Wed Jan 2, 2013 5:53pm EST

n">(Reuters) - SunPower Corp (SPWR.O) said it sold two solar projects in California to a company controlled by Warren Buffett's Berkshire Hathaway Inc (BRKa.N), and would receive up to $2.5 billion in proceeds and related contracts.

Berkshire utility MidAmerican Energy Holdings Co will pay SunPower between $2.0 billion and $2.5 billion for the 579-megawatt (MW) Antelope Valley solar projects and for designing, installing and constructing them, the company said in a regulatory filing on Wednesday. (link.reuters.com/bag94t)

Construction of the projects, which the companies called the world's largest photovoltaic power development, will begin this quarter and is expected to be completed by the end of 2015.

The stamp of approval from a Buffett utility, combined with expected cashflow from the projects, will make SunPower more bankable and more creditworthy, its Chief Executive Tom Werner told Reuters.

"If you are a bank you are looking at us a lot differently today than you did last week," he said.

SunPower shares ended up 9 percent at $6.13 on Wednesday on the Nasdaq, their highest closing in about eight months.

Raymond James analyst Marshall Adkins said the monetization of the projects "does not alter the fact that SunPower retains a markedly high-cost structure and razor-thin margins in the context of a massively oversupplied market."

The projects, based in Kern and Los Angeles counties, will add to MidAmerican Energy's growing investments in clean energy.

It bought a 49 percent stake in a 290 MW solar power plant in Arizona from NRG Energy Inc (NRG.N) and acquired First Solar Inc's (FSLR.O) 550 MW Topaz Solar Farm power plant in California in late-2011.

The SunPower projects will sell power to California utility Southern California Edison under two long-term contracts.

California plans to reduce emissions of planet-warming greenhouse gases to 1990 levels by 2020, and by an additional 80 percent by 2050.

(Reporting By Garima Goel in Bangalore and Nichola Groom in Los Angeles; Editing by Sriraj Kalluvila)

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n">(Reuters) - Family Dollar Stores Inc (FDO.N) posted a lower-than-expected quarterly profit on Thursday as its emphasis on selling more everyday items such as cigarettes and soft drinks put pressure on margins.

Its shares fell 8.6 percent premarket as the company also lowered its forecast for the year and said that December sales, which came in after the quarter ended, were hurt as shoppers cut back on discretionary spending.

The discount chain added cigarettes and other tobacco products, Pepsi drinks, gift cards, magazines and some other goods to its assortment in recent months to better compete against chains such as Dollar General Corp (DG.N).

While that change has helped bring in more traffic, those items tend to carry lower profit margins. Gross profit margin fell to 34.1 percent in the quarter from 35.3 percent a year earlier, the company said.

Its profit was $80.3 million, or 69 cents a share, in the fiscal first-quarter that ended November 24, compared with a profit of $80.4 percent, or 68 cents, a year earlier.

Analysts on average forecast 75 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 12.7 percent to $2.42 billion. Analysts on average forecast $2.38 billion.

Sales at stores open at least a year rose 6.6 percent. The company had forecast an increase of 4 percent to 6 percent.

But in December, same-store sales rose only 2.5 percent

Sales of "consumables" such as food and beauty products - by far the chain's largest category - rose 18.5 percent in the first quarter, the company said.

For the year, Family Dollar said it expects earnings of $3.95 to $4.20, below its prior forecast of $4.10 to $4.40. Analysts on average forecast $4.24 a share.

(Reporting by Jessica Wohl and Brad Dorfman in Chicago; Editing by Maureen Bavdek)

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Speaker of the House John Boehner (R-OH) (front, in green tie) walks with Congressman Dave Camp (R-MI) (R) after a meeting with House Republicans about a ''fiscal cliff'' deal on Capitol Hill in Washington January 1, 2013.

NEW YORK | Wed Jan 2, 2013 12:16am EST

NEW YORK (Reuters) - U.S. stocks are poised for gains to begin the year after the late passage of a bill to avoid harsh tax hikes that would have hit most Americans and crimped economic growth.

However, harsh reality awaits any euphoria that comes from avoiding the "fiscal cliff". In two months, battles over further spending cuts and, in particular, the U.S. federal debt limit will come to a head.

The House of Representatives voted for a bill passed on Monday by the Senate that will raise taxes on wealthy individuals and families and preserve certain other benefits that will, together, soften some of the blow that would have been sustained without an agreement to avoid the fiscal cliff.

That puts Wall Street in prime position to begin 2013 with a rally, even if thorny issues remain to be addressed in the coming months in Washington.

Asian markets extended gains modestly, with the MSCI Asia Pacific ex-Japan index of stocks up 1.7 percent. U.S. markets will not have a chance to react until 6 a.m. ET, when futures trading begins after the New Year's Day holiday.

"When you separate the fundamentals of the economy from the headlines, the fundamentals really suggest we can support higher prices in the new year," said Bill Vaughn, equity portfolio manager at Evercore Wealth Management in San Francisco.

The Standard & Poor's 500 stock index ended the year up 13 percent, its best gain since 2009, mostly shrugging off the debt-related worries that dominated headlines during the year.

Equity markets held up in the last two months of the year as well, expecting a resolution to head off $600 billion in spending cuts and tax hikes that could push the economy into recession if they stay in effect for long. While the deadline to avert the cliff was December 31, legislation can be formulated to retroactively prevent going over.

The back-and-forth in recent weeks has primarily been of concern to businesses, where confidence has eroded. Some slowing in economic growth due to the impasse is expected, but that may play into the hands of value investors if the market corrects in coming months.

"It appears as though politics will dominate for some time," said Richard Bernstein, chief executive of Richard Bernstein Advisors in New York. "That being said, equity market valuations already reflect this ... the stock market is attractive from my perspective."

Stock markets around the world were closed Tuesday because of New Year's Day. Some Republicans in the House had expressed concern on Tuesday afternoon that a bill would not be finished before U.S. markets open.

Many traders will still be away from their desks because of the holiday, indicating trading volume will stay near its recent low levels. The anemic action, coupled with uncertainty over the cliff, resulted in a spike of volatility in December, with the CBOE Volatility index jumping 13.5 percent in the month.

DEBT CEILING BATTLE REMAINS

The bill that passed does not contain the kind of spending cuts that many conservative Republicans favor in order to bring down the high U.S. federal debt.

Even as this battle recedes, markets will look ahead to another fight in the next few months, this time over whether Congress will approve an increase in the U.S. debt ceiling.

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

"The spending side fight looms and it will be tougher," said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida. "The Republican caucus is tighter on that side."

Markets posted several days of sharp losses in the period surrounding the fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Economists at Goldman Sachs, in a note Tuesday, said the coming fight to raise the debt ceiling -- where Republicans are likely to demand spending cuts while President Obama pushes for more taxes -- "is likely to be at least as politically difficult as the last increase was in the summer of 2011."

During this fight, the markets have been less volatile, largely because the effects of the spending cuts and tax hikes will be gradual, and there was an ongoing expectation that a retroactive fix was in the offing.

(Additional reporting by David Gaffen, David Randall, Chuck Mikolajczak and Richard Leong; Editing by Neil Fullick and Paul Tait)

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Cranes tower over the World Trade Center site in New York's lower Manhattan, December 12, 2012.

WASHINGTON | Wed Jan 2, 2013 10:12am EST

WASHINGTON (Reuters) - Construction spending fell in November for the first time in eight months, as an extended bout of weakness in the business sector outweighed modest growth in outlays on residential projects.

Construction spending dropped 0.3 percent to an annual rate of $866 billion, the Commerce Department said on Wednesday. Analysts polled by Reuters had expected a 0.6 percent gain.

Businesses have shown signs they are holding back on investments because of worries over federal austerity plans, and the construction data could be another sign of flagging confidence.

Private spending on nonresidential projects slipped by 0.7 percent, the fourth decline in six months.

Spending on private residential projects, however, rose 0.4 percent, a reflection of the country's improving housing market.

Home building likely added to economic growth in 2012 for the first time since 2005, although the housing sector remains a shadow of what it was before the 2007-09 recession.

Public sector construction spending fell 0.4 percent. State and local spending edged 0.1 percent higher, while outlays on federal government projects - a relatively small component of overall construction spending - declined 5.5 percent.

(Reporting by Jason Lange; Editing by Neil Stempleman)

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Job seekers apply for the 300 available positions at a new Target retail store in San Francisco, California August 9, 2012.

