to wield the levers of power after a new government is sworn in.

PROTEST AT POLICE

About 5,000 protesters had converged on Tahrir on Saturday afternoon when police tried to evict the remnants of a 50,000-strong demonstration a day earlier, mostly by Islamists demanding the departure of the military.

Police beat the protesters, most of them not Islamists, with batons and fired teargas to regain control of the square, only to retreat after night fell.

Protests erupted in other cities. About 800 people gathered in front of the security directorate in Alexandria, chanting: "Interior Ministry officials are thugs."

About 1,000 gathered outside a police station in the eastern city of Suez, site of some of the worst violence in the uprising. They threw stones at it and tried to force their way in. Police fired teargas and shot in the air.

Liberal groups are dismayed by the military trials of thousands of civilians and the army's failure to scrap a hated emergency law. Islamists eyeing a strong showing in the next parliament suspect the army wants to curtail their influence.

Analysts say Islamists could win 40 percent of parliamentary seats, with a big portion going to the Muslim Brotherhood.

"We are not political parties and we hate the Brotherhood who gave up on the revolution and the people," Medhat Fawzy said. "We are Egyptian youth," he said, flashing a victory sign.

The liberal April 6 Youth movement said the interior minister should quit for ordering the use of force against a peaceful protest.

Friday's rally appeared to be the biggest Islamist challenge to military rule since the largely secular uprising that toppled Mubarak. The demonstrators were mainly Brotherhood members and their harder-line Salafi rivals.

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Obama administration launches $1 billion healthcare drive

Barack Obama

(Reuters) - The Obama administration on Monday said $1 billion of federal funds allocated in last year's health reform law will go toward innovation programs designed to boost jobs and improve patient care.

The announcement is the administration's latest attempt to show that it is working outside of a deeply divided Congress to create jobs.

The administration will award grants in March to people who come up with the best ideas to lift care and save money for those enrolled in the federal healthcare programs Medicare, Medicaid and the Children's Health Insurance Program.

However, the administration did not say how many jobs the measure would create.

Don Berwick, head of the Centers for Medicare and Medicaid Services, said a good example includes the Baylor Heart Hospital in Dallas which has worked to lower readmission rates for congestive heart failure.

"With the healthcare innovation challenge, we're going straight to the source," Berwick said during a news conference for the announcement.

"We want to find them, we want to help them, we want to spread what they know and what they've learned."

The $1 billion of awards will cut into the $10 billion that Congress set aside in the Affordable Care Act to fund a new CMS Innovation Center. The center is meant to promote better care and health at reduced costs by identifying, testing and spreading new models of care and payment.

To get a grant, projects must start within six months and the program will concentrate on those ideas that spur the most hiring and workforce training, the Department of Health and Human Services said.

Awards will range from around $1 million to up to $30 million and be spread over three years. Applications are open to providers, payers, local government, community organizations and public-private partnerships.

Separately on Monday, the Supreme Court agreed to decide the legal fate of Obama's healthcare law, with an election-year ruling due by July.

JOB POLITICS

President Barack Obama has been aggressively promoting programs that hold potential to boost hiring, amid 9 percent U.S. unemployment which will hurt his re-election chances next year unless job creation improves.

Republican lawmakers have held up passage of most of a $447 billion jobs bill that Obama proposed in September, and which Democrats want funded by a tax on millionaires.

So far, only two modest proposals in the package have been approved by the Senate with Republican support.

Republicans in the U.S. House of Representatives have meanwhile passed a number of measures to boost jobs, but these have yet to be taken up by the Democratic-controlled Senate.

Asked how many jobs the grants would create, Dr. Rick Gilfillan, acting director of the Center for Medicare and Medicaid Innovation, said: "This is not about a specific number. This is about recognizing that there are going to be more people involved in healthcare" as the population ages.

"The question is what are they going to be doing," he said, adding that the program would help identify high-value jobs in healthcare and help train people for them.

Some Republicans have questioned the innovation center's approach.

"We are concerned that at a time of significant uncertainty for the fiscal health of the U.S. government, funds are being expended by the Innovation Center with little to no actual value provided," three Republicans on the Senate Finance Committee wrote to Health and Human Service Secretary Kathleen Sebelius last week.