NEW YORK | Thu Jan 3, 2013 8:41am EST

NEW YORK (Reuters) - Private-sector employers added more new jobs than expected last month even as a possible budget crisis loomed, helping the job market end 2012 on a high note, a report by a payrolls processor showed on Thursday.

The ADP National Employment Report showed the private sector added 215,000 jobs last month, comfortably above economists' expectation of a 133,000 gain. The report is jointly developed with Moody's Analytics.

The increase came even as companies worried the economy might fall off the "fiscal cliff" at year end, which would have meant higher taxes and, some predicted, suppressed hiring.

"All the labor market data…has held up very, very well so (there is) no sign of the fiscal cliff impact on the job market," Mark Zandi, chief economist at Moody's Analytics, told CNBC television.

A last-minute deal to avoid going over the fiscal cliff was struck on New Year's day.

"The underlying economy has momentum and the employment data confirms that," said John Brady, managing director at R.J. O'Brien & Associates in Chicago. "The hope and prayer of the market is that our political leaders don't screw it up."

A revival in new construction jobs was also a hopeful sign, Zandi said, though the gains were likely boosted by rebuilding efforts after Superstorm Sandy hit the east coast in October.

November's private payrolls tally was also revised upward to show an gain of 148,000 from the previously reported 118,000.

The Bureau of Labor Statistics' more comprehensive payrolls report due on Friday is expected to show the economy added 150,000 jobs last month after adding 146,000 in November.

(Editing by Chizu Nomiyama)

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Ford Assembly workers Calvin Thompson (R ) and Jimmie Lackey install a battery in the back of a partially assembled C-MAX Hybrid vehicle at the Michigan Assembly Plant in Wayne, Michigan November 7, 2012.

NEW YORK | Wed Jan 2, 2013 9:03am EST

NEW YORK (Reuters) - U.S. manufacturing closed out 2012 on the upswing as increased demand at home and abroad helped the sector grow in December at its fastest rate in seven months.

Financial data firm Markit said on Wednesday its U.S. Manufacturing Purchasing Managers Index rose to 54.0 from 52.8 in November. December's reading was a touch below the "flash," or preliminary estimate of 54.2 but was still the highest since May on a final basis.

A reading above 50 indicates expansion.

Firms tied the faster growth to a rise in new orders, with one in five companies reporting an increase. The index's new orders component rose to 54.7, the fastest increase since April, from 53.6 in November.

The second straight monthly increase in new export orders also boosted the sector and could bode well for the year ahead.

"With recent indications that growth is also picking up in other key economies around the world, notably in emerging markets such as China and Brazil, and that the euro zone's economic crisis is easing, U.S. companies should benefit as stronger demand lifts exports in early 2013," said Markit Chief Economist Chris Williamson.

The pace of hiring hit an eight-month high, "suggesting underlying improvement in demand pushed away worries about the 'fiscal cliff' to the backs of manufacturers' minds," Williamson said.

For months, Americans had been worried about the "fiscal cliff", some $600 billion of automatic tax hikes and spending cuts that had been set to take effect in January, which economists had said could push the economy into recession. On Tuesday, U.S. lawmakers reached a deal to avoid the tax hikes and spending cuts.

(Reporting By Steven C. Johnson; Editing by Chizu Nomiyama)

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A machine that makes bubble wrap padded envelopes is pictured at the Wrap-Tite manufacturing facility in Solon, Ohio July 13, 2012.

NEW YORK | Wed Jan 2, 2013 2:48pm EST

NEW YORK (Reuters) - U.S. manufacturing ended 2012 on an upswing despite fears about the "fiscal cliff," data showed on Wednesday.

U.S. factories returned to growth in December after contracting the previous month, the Institute for Supply Management said.

Its index of national factory activity rose to 50.7 up from 49.5 in November, narrowly beating the consensus forecast in a Reuters poll. The ISM index had fallen to a 40-month low in November.

"What is interesting in this report is that you would think the negative headlines surrounding the fiscal cliff would have put pressure on manufacturing," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

ISM's employment index rose to 52.7 from 48.4 in November, while its forward-looking new orders component kept at 50.3.

A separate measure of manufacturing also showed growth.

Financial data firm Markit's U.S. Manufacturing Purchasing Managers Index picked up to 54.0 from 52.8 in November. This was its highest point since May on a final basis despite just missing its preliminary estimate of 54.2.

"With recent indications that growth is also picking up in other key economies around the world, notably in emerging markets such as China and Brazil, and that the euro zone's economic crisis is easing, U.S. companies should benefit as stronger demand lifts exports in early 2013," said Markit Chief Economist Chris Williamson.

A rise in new orders fueled the faster growth, as one in five companies reported an increase. The Markit index's new orders component rose to 54.7 from 53.6 in November, its quickest increase since April.

The growth in U.S. manufacturing came in the face of fears late last year over the "fiscal cliff" of tax hikes and spending cuts, which would have kicked in at the start of 2013, risking a new U.S. recession.

Lawmakers struck a deal late on Tuesday, avoiding income tax hikes for most Americans and delaying the spending cuts for two months.

U.S. stock prices surged at the open on the congressional action, while yields on U.S. government debt rose.

"Now that Congress has come to an agreement. ... We expect that new orders and overall activity in the sector will accelerate. However, we also expect that growth in the first quarter will be slow due to continued uncertainty over spending cuts and the debt ceiling," said Thomas Simons, vice president and money market economist at New York brokerage Jeffries, in a note.

Despite Tuesday's deal, Congress still must debate how to handle the automatic spending cuts and resolve differences over the federal debt ceiling which could result in a new round of political wrangling.

The deal is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9 percent for 2013 would likely hold.

Even as manufacturing grew, uncertainty remained for smaller businesses.

Borrowing by small U.S. businesses rose marginally in November, as the Thomson Reuters/PayNet Small Business Lending Index - which measures the overall volume of financing to small U.S. companies -- rose to 108.3 from a downwardly revised 107 in October, PayNet said.

"Small businesses were waiting to see what is happening with Washington. ... They were waiting for more consumer activity to emerge, really watching the front door for new sales to emerge and it doesn't look like any major new influx of sales came in - they have really been on hold," PayNet founder Bill Phelan said.

(Reporting by Gabriel Debenedetti; Additional reporting by Steven C. Johnson, Chris Reese, Julie Haviv, Jason Lange; Editing by Neil Stempleman)

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A man walks past the U.S. Capitol Building in Washington December 17, 2012.

WASHINGTON | Wed Jan 2, 2013 4:52pm EST

WASHINGTON (Reuters) - Washington has steered clear of severe austerity measures for now, reducing the risk of recession, but a clutch of U.S. tax hikes will nevertheless be a drag on economic growth this year.

The U.S. Congress approved a deal late on Tuesday to scale back some $600 billion in scheduled tax hikes and government spending cuts known as the "fiscal cliff."

Analysts said the package at least marked a temporary reprieve for the economy, and investors charged into U.S. stocks, pushing the Standard & Poor's 500 up 2.5 percent on Wednesday.

However, the legislation, which is expected to be signed into law soon by President Barack Obama, will raise taxes on most Americans through a hike in the payroll tax used to fund Social Security pensions for the elderly.

Economists say the U.S. economy would likely grow much more quickly if the government was not raising taxes.

The payroll tax hike alone - which comes from the expiration of stimulus measures enacted to fight the 2007-09 recession - could push the average household tax bill up by about $700 this year, according to estimates from the Tax Policy Center, a Washington think tank.

That will likely reduce consumer spending and subtract about three quarters of a percentage point from economic growth, said Joseph LaVorgna, an economist at Deutsche Bank in New York.

The package will also raise income tax rates for households making over $450,000 a year, although rates will remain at 2012 levels for everyone else.

The other modest tax hikes, including a tax on wealthy households to help pay for Obama's 2010 healthcare reform law, could shave another quarter of a point from growth.

"We are still getting some fiscal drag this year," LaVorgna said.

Even so, the tenor of the deal was widely anticipated by economists in financial centers like Wall Street, and appears to support forecasts for economic growth of around 2 percent this year.

Barclays Capital said it was holding its growth forecast for this year at 2.1 percent.

A Reuters poll of analysts in December produced a median forecast for 1.9 percent U.S. economic growth in 2013.

"There seems to be a collective sigh of relief," strategists at Brown Brothers Harriman wrote in a note to clients. "The full force of the U.S. fiscal cliff - (which) could have dragged the world's largest economy into a recession - has been averted."

The Congressional Budget Office had estimated that completely running over the fiscal cliff would have caused the economy to contract 0.5 percent this year. The full brunt of the cliff would have hit the average U.S. household with about an additional $3,500 in taxes this year, according to the Tax Policy Center.

Still, U.S. lawmakers only agreed to delay scheduled cuts on government spending on the military, education and other areas for another two months.

Many economists think ongoing talks in Congress will eventually lead these spending cuts to be put off until next year, presumably once lawmakers reach a deal to reduce spending over the longer term while granting the government authority to increase the national debt.

Then again, they might not reach a deal, and the planned spending cuts would then cut deeply into economic growth in the second half of the year.

"While we retain our 2013 GDP forecast, we also retain the view that fiscal policy presents downside risks to growth," analysts at Barclays said in a research note.

Some economists noted that tax policy now looks more stable for the majority of Americans, removing some of the uncertainty that may have held back spending by consumers and business in recent months.

At the same time, with an axe still hanging above billions of dollars in government spending, many businesses are likely to remain cautious.

Analysts say financial markets are likely to remain on tenterhooks until Congress raises the nation's $16.4 trillion debt ceiling, which the U.S. Treasury confirmed had been reached on Monday.

The government likely will need to raise the debt ceiling by February or March to remove the risk albeit remote, of the country defaulting on its debt. Such an extreme scenario would likely make it more expensive for governments and companies alike to borrow money, hurting the economy.

"We have some more certainty, but there are still quite a few questions left to be resolved," said Dana Saporta, an economist at Credit Suisse.

(Additional reporting by Jonathan Spicer in New York; Editing by Leslie Adler)

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1 of 12. Speaker of the House John Boehner (R-OH) walks with House Majority Leader Rep. Eric Cantor (R-VA) to a meeting with House Republicans on the ''fiscal cliff'' budget deal on Capitol Hill in Washington on January 1, 2013. Washington's last-minute scramble to step back from a ''fiscal cliff'' ran into trouble on Tuesday as Republicans in the House of Representatives balked at a deal to avert a budget crisis.

WASHINGTON | Thu Jan 3, 2013 12:44am EST

WASHINGTON (Reuters) - President Barack Obama and congressional Republicans face even bigger budget battles in the next two months after a hard-fought "fiscal cliff" deal narrowly averted devastating tax increases and spending cuts.

The agreement, approved late on Tuesday by the Republican-led House of Representatives and signed by Obama on Wednesday, was a victory for the president, who had won re-election in November on a promise to address budget woes, partly by raising taxes on the wealthiest Americans.

But it set up potentially bruising showdowns over the next two months on spending cuts and an increase in the nation's limit on borrowing. Republicans, angry the fiscal cliff deal did little to curb the federal deficit, promised to use the debt-ceiling debate to win deep spending cuts next time.

Republicans believe they will have greater leverage over Democrat Obama when they must consider raising the borrowing limit in February because failure to close a deal could mean a default on U.S. debt or another downgrade in the U.S. credit rating. A similar showdown in 2011 led to a credit downgrade.

"Our opportunity here is on the debt ceiling," Republican Senator Pat Toomey of Pennsylvania said on MSNBC. "We Republicans need to be willing to tolerate a temporary, partial government shutdown, which is what that could mean."

But Obama and congressional Democrats may be emboldened by winning the first round of fiscal fights when dozens of House Republicans buckled and voted for major tax hikes for the first time in two decades.

"We believe that passing this legislation greatly strengthens the president's hand in negotiations that come next," House Minority Leader Nancy Pelosi told NBC in an interview to air on Thursday.

Obama, who is vacationing in Hawaii, signed the legislation late on Wednesday, the White House said.

"We received the bill late this afternoon, and it was immediately processed. A copy was delivered to the president for review. He then directed the bill be signed by autopen," a senior administration official said. An autopen is an automatic pen with the president's signature.

Deteriorating relations between leaders in the two parties do not bode well for the more difficult fights ahead. Vice President Joe Biden and Republican Senate leader Mitch McConnell had to step in to work out the final deal as the relationship between House Speaker John Boehner and Obama unraveled.

Senate Majority Leader Harry Reid also drew the ire of Boehner, who told Reid in the White House to "Go fuck yourself" after a tense meeting last week, aides said. His remark came after the Democrat accused Boehner of running a "dictatorship" in the House.

Bemoaning the intensity of the fiscal cliff fight, Obama urged "a little less drama" when the Congress and White House next address budget issues like the government's rapidly mounting $16 trillion debt load. He vowed to avoid another divisive debt-ceiling fight before the late-February deadline for raising the limit.

"While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up," Obama said before he headed to Hawaii to resume an interrupted vacation.

NOT TIME TO CELEBRATE

Analysts warned that might not be so easy. "While the markets and most taxpayers may breathe a sigh of relief for a few days, excuse us for not celebrating," said Greg Valliere, chief political strategist at Potomac Research Group.

"We have consistently warned that the next brawl represents a far greater threat to the markets - talk of default will grow by February, accompanied by concerns over a credit rating downgrade," he said.

Rating agencies Moody's Investors Service and Standard & Poor's said the "fiscal cliff" measure did not put the budget on a more sustainable path. The International Monetary Fund said raising the debt ceiling would be a critical move.

"More remains to be done to put U.S. public finances back on a sustainable path without harming the still fragile recovery," said Gerry Rice, a spokesman for the IMF.

Financial markets that had been worried about the fiscal cliff showdown welcomed the deal, with U.S. stocks recording their best day in more than a year. The S&P 500 achieved its biggest one-day gain since December 20, 2011, pushing the benchmark index to its highest close since September 14.

The debate over "entitlement" programs is also bound to be difficult. Republicans will be pushing for significant cuts in government healthcare programs like Medicare and Medicaid for retirees and the poor, which are the biggest drivers of federal debt. Democrats have opposed cuts in those popular programs.

"This is going to be much uglier to me than the tax issue ... this is going to be about entitlement reform," Republican Senator Bob Corker of Tennessee said on CNBC.

"Now that we have this other piece behind us - hopefully - we'll deal in a real way with the kinds of things our nation needs to face," he said.

The fiscal cliff crisis ended when dozens of Republicans in the House relented and backed a bill passed by the Democratic-controlled Senate that hiked taxes on household income above $450,000 a year. Spending cuts of $109 billion in military and domestic programs were delayed for two months.

Economists had warned that the fiscal cliff of across-the-board tax hikes and spending cuts would have punched a $600 billion hole in the economy this year and threatened to send the country back into recession.

Dozens of House Republicans reluctantly approved the Senate bill, which passed by a bipartisan vote of 257-167 and sent it to Obama to sign into law.

Peter Huntsman, chief executive of chemical producer Huntsman Corp, said the vote did little to reduce the U.S. budget deficit and would hinder growth.

"We haven't even begun to address the basic issues behind this," Huntsman told Reuters. "We haven't fixed anything. All we've done is addressed the short-term pain.

The vote underlined the precarious position of Boehner, who will ask his Republicans to re-elect him as speaker on Thursday when a new Congress is sworn in. Boehner backed the bill, but most House Republicans, including his top lieutenants, voted against it.

The Ohio congressman also drew criticism on Wednesday from his fellow Republicans for failing to schedule a House vote on a bill passed by the Senate that would provide federal aid to Northeastern states hit by the storm Sandy.

(Additional reporting by Susan Heavey, Richard Cowan in Washington and Gabriel Debenedetti and Ernest Scheyder in New York, Editing by Alistair Bell, Peter Cooney and Mohammad Zargham)

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U.S. Vice President Joe Biden (L) and President Barack Obama (R) depart following Obama's remarks after the House of Representatives acted on legislation intended to avoid the ''fiscal cliff,'' at the White House in Washington January 1, 2013. The Republican-controlled House backed a tax hike on the top U.S. earners shortly before midnight on Tuesday, ending weeks of high-stakes budget brinkmanship that threatened to spook consumers and throw financial markets into turmoil.

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NEW YORK | Thu Jan 3, 2013 7:57am EST

NEW YORK (Reuters) - Planned layoffs at U.S. firms fell in December for the first time in four months, while the overall job-cut total in 2012 was the lowest since 1997, a report showed on Thursday.

Employers announced 32,556 job cuts last month, the second lowest monthly total of 2012 and down 43 percent from 57,081 in November, according to the report from consultants Challenger, Gray & Christmas, Inc. In 2012, the only month with a lower job-cuts tally was August, with 32,239.