Senators Orrin Hatch, the top Republican on the committee, Mike Enzi and Tom Coburn said the innovation center received $10 billion in federal funding but has not yet produced recommendations or implemented any reforms.

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Kinder Morgan to buy El Paso for $21 billion

(Reuters) - Kinder Morgan Inc struck a $21 billion deal to buy rival El Paso Corp, combining the two largest North American natural gas pipeline companies and making a big bet on the fast-growing market for that fuel.

Despite weak natural gas prices, production of the fuel has been rising as energy companies pile into shale fields -- underground formations rich in oil and gas.

El Paso already owned the largest natural gas pipeline system in North America, with more than 43,000 miles of pipelines. The combined company would own 67,000 miles of natural gas pipelines and another 13,000 miles of pipelines to move refined products and other fuels, Kinder Morgan said on Sunday.

"We believe that natural gas is going to play an increasingly integral role in North America," Kinder Morgan Chief Executive Richard Kinder said in a statement. "We are delighted to be able to significantly expand our natural gas transportation footprint at a time when it seems likely that domestic natural gas supply and demand will grow at attractive rates for years to come."

The offer of $26.87 a share in cash, stock and warrants, represents a 37 percent premium to El Paso's Friday closing price of $19.59.

Including El Paso's debt, the deal tops $38 billion, making it the second biggest merger in 2011, according to Thomson Reuters data.

The deal derails El Paso's plan, announced in May, to split into two publicly traded companies, which would have separated its exploration and production business from its pipeline operations. Kinder Morgan said it plans to sell El Paso's exploration and production assets.

John White, an analyst at Houston-based Triple Double Advisors, said the deal makes perfect sense for both companies.

"El Paso has the largest natural gas pipeline in North America -- it's a tremendous and premium set of assets," said White, who helps to manage a portfolio of energy equities, MLPs and bonds. "They are doing this deal at a nice premium."

INFRASTRUCTURE CONSTRAINTS

Kinder Morgan is buying El Paso as companies including Exxon Mobil Corp and others are spending billions of dollars to develop shale gas and crude oil exploration and production in areas that are constrained by infrastructure.

For example, in the Eagle Ford Shale in South Texas where there are scant pipelines, companies are having to rely on trucks and are building rail terminals to handle the vast field's output.

Oil and gas producers could have to pay up to ship their gas on Kinder Morgan's pipelines if they are dealing with one behemoth, rather than two smaller pipeline companies. That could hit the bottom line for end users like power companies.

The combined company's pipelines will be connected to natural gas shales including the Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville and Barnett.

Houston-based pipeline company Kinder Morgan raised $2.86 billion in February in an IPO valuing the firm at more than $21 billion. The company's market capitalization as of Friday was around $19 billion.

The offer per share comprises $14.65 in cash, 0.4187 Kinder Morgan shares -- valued at $11.26 per EP share -- and 0.640 Kinder Morgan warrants -- valued at $0.96 per EP share -- based on Kinder Morgan's closing price on Friday.

The warrants will have an exercise price of $40 and a five-year term.

The transaction has been approved by each company's board the companies said. Kinder Morgan said it has a commitment letter from Barclays Capital underwriting the full amount of cash required for the transaction.

The new company hopes to generate $350 million a year in cost savings, or about 5 percent of the combined companies' earnings before interest taxes, depreciation and amortization. Kinder Morgan expects to be able to increase its dividend after the deal closes due to these savings.

It said that if the deal were to close at the beginning of 2012, it would expect to be able to pay a dividend of about $1.45 a share that year. But because it expects the deal to close later, it said its dividend will likely be slightly below that target.

The new combined company will be 68 percent owned by Kinder Morgan shareholders with El Paso holders owning the remaining 32 percent.

Evercore Partners and Barclays Capital advised Kinder Morgan on the deal, while Morgan Stanley advised El Paso. Goldman Sachs acted as an adviser to El Paso on its previously announced spin-off and related matters to the Kinder Morgan deal, the companies said.

The advisors are set to rake in a total of $100 million to $145 million in M&A fees, according to Freeman & Co.

News by Reuters