December's job cuts were also down 22 percent from the 41,785 seen a year ago.

During 2012, employers announced 523,362 cuts, down 14 percent from the 606,082 job cuts announced in 2011 and the lowest level since 1997 when employers announced 434,350 cuts.

"We saw a few spikes in monthly job cuts in 2012 and there were some significant mass layoffs that definitely reminded us that not every industry is enjoying the fruits of recovery. However, the overall pace of downsizing was at its slowest since the end of the recession," said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

"In fact, we have not seen this level of job cutting since before the dot-com collapse and subsequent 2001 recession," Challenger said in a statement.

One of the significant mass layoffs of last year was made in December by Citigroup Inc (C.N), which announced 11,000 job cuts early in the month. The bank accounted for the majority of the 11,355 job cuts announced last month in the financial sector, which was the top job-cutting sector in December.

The leading job-cut sector of 2012 was the computer industry, which announced 46,164 layoffs last year, up 215 percent from 14,677 job cuts in the computer industry in 2011.

The most dramatic decline in job cuts came in the government sector, which announced 19,128 layoffs in 2012, down 90 percent from 183,064 announced job cuts in 2011.

However, the fall in job cuts in December may not carry over into early 2013.

"Historically, January is, on average, the biggest job-cut month of the year, and several sectors, including computer, financial services, consumer products, transportation and aerospace and defense are at risk due to a high potential for reduced spending by consumers, businesses and government in 2013," Challenger said.

The report comes a day ahead of the key jobs report, which is forecast to show 150,000 new U.S. jobs were added in December, up slightly from 146,000 new jobs in November.

(Reporting by Chris Reese; Editing by Chizu Nomiyama)

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Job seekers stand in line to meet with prospective employers at a career fair in New York City, October 24, 2012.

WASHINGTON | Thu Jan 3, 2013 8:32am EST

WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits rose last week, but the data continues to be too distorted by the holidays to offer a clear read of labor market conditions.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 372,000, the Labor Department said on Thursday. The prior week's figure was revised to show 12,000 more applications than previously reported.

Claims data reported for the week ended December 22 had been artificially depressed by the holidays, which resulted in data for 19 states being estimated.

A Labor Department official said claims data for nine states, including California and Virginia, had been estimated last week because of the Christmas and New Year holidays. This suggests the numbers are subject to revisions next week.

The four-week moving average for new claims, a better measure of labor market trends, rose 250 to 360,000. The claims data has no bearing on December's employment report, scheduled for release on Friday.

Employers are expected to have added 150,000 jobs to their payrolls last month, little changed from 146,000 in November, according to a Reuters survey of economists.

Job gains in the first 11 months of last year averaged about 151,000 per month, not enough to significantly lower unemployment. Employers' hesitancy to ramp up hiring had been blamed on the so-called fiscal cliff, a combination of sharp government spending cuts and higher taxes.

Although Congress this week approved a deal to avoid the fiscal cliff, the budget problems are far from resolved. That could continue to cast a shadow of uncertainty and hurt job growth.

The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid increased 44,000 to 3.25 million in the week ended December 22.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)

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1 of 3. People arrive at a district court in New Delhi January 3, 2013. The December 16 attack on the physiotherapy student and a male companion provoked furious protests close to the seat of government in New Delhi and has fuelled a nationwide debate about the prevalence of sexual crimes in India, where a rape is reported on average every 20 minutes.

NEW DELHI | Thu Jan 3, 2013 8:22am EST

NEW DELHI (Reuters) - Five Indian men were formally charged in court on Thursday with the gang rape and murder of a physiotherapy student in a case that has generated widespread anger about the government's inability to prevent violence against women.

The December 16 attack on the 23-year-old student and a male companion provoked furious protests close to the seat of government in New Delhi and has fuelled a nationwide debate about the prevalence of sexual crime in India, where a rape is reported on average every 20 minutes.

The woman died of her injuries in hospital in Singapore, where she had been taken for treatment, on Saturday.

The five are accused of assaulting the woman on a bus in New Delhi, leaving her with such severe injuries that she died two weeks later. They were not present in court.

A sixth accused is under 18 and is due to be tried separately in a juvenile court.

A public prosecutor read out charges including murder, gang rape and criminal conspiracy. The court will examine the charges on Saturday, duty magistrate Surya Malik Grover said.

Murder carries the death penalty in India.

The father of the woman said earlier he backed the chorus of calls for those responsible to be executed.

"The whole country is demanding that these monsters be hanged. I am with them," the father told reporters in his home village of Mandwara Kalan in Uttar Pradesh state. The woman was born in the village but the family later moved to New Delhi.

She has not been identified and nor have members of her family, in accordance with Indian law.

In a sign of the depth of feeling surrounding the case, the bar association at the court said none of its members was willing to represent the accused. The court is expected to assign a defense lawyer for the men.

Advocates dressed in black robes protesting outside the court called for fast justice. In the northern state of Kashmir, school girls marched with black ribbons over their mouths and demanded harsh punishment for the accused.

The case is due to be processed by a new, fast-track chamber set up in response to the crime.

While the fast-track procedure has broad support, many lawyers worry new that legislation written in haste could be unconstitutional and oppose introducing the death penalty for rape.

"A swift trial should not be at the cost of a fair trial," Chief Justice Altamas Kabir said on Wednesday.

ANGER

Police have said the accused have admitted to torturing and raping the student "to teach her a lesson". She fought back and bit three of them, a police source told Reuters, and the bite marks are part of the evidence against them.

After throwing her from the private bus, the driver tried to run the victim over but she was pulled away by her companion, a senior police official told Reuters.

Police have prepared a dossier of evidence and charges against the accused, which is believed to run to 1,000 pages, including testimony from the woman's friend who survived the hour-long attack and a man who said he was robbed by the same gang prior to the rape.

Days of protests in New Delhi and other cities followed the attack. Many of the protesters have been students, infuriated by what they see as the failure of the government to protect women.

In the northeastern state of Assam on Wednesday, village women beat a politician and handed him to police for what they said was the attempted rape of a woman, police said. Anti-rape protests have also broken out in neighboring Nepal.

The government has set up two panels headed by retired judges to recommend measures to ensure women's safety. One of the panels, due to make recommendations this month, has received some 17,000 suggestions from the public, media reported.

India's chief justice inaugurated the first fast-track court for sexual offences on Wednesday - a long standing demand of activists to clear a court backlog.

A review of India's penal code, which dates back to 1860, was presented to parliament last month, before the attack, and widens the definition of rape, another demand of activists.

That bill is now likely to be revised further, with chemical castration and the death penalty in rape cases among proposals under consideration.

"We want the laws to be amended in such a stringent way that before a person even thinks of touching a girl, he should feel chills down his spine," said lawyer Suman Lata Katiyal, protesting at the south Delhi courthouse.

Hanging is only allowed in the "rarest of rare" cases according to a 1983 Supreme Court ruling. It was used for the first time in eight years in November when the lone surviving gunman from a 2008 militant attack on Mumbai, Mohammad Ajmal Kasab from Pakistan, was executed.

(Additional reporting by Diksha Madhok, Annie Banerji and Satarupa Bhatgtacharjya in NEW DELHI; and Gopal Sharma in KATHMANDU; Writing by Frank Jack Daniel; Editing by Robert Birsel)

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1 of 6. Police stand near a crime scene in the Swiss village of Daillon near Sion January 3, 2013.

DAILLON, Switzerland | Thu Jan 3, 2013 7:28am EST

DAILLON, Switzerland (Reuters) - Three women were killed and two men were wounded late on Wednesday when a gunman opened fire in the Swiss village of Daillon, Swiss police and prosecutors said on Thursday.

The 33-year-old gunman, who has not been named, threatened police when they tried to arrest him and was shot in the chest before being arrested and taken to hospital, police in the Swiss canton of Valais said. No police officers were wounded.

Gun ownership is widespread in Switzerland and voters rejected a proposal in February 2011 to tighten the country's liberal fire arms laws.

The women killed in Daillon were aged 32, 54 and 79. They were all shot at least twice, in the head and chest. The youngest was married to one of the injured men and they had young children together, regional public prosecutor Catherine Seppey told a news conference.

The injured men were aged 33 and 63.

The gunman was a local resident who had been in psychiatric care in 2005 and was unemployed and living on welfare benefits, police said. His only previous conviction was for marijuana use.

He used at least two firearms - an old Swiss army carbine and a rifle capable of firing lead shot - even though his weapons had been seized and destroyed in 2005, and he was not currently listed as having any guns.

He began firing from his apartment, shooting at people in the street and in neighboring buildings, but later came out into the street, police said, adding that he appeared to have fired more than 20 shots.

Swiss website 20minutes.ch quoted villagers as saying the gunman had been drinking heavily. It also said he was armed with an assault rifle, but the public prosecutor did not confirm that information.

The village is close to the town of Sion, the capital of the canton - or region - of Valais.

A shooting in the regional parliament in the canton of Zug in 2001 stirred debate over gun control in Switzerland, where - according to some estimates - at least one in every three of its 8 million inhabitants holds a gun.

Many are stored in people's attics, a legacy of Switzerland's policy of creating a citizen army that can be mobilized quickly to defend its neutrality.

(Writing by Tom Miles; Additional reporting by Emma Farge; Editing by Mohammad Zargham/Ruth Pitchford)

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Italy's outgoing Prime Minister Mario Monti talks during a news conference in Rome December 28, 2012.

ROME | Thu Jan 3, 2013 6:36am EST

ROME (Reuters) - Mario Monti, bidding for a second term as Italy's prime minister, said on Thursday that excluding "extreme" elements from mainstream politics would make it easier to push ahead with economic reforms.

The former European commissioner said last week he would lead a centrist bloc in parliamentary elections in February, shedding his neutral stance and criticizing factions he felt had hindered his government's progress over the past 13 months.

"I believe that cutting out the extreme wings would be a good thing," Monti told the Uno Mattina program on state television.

"It will be very important to be able to gather up reformists on the left and right who are available to contribute to the reform effort," he said.

Monti was appointed in November 2011 to lead an unelected right-left government of experts to save Italy from financial crisis after then-Prime Minister Silvio Berlusconi quit. The 69-year-old is in a three-way race with the Democratic Party (PD) on the left and Berlusconi's People of Freedom (PDL) on the right.

A poll published on Wednesday said Monti's grouping would win 12 percent of the vote. One published last week said it could gain up to 16 percent, depriving rivals of a clear win, but not enough to govern.

The PD and its coalition ally, the Left, Ecology, Freedom party, are on track to win the elections, at least in the lower house.

Monti has blamed the left-wing CGIL trade union and a minority of PD supporters for blocking more radical labor reforms he had wanted to introduce. He also said pressure from the pharmacy sector and its backers on the right had watered down plans to deregulate that market.

Monti said on Thursday that the next government should aim to reduce taxes gradually alongside public spending controls, and continue to fight tax evasion.

To Italians who have borne the brunt of the austerity measures he passed in late 2011 to shore up public finances, he has pledged to cut labor taxes and redistribute wealth from the richest to the poorest if he wins.

But on Thursday he said he was not considering an annual tax levy on wealth, though he said it was not a "taboo" topic.

(Reporting By Catherine Hornby; Editing by Naomi O'Leary and Robin Pomeroy)

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Pro-Taliban Pakistani tribal leader Maulvi Nazir Wazir, also known as Mullah Nazir, speaks during a news conference in Wana, the main town of the South Waziristan region bordering Afghanistan in this April 20, 2007 file photo. A U.S. drone strike killed a Nazir, his deputy and eight others in northwest Pakistan, intelligence sources and tribal leaders said January 3, 2013, deaths that could substantially alter the power balance in the Taliban heartland of Waziristan.

WANA, Pakistan | Thu Jan 3, 2013 6:20am EST

WANA, Pakistan (Reuters) - A U.S. drone strike killed a key Taliban commander, his deputy and eight others in northwest Pakistan, intelligence sources and tribal leaders said Thursday, deaths that could substantially alter the power balance in the Taliban heartland of Waziristan.

Maulvi Nazir Wazir, also known as Mullah Nazir, was killed on Wednesday night when missiles struck a mud house in South Waziristan, near the Afghan border, intelligence sources and residents said.

He had survived at least one previous drone attack and was wounded weeks earlier in a bomb attack believed to have been launched by Taliban rivals.

His key commanders and his deputy, Ratta Khan, were also killed in the attack at Angoor Adda, near the provincial capital of Wana, sources said.

Nazir had expelled foreign militants from his area, favored attacking American forces in Afghanistan and had signed non-aggression pacts with the Pakistani military in 2007 in 2009. That put him at odds with some other Pakistan Taliban commanders, but earned him a reputation as a "good" Taliban among some in the Pakistan military.

Nazir's successor was announced in front of a crowd of thousands at his funeral, a witness said. People will be watching closely to see if fellow Wazir tribesman Salahud Din Ayubi continues with Nazir's policies.

The military has a large base in Wana, where Nazir and his men were based. Nazir presided over an uneasy peace between the militants and the army there, but the truce was endangered by the military's alliance with the United States and drone strikes, a military officer said recently.

"The (drone) program is making things very difficult for us. Nazir is the sole remaining major militant leader willing to be an ally," he said.

"If he decides to side with (Pakistan Taliban leader) Hakimullah, thousands of fighters will come to the frontlines against the Pakistani military. It is in our interest to keep him neutral, if not on our side, because then we can direct our resources against anti-state militants with much greater efficiency."

PRAYERS FOR "OUR HERO"

Militants have launched a string of attacks in Pakistan in recent months, including shooting dead 16 aid workers and an attack by multiple suicide bombers on the airport in the northern city of Peshawar.

Residents said the main market in Wana shut down on Thursday to mark Nazir's death. The were calls over loudspeakers for prayers for his soul.

"The tribesmen are very grieved at his death as he was our hero. He had expelled all the foreign militants from our villages and towns and given real freedom to our people," a local shopkeeper in Wana bazaar, Siraj Noor Wazir, said.

Foreign militants, particularly Uzbeks, are disliked in some parts of the Pakistani tribal areas because of their perceived brutality towards civilians.

Nazir was wounded in the market in a bombing in November, widely believed to be a result of his rivalries with other Taliban commanders. Six others were killed in the same attack.

Both the Afghan and Pakistani Taliban draw support from ethnic Pashtuns, who live on both sides of the Afghan-Pakistani border. Rivalry between militant factions often reflects old rivalries between Pashtun tribes.

Shortly after the bombing, Nazir's Wazir tribe told the Mehsud tribe, related to Taliban leader Hakimullah Mehsud, to leave the area. Hakimullah Mehsud's men frequently target the Pakistani army.

The army has clawed back territory from the Taliban since launching a military offensive in 2009. North Waziristan, along the Afghan border, is now the key Pakistan Taliban stronghold.

Pakistan's ally the United States is eager for it to push further forward into North Waziristan before NATO troops begin drawing down in Afghanistan in 2014 but the military says it needs to consolidate its gains.

Senior U.S. officials have frequently charged that some elements within Pakistan's security services retain ties to some Taliban commanders because they wish to use the Taliban to counter the influence of archrival India.

Four men in a car were killed in North Waziristan in a separate drone strike, local residents said. Their identity was not immediately known.

Intensified U.S. drone strikes have killed many senior Taliban leaders, including the former leader of the Pakistani Taliban, Baitullah Mehsud, in 2009.

The strikes dramatically increased when U.S. President Barack Obama took office. There were only five drone strikes in 2007. The number of strikes peaked at 117 in 2010 before declining to 46 last year.

Data collected by the Bureau of Investigative Journalism say that between 2,600-3,404 Pakistanis have been killed by drones, of which 473-889 were reported to be civilians.

Rights groups say that some residents are so afraid of the strikes they don't want to leave their homes.

"People of Wazir tribe are mourning Nazir's death but they are reluctant to attend his funeral because of fears of another drone attack," one resident said.

Civilian casualties are difficult to verify. Foreign journalists must have permission from the military to visit the tribal areas along the Afghan border.

Taliban fighters also often seal off the sites of drone strikes immediately so Pakistani journalists cannot see the victims.

Some Pakistanis say the drone strikes are an infringement of sovereignty and have called for a halt. Others, including some residents of the tribal areas, say they are killing Taliban commanders who have terrorized the local population.

The insecurity will be a key issue in elections scheduled for this spring. The nuclear-armed nation of 180 million has a history of military coups, but these polls should mark the first time one elected civilian government hands power to another.

(Additional reporting by Saud Mehsud in Dera Ismail Khan, Jibran Ahmad in Peshawar, and Mehreen Zahra-Malik and Katharine Houreld in Islamabad; Writing by Katharine Houreld; Editing by Nick Macfie)

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KADUNA, Nigeria | Thu Jan 3, 2013 8:26am EST

KADUNA, Nigeria (Reuters) - Gunmen have killed four people and burned down a police station in northeast Adamawa state, the police said on Thursday, the latest such attack in a region where Islamist sect Boko Haram has its stronghold.

A soldier, a policeman, a civilian and her grandchild were killed by unknown gunmen and a local government office was destroyed in the town of Song, near the border with Cameroon, Adamawa police spokesman Mohammed Ibrahim told Reuters. He said it happened around midnight on Wednesday.

At least 37 people have now died in Nigeria's northeast in the last 10 days alone in violence presumed to be linked to Islamist militancy, the biggest threat to stability in Africa's main oil exporter.

There was a similar attack in another town in Adamawa last week when police said one person was killed, although local media reports, quoting eye-witnesses, said 20 died.

Authorities in the northeast have in the past played down their own casualties in fighting with Boko Haram.

The sect, which is loosely based on the Afghan Taliban, killed hundreds last year in a campaign to impose sharia, or Islamic law. Nigeria's more than 160 million people are split roughly equally between Christians and Muslims.

Boko Haram's violence remains focused mostly on security forces in the northeast, although its attacks have spread across the north and to the capital Abuja.

President Goodluck Jonathan has been unable to stop the rebellion despite waves of military offensives in the northeast and other parts of northern and central Nigeria where Boko Haram has a strong presence.

Jonathan said this week that most suspects behind major bombings in Nigeria had been arrested and attacks by what he called "terrorists" would be over soon.

Around 3,000 people have been killed in violence linked to Boko Haram since the group's uprising in 2009, human rights groups say.

(Reporting by Isaac Abrak; Writing by Joe Brock; Editing by Ruth Pitchford)

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1 of 4. Labour party candidates Itzik Shmuli (R) and Stav Shaffir attend a mock election at a high school in Ramat Gan near Tel Aviv December 6, 2012.

TEL AVIV | Thu Jan 3, 2013 7:31am EST

TEL AVIV (Reuters) - They are young and they are driven. They got half a million Israelis out on the streets demanding social justice. Now they want their votes.

The leaders of a grassroots social protest movement that swept Israel in 2011 have shot to the top of a rejuvenated Labour party that polls say will at least double its power in a January 22 general election that Prime Minister Benjamin Netanyahu's right-wing Likud is forecast to win.

"The next stage is to continue what started in the streets, to bring that to the ballot ... so that we can translate it into achievements in budgets, laws and a change of policy," said 32-year-old Itzik Shmuli, who as head of the student union was one of the most prominent leaders of the protest movement.

It began with a handful of youngsters who pitched tents along Tel Aviv's luxurious Rothschild Avenue to protest against high housing costs. Eventually, hundreds of thousands of Israelis demonstrated weekly across the country.

Inspired also by the Arab Spring that swept the region, the protesters, chanting "the people demand social justice", dominated headlines in Israel in the summer of 2011, and posed a new challenge to the government.

Political parties soon saw potential vote magnets in the movement's leaders, who were often portrayed in the media as idealists with just the right mix of innocence and savvy to promote a message of hope and change.

Shmuli quit the student union this year to win the number 11 spot on Labour's list of parliamentary candidates, running a distant second to Likud in the upcoming election.

"The answer the government gave was a thin, cosmetic and cynical one. They did not want to truly deal with the problems raised by the protest," Shmuli said.

Israel has a relatively low unemployment rate of 6.7 percent and a growing economy, but business cartels and wage disparities have kept many from feeling the benefit.

In parliament, Shmuli and his allies hope to push affordable housing, reform the education, welfare and health systems and to narrow the gap between rich and poor in Israel, which the Organisation for Economic Cooperation and Development (OECD) has said is among the highest in developed countries.

In response to the protest, Netanyahu, a free market champion and fiscal conservative, vowed to revamp the economy and lower living costs. Some of the government's steps have eased the pain for the middle and lower classes.

But other measures are moving slowly or have had no major effect. With rising food and fuel prices, few feel significant change in the cost of living since the protest.

"It means that we were mistaken when, as a young generation, we thought we could avoid sitting in the places where we make the most important decisions," said Stav Shaffir, 27, another of the movement's leaders.

Shaffir is now eighth on Labour's list. Polls show that like Shmuli, she will be a member of Israel's next parliament, with her party winning about 16 to 20 of the 120 Knesset seats.

"There is something pure and beautiful about a popular protest," Shaffir told a group of students in December. "But the change it brings comes only after generations ... and we don't have that time if we want to change policy."

UNDER THE TANKS

Shaffir lives with four roommates in a Jaffa apartment. Shmuli moved to the run-down town of Lod last year to set up a student community outreach program. Both say they have no intention of changing their dwellings after becoming lawmakers.

At the protest's peak, Shmuli addressed about half a million people at one of the biggest rallies ever held in Israel. He spoke to the cheering crowd about "The New Israelis", who will fight for a better future and social equality.

But that was in September 2011. The question now is whether the "New Israelis" who cheered for Shmuli will turn up to vote for him.

The summer of 2011 marked one of the only times that social-economic issues consistently topped the agenda in a country whose population of 7.8 million is usually preoccupied with matters of war and peace.

Yariv Ben-Eliezer, a media expert at the Interdisciplinary Center Herzliya, a college near Tel Aviv, says those issues have once more taken a back seat.

In November, Israel carried out an eight-day offensive in Gaza with the declared aim of ending Palestinian rocket fire into its territory. The same month the Palestinians relaunched their statehood bid at the United Nations and won great support.

"Before the (Gaza) operation, Labour was rising in the polls and Likud was sliding. There was a feeling that the social protest should be moved into politics. But the main issue has gone back to being defense," Ben-Eliezer said.

Shmuli disagrees. Called up to the Gaza border for reserve duty during the offensive, he took shelter with fellow soldiers under their tank when rockets from Gaza hailed down.

"While all these missiles were flying over us, we had to find a way to pass those 10 minutes under the tank - and what did we talk about? About housing and about the high living costs."

Many of the protesters came from the middle class, which bears a heavy tax burden and sustains the conscript military.

"We will always be there for our country - whenever it needs us, but the big question is, when we are out of our uniforms, will the state be there for us?" Shmuli said.

Tamar Hermann at The Israel Democracy Institute, a Jerusalem think tank, said a Netanyahu election win would not spell defeat for the social protest movement.

"Now we see the social-economic issues taking a much more significant role in the discussion over the future of the country," Hermann said. "All the parties feel obliged to relate to the issues that were raised by the protest movement."

MAKING POLITICS SEXY

Israel's election had been set for late 2013 but the government failed to agree on a state budget, which it said would require harsh austerity steps.

Netanyahu called an early vote in what commentators said was an attempt by the prime minister and partners in his governing coalition to avoid the risk of going to the polls after imposing unpopular cuts.

Labour has focused its campaign almost entirely on social and economic issues, and its projected gains in parliament are largely attributed to the protest movement.

If Netanyahu, against the odds, chooses to include Labour in his next government, some of the movement's demands will undoubtedly be part of that deal, said Yossi Yonah, a Labour candidate who has advised social protest leaders.

Labour chief Shelly Yachimovich, an advocate of a welfare state, has not ruled out serving in a Netanyahu administration. But the option seems remote given their opposing economic views.

Looking ahead to likely budget cuts after the election, Yonah predicted such steps could revive and bolster the protest movement, if it combines civil action on the streets with a combative parliamentary opposition to Netanyahu.

"The protest's impact cannot be judged after only one year," Yonah said. "Eventually something must give."

Both Shaffir and Shmuli hope to draw young people who are disillusioned with politics to come vote.

"Our parents brought us up to believe that if we work hard, study and try then everything will be okay, we will succeed. But when we grew up, when we were released from the army, we looked around and this society we were told about was gone," Shaffir said.

Instead, she said, they found corrupt politicians who were not looking out for young people's interests.

The tents that Shaffir helped pitch are long gone and life has returned to normal on Rothschild Avenue, which is lined with banks, shops and cafes.

"We need to make politics sexy again," Shaffir said, sitting on a bench on the trendy avenue filled with people walking their dogs and riding bicycles.

(Writing by Maayan Lubell; Editing by Jeffrey Heller and Janet McBride)

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Residents run along a street after an air strike by a fighter jet loyal to Syrian President Bashar al-Assad in Aleppo's al-Marja district December 31, 2012.

AZAZ, Syria | Thu Jan 3, 2013 8:50am EST

AZAZ, Syria (Reuters) - Rebels battled on Thursday to seize an air base in northern Syria, part of a campaign to fight back against the air power that has given President Bashar al-Assad's forces free rein to bomb rebel-held towns.

More than 60,000 people have been killed in the 21-month-old uprising and civil war, the United Nations said this week, sharply raising the death toll estimate in a conflict that shows no sign of ending.

After dramatic advances over the second half of 2012, the rebels now hold wide swathes of territory in the north and east, but are limited in exerting control because they cannot protect towns and villages from Assad's helicopters and jets.

Hundreds of fighters from rebel groups were attempting to storm the Taftanaz air base, near the northern highway that links Syria's two main cities, Aleppo and the capital Damascus.

Rebels have been besieging air bases across the north in recent weeks, in the hope this will reduce the government's power to carry out air strikes and resupply loyalist-held areas.

A rebel fighter speaking from near the Taftanaz base overnight said the base's main sections were still in loyalist hands but insurgents had managed to infiltrate and destroy a helicopter and a fighter jet on the ground.

The northern rebel Idlib Coordination Committee said the rebels had detonated a car bomb inside the base.

The government's SANA news agency said the base had not fallen and that the military had "strongly confronted an attempt by the terrorists to attack the airport from several axes, inflicting heavy losses among them and destroying their weapons and munitions".

Rami Abdulrahman, head of the opposition-aligned Syrian Observatory for Human Rights which monitors the conflict from Britain, said as many as 800 fighters were involved in the assault, including Islamists from Jabhat al-Nusra, a powerful group that Washington considers terrorists.

Taftanaz is mainly a helicopter base, used for missions to resupply army positions in the north, many of which are cut off by road because of rebel gains, as well as for dropping crude "barrel bombs" of explosives on rebel-controlled areas.

"WHAT IS THE FAULT OF THE CHILDREN?"

Near Minakh, another northern air base that rebels have surrounded, government forces have retaliated by regularly shelling and bombing nearby towns.

In the town of Azaz, where the bombardment has become a near nightly occurrence, shells hit a family house overnight. Zeinab Hammadi said her two wounded daughters, aged 10 and 12, had been rushed across the border to Turkey, one with her brain exposed.

"We were sleeping and it just landed on us in the blink of an eye," she said, weeping as she surveyed the damage.

Family members tried to salvage possessions from the wreckage, men lifting out furniture and children carrying out their belongings in tubs.

"He (Assad) wants revenge against the people," said Abu Hassan, 33, working at a garage near the destroyed house. "What is the fault of the children? Are they the ones fighting?"

Opposition activists said warplanes struck a residential building in another rebel-held northern town, Hayyan, killing at least eight civilians.

Video footage showed men carrying dismembered bodies of children and dozens of people searching for victims in the rubble of the destroyed building, shouting "God is greatest". The provenance of the video could not be independently confirmed.

In addition to their tenuous grip on the north, the rebels also hold a crescent of suburbs on the edge of Damascus, which have come under bombardment by government forces that control the center of the capital.

On Wednesday, according to opposition activists, dozens of people were incinerated in an inferno caused by an air strike on a petrol station in a Damascus suburb where residents were lining up for precious fuel.

The civil war in Syria has become the longest and bloodiest of the conflicts that rose out of uprisings across the Arab world in the past two years.

Assad's family has ruled for 42 years since his father seized power in a coup. The war pits rebels, mainly from the Sunni Muslim majority, against a government supported by members of Assad's Shi'ite-derived Alawite minority sect and some members of other minorities who fear revenge if he falls.

The West, most Sunni-ruled Arab states and Turkey have called for Assad to leave power. He is supported by Russia and Shi'ite Iran.

(Additional reporting by Khaled Yacoub Oweis in Amman and Dominic Evans in Beirut; Writing by Peter Graff; Editing by Ruth Pitchford)

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Smoke is seen rising from a mountain in Kachin state in this still image taken from a video dated December 27, 2012.

YANGON | Thu Jan 3, 2013 6:38am EST

YANGON (Reuters) - Myanmar's military has used jets to attacks rebel fighters in northern Kachin state, the government said on Thursday, its first admission of an intensification of a conflict that has raised doubts about its reformist credentials.

Rebel sources have reported aerial bombings, shelling and even the use of chemical weapons since December 28 after the Kachin Independence Army (KIA) ignored an ultimatum to stop blocking an army supply route in the hilly, resource-rich state where more than 50,000 people have been displaced.

Official newspapers said that air support was used on December 30 to thwart KIA fighters who had occupied a hill and were attacking logistics units of the Tatmadaw, as Myanmar's military is known.

"The Tatmadaw troops cleared Point-771 hill and its surrounding areas where the KIA troops were attacking the Tatmadaw logistic troops," the New Light of Myanmar, a government mouthpiece, said. "The air cover was used in the attack."

U.N. Secretary-General Ban Ki-moon voiced concern on Wednesday over reports of helicopters and fighter jets being used in the state bordering China. The KIA said the attacks were intended to clear the path for an assault on its headquarters in Laisa.

Ban called on Myanmar's government to "desist from any action that could endanger the lives of civilians" and reiterated demands for humanitarian aid groups to be granted access, U.N. spokesman Martin Nesirky said in a statement.

President Thein Sein's quasi-civilian administration insists it wants a ceasefire and political dialogue. It says troops have acted only in self-defense and on Thursday denied having plans to seize the KIA's stronghold.

DOMINANT MILITARY

The escalation of fighting has raised doubts about the sincerity of the reformist ex-generals running the government and the extent of their power in a country the size of Britain and France plagued by decades of internal conflict.

Some analysts and diplomats say central government is either not fully committed to peace with the KIA or unable to assert control over the military, which still dominates politics and the economy despite formally ceding power in March 2011.

Colonel James Lum Dau, a Thai-based spokesman for the KIA's political wing, said Kachin officials on the ground had reported up to 300 people killed in air strikes.

"We are in a defensive position. Right now more people are suffering not only bombings, but shelling and spraying of chemical weapons with helicopter gunships and jets," he said. "Only god knows what to do. We are praying."

It is difficult for journalists to independently verify accounts from the two sides.

Fighting erupted in Kachin in June 2010, ending a 17-year truce, and has continued even as government negotiators have agreed ceasefires elsewhere with ethnic Shan, Chin, Mon and Karen militias after decades of fighting in border areas.

Mistrust runs deep between the military and the KIA, which was once backed by China, and multiple rounds of talks aimed at reaching a ceasefire have gone nowhere. Analysts say a history of bad blood and a battle for control of resources, including highly lucrative jade, could be stoking the unrest.

Zaw Htay, a senior official in Thein Sein's office, told Reuters no air strikes had taken place but K-8 trainer jets had provided cover fire to protect ground troops from rebel attacks. The military, he said, had no intention of seizing the KIA's headquarters.

"The president has said this and at the same time he has invited KIA leaders to come and talk with him in Naypyitaw, but they still haven't responded," Zaw Htay said.

(Additional reporting by Paul Carsten in Bangkok; Writing by Martin Petty; Editing by Alan Raybould)

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JERUSALEM | Thu Jan 3, 2013 8:44am EST

JERUSALEM (Reuters) - Israeli forces raided the West Bank city of Jenin on Thursday in search of a suspected Palestinian militant, touching off clashes with residents who threw rocks and petrol bombs at them, an Israeli security source said.

It was the second time this week that Israeli forces had entered the Jenin area to detain suspects.

On Tuesday, Israeli soldiers disguised as Palestinians raided the village of Tamoun, arresting a member of the Islamic Jihad group. Several dozen Palestinians were injured in ensuing clashes, medical officials said.

In the latest raid, the soldiers clashed with some 500 Palestinians, forcing them out of Jenin, the security source said. An elderly Palestinian woman was slightly injured by a dog used by Israeli forces during the operation.

The city is under the control of the Palestinian Authority, which exercises limited self-rule in the West Bank under interim peace accords with Israel.

Israel has reserved the right to carry out its own operations against militants in the West Bank.

(Reporting by Ari Rabinovitch; Editing by Louise Ireland and Jeffrey Heller)

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House Speaker John Boehner (R-OH) arrives to speak to the media on the ''fiscal cliff'' on Capitol Hill in Washington, December 21, 2012.

WASHINGTON | Wed Jan 2, 2013 11:13pm EST

WASHINGTON (Reuters) - In the wake of bruising fights in their own ranks over the "fiscal cliff" and aid for victims of superstorm Sandy - Republicans in the U.S. House of Representatives open a new Congress on Thursday more divided than ever.

While their leader, Speaker John Boehner, seems in no danger of losing his position because of the divisions, his ability to speak for his membership in the House appears greatly diminished.

That could not come at a worse time for Republicans as they prepare for their next attempt to get more spending cuts out of President Barack Obama. They will try to use the debt ceiling - and Obama's request to raise it - as leverage, as they did in 2011.

But if the final days of this Congress were indicative of things to come, Republicans will have a rough time effectively using their majority in the House against Obama, who even Republicans acknowledge is at the top of his game following the Democrat's re-election in November.

The fiscal cliff battle to avert steep tax hikes and spending cuts that were due to kick in at the start of this year proved gut-wrenching for Republicans.

Obama's demand for a tax hike on the rich challenged a core principle that has guided Republicans for decades: No new taxes. Ever.

Yet, late on New Year's night, 85 Republicans in the House did just that, voting to raise income taxes on household income of more than $450,000 a year.

Some of the Republican Party's biggest stars were among the 85 - including Boehner and Paul Ryan, the 2012 Republican vice presidential candidate, who is seen as a conservative anchor.

But 151 House Republicans stood in defiance, leaving Boehner in the unenviable position of having to rely on opposition Democrats to pass major legislation.

Earlier in the fiscal cliff fight, Boehner suffered a humiliating defeat when his "Plan B" solution - which would have limited the tax hikes to income of $1 million a year or more, got so little support he had to cancel the vote.

No sooner had the fiscal cliff battle ended than Boehner found himself in trouble with other Republicans over aid for victims of Sandy, the second costliest storm in U.S. history, which smashed New York and New Jersey coastal communities in late October.

Legislation providing disaster relief to New York, New Jersey and other East Coast states was delayed. A House Republican aide said that given Republicans' frustration with the fiscal cliff bill and its lack of significant spending cuts, "it was not a good time to immediately vote on $60 billion in new spending."

"I don't enjoy saying this. I consider myself a personal friend of John Boehner's," said Republican Representative Peter King of New York. "It pains me to say this, but the fact is that the dismissive attitude that was shown ... toward New York, New Jersey and Connecticut typifies, I believe, a strain in the Republican Party."

Earlier, King had condemned House inaction on Sandy as a "knife in the back."

Republican Representative Michael Grimm, also of New York, said of Boehner's refusal to bring the disaster bill to a vote: "There was a betrayal. There was an arrogant judgment that is going to cost I think the trust of the American people."

Ironically, Grimm first won his seat in Congress in 2010 with the help of conservative Tea Party activists who sometimes show displeasure with disaster aid spending.

By midday on Wednesday, Boehner had changed course, promising a House vote by week's end on a $9 billion down payment in storm assistance, with a second bill providing $51 billion to be voted on January 15.

TEA PARTY EFFECT

Paul Light, a New York University professor and a specialist on Congress, said the vote on the fiscal cliff bill could mark the start of a "major realignment" in the run-up to the 2014 congressional elections and the 2016 presidential race.

Republicans who voted for the legislation "are going to have to find a home. They're not going to find it with the Tea Party," Light said.

He said that Republicans who were uncomfortable with the Tea Party could begin aligning themselves more closely with a dwindling band of centrist Democrats.

Congressional Republicans, especially in the House, have been buffeted for two years by the Tea Party, which helped them win control of the House in 2010.

Boehner had to navigate Tea Party demands throughout the 2011 fight over raising U.S. borrowing authority or risking a historic government default.

In rapid succession, Tea Party-fueled battles were waged over infrastructure investments, farm subsidies, payroll tax cuts and the fiscal cliff.

At the core of the disputes was whether the government should be made smaller, forcing Boehner to balance that demand with the need to govern and keep the federal government operating in an orderly way.

For all the heartache over the past several weeks as Republicans fought with one another over whether to let taxes on the rich go up, many see better days ahead.

"By and large, people are probably happy to have it behind them. This was obviously the worst part of the fiscal debate," said one House Republican staffer, referring to the tax hikes.

The staffer added, "Republicans get to point out that we still have a $1 trillion deficit and ask Democrats what kind of spending cuts, entitlement reforms they are willing to do to fix it."

Republicans feel that will be an easier lift for them - one that they can sell to the American public as they move on to the fight over the debt ceiling.

(Editing by Fred Barbash and Peter Cooney)

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A man walks past the U.S. Capitol Building in Washington December 17, 2012.

WASHINGTON | Wed Jan 2, 2013 4:52pm EST

WASHINGTON (Reuters) - Washington has steered clear of severe austerity measures for now, reducing the risk of recession, but a clutch of U.S. tax hikes will nevertheless be a drag on economic growth this year.

The U.S. Congress approved a deal late on Tuesday to scale back some $600 billion in scheduled tax hikes and government spending cuts known as the "fiscal cliff."

Analysts said the package at least marked a temporary reprieve for the economy, and investors charged into U.S. stocks, pushing the Standard & Poor's 500 up 2.5 percent on Wednesday.

However, the legislation, which is expected to be signed into law soon by President Barack Obama, will raise taxes on most Americans through a hike in the payroll tax used to fund Social Security pensions for the elderly.

Economists say the U.S. economy would likely grow much more quickly if the government was not raising taxes.

The payroll tax hike alone - which comes from the expiration of stimulus measures enacted to fight the 2007-09 recession - could push the average household tax bill up by about $700 this year, according to estimates from the Tax Policy Center, a Washington think tank.

That will likely reduce consumer spending and subtract about three quarters of a percentage point from economic growth, said Joseph LaVorgna, an economist at Deutsche Bank in New York.

The package will also raise income tax rates for households making over $450,000 a year, although rates will remain at 2012 levels for everyone else.

The other modest tax hikes, including a tax on wealthy households to help pay for Obama's 2010 healthcare reform law, could shave another quarter of a point from growth.

"We are still getting some fiscal drag this year," LaVorgna said.

Even so, the tenor of the deal was widely anticipated by economists in financial centers like Wall Street, and appears to support forecasts for economic growth of around 2 percent this year.

Barclays Capital said it was holding its growth forecast for this year at 2.1 percent.

A Reuters poll of analysts in December produced a median forecast for 1.9 percent U.S. economic growth in 2013.

"There seems to be a collective sigh of relief," strategists at Brown Brothers Harriman wrote in a note to clients. "The full force of the U.S. fiscal cliff - (which) could have dragged the world's largest economy into a recession - has been averted."

The Congressional Budget Office had estimated that completely running over the fiscal cliff would have caused the economy to contract 0.5 percent this year. The full brunt of the cliff would have hit the average U.S. household with about an additional $3,500 in taxes this year, according to the Tax Policy Center.

Still, U.S. lawmakers only agreed to delay scheduled cuts on government spending on the military, education and other areas for another two months.

Many economists think ongoing talks in Congress will eventually lead these spending cuts to be put off until next year, presumably once lawmakers reach a deal to reduce spending over the longer term while granting the government authority to increase the national debt.

Then again, they might not reach a deal, and the planned spending cuts would then cut deeply into economic growth in the second half of the year.

"While we retain our 2013 GDP forecast, we also retain the view that fiscal policy presents downside risks to growth," analysts at Barclays said in a research note.

Some economists noted that tax policy now looks more stable for the majority of Americans, removing some of the uncertainty that may have held back spending by consumers and business in recent months.

At the same time, with an axe still hanging above billions of dollars in government spending, many businesses are likely to remain cautious.

Analysts say financial markets are likely to remain on tenterhooks until Congress raises the nation's $16.4 trillion debt ceiling, which the U.S. Treasury confirmed had been reached on Monday.

The government likely will need to raise the debt ceiling by February or March to remove the risk albeit remote, of the country defaulting on its debt. Such an extreme scenario would likely make it more expensive for governments and companies alike to borrow money, hurting the economy.

"We have some more certainty, but there are still quite a few questions left to be resolved," said Dana Saporta, an economist at Credit Suisse.

(Additional reporting by Jonathan Spicer in New York; Editing by Leslie Adler)

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