WASHINGTON | Fri Dec 21, 2012 12:41pm EST

WASHINGTON (Reuters) - State and local government spending grew at a 0.3 percent annual rate in the third quarter, after 11 straight quarters of contraction, the U.S. Commerce Department said on Thursday.

The last time state and local spending expanded was in the third quarter of 2009, at a much more robust rate of 2.2 percent. Then, for nearly three years, spending contracted sharply, with the biggest drop in the first quarter of 2010 at 5.5 percent.

States are pinching pennies, keeping spending growth slow as the economy recovers from the 2007-09 recession and the federal government sends them fewer funds.

"The recent improvement in the national economy has not translated to strong growth in total state expenditures," said the National Association of State Budget Officers (NASBO) in a report also released on Thursday.

Total state spending likely grew only 0.1 percent in fiscal 2012, the lowest level since the group began tracking state spending in 1987, NASBO said. Most states' fiscal years end in June, which means that many have already started fiscal 2013.

The 2007-09 recession caused states' revenues to plunge and, because all states except Vermont must end their fiscal years with balanced budgets, many slashed spending, calling special legislative sessions to make emergency mid-year cuts.

The federal government stepped in to help with the 2009 economic stimulus plan known as the American Recovery and Reinvestment Act (ARRA), which included the largest transfer of federal funds to states in U.S. history.

NASBO said state expenditures grew 3.8 percent in fiscal 2010 and 2.8 percent in fiscal 2011, mostly due to the assistance. By fiscal 2010 federal money made up nearly 35 percent of state spending, compared with 26.3 percent in fiscal 2008.

Now that the burst of stimulus money is over, states must once again shoulder the costs of public programs, even though their revenues are only beginning to return to pre-recession levels. Federal funds likely only represented 31.2 percent of state spending in fiscal 2012 and will continue to shrink, NASBO said.

"State revenues have not increased as fast as ARRA funds have declined, leading to a unique situation in which total state expenditure growth has slowed during the same time that the national economy has been improving," it reported.

Meanwhile, spending demands continue to grow, particularly for the Medicaid healthcare program for the poor that states operate with partial reimbursement from the federal government.

Over the last three years, the portion of state spending going to Medicaid has risen to 23.9 percent from 22.2 percent. Many states worry that Medicaid will eat up their budgets, and leave fewer dollars for other areas.

Spending on education dipped to 19.8 percent in fiscal 2012, the first time on record that the portion has been less than 20 percent, NASBO said.

(Reporting by Lisa Lambert; Editing by Nick Zieminski)

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Commander Job Price, 42, of Pottstown, Pennsylvania, shown in this Naval Special Warfare Group TWO handout photograph, died of a non-combat related injury in central Afghanistan's Uruzgan Province, the Pentagon said in a statement. A senior member of the U.S. Navy's elite SEAL unit has died in Afghanistan, the Defense Department said on December 23, 2012, and media reports said the death was a possible suicide.

WASHINGTON | Sun Dec 23, 2012 10:47pm EST

WASHINGTON (Reuters) - The commander of an elite U.S. Navy SEAL unit has died in Afghanistan, the Defense Department said on Sunday, and a U.S. military official said his death was being investigated as a suspected suicide.

Commander Job Price, 42, of Pottstown, Pennsylvania, died on Saturday of a non-combat related injury in central Afghanistan's Uruzgan Province, the Pentagon said in a statement.

"This incident is currently under investigation," it said.

Price, was assigned to a Naval Special Warfare unit in Virginia Beach, Virginia, and was the commanding officer of SEAL Team Four. He failed to show up for an event on Saturday and colleagues found him dead in his quarters, the U.S. military official told Reuters on condition of anonymity.

NBC News and CNN also quoted unnamed military officials as saying that the death was being looked at as a possible suicide.

Lieutenant David Lloyd, a spokesman for Naval Special Warfare Group Two, which comprises the four SEAL teams on the U.S. East Coast, declined to comment on the cause of death, saying it was under investigation.

Price was married and had a daughter. He had been a naval officer since May 1993, Lloyd said.

Captain Robert Smith, the Group Two commander, said in a statement: "The Naval Special Warfare family is deeply saddened by the loss of our teammate. We extend our condolences, thoughts and prayers to the family, friends, and NSW community during this time of grieving.

"As we mourn the loss and honor the memory of our fallen teammate, those he served with will continue to carry out the mission."

SEAL is an acronym for sea, air, land.

(Reporting by Ian Simpson and Phil Stewart; editing by Christopher Wilson)

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KABUL | Mon Dec 24, 2012 12:26am EST

KABUL (Reuters) - Pakistan is genuine about backing the nascent Afghan peace process and shares the Kabul government's goal of transforming the Taliban insurgency into a political movement, a senior Afghan government official told Reuters.

"They have told us that they share the vision contained in our roadmap which is basically to transform the Taliban from a military entity into a political entity to enable them to take part in the Afghan political process and peacefully seek power like any other political entity in Afghanistan, he said.

"This is the vision that they share."

The official, who is closely involved in reconciliation efforts, said recent face-to-face talks between senior Taliban members and Afghan officials in France were an "enormously helpful" step in building a wider environment for peace.

Until now, the Taliban and Afghan officials only made indirect contacts.

The official's remarks signaled unprecedented optimism from Afghanistan that Pakistan - long accused of backing Afghan insurgent groups - was now willing to put its weight behind reconciliation efforts, which are still in early stages and are vulnerable to factionalism.

"We are very optimistic. We believe that they are genuine in this discussion with us," said the senior government official.

The senior official cautioned, however, that in order to sustain that optimism, Pakistan would need to take further concrete steps after releasing some mid-level Afghan Taliban members from detention, who may be useful in promoting peace.

The nuclear-armed South Asian nation, a strategic U.S. ally, is seen as critical to U.S. and Afghan efforts to stabilize the country before most NATO combat troops withdraw by the end of 2014.

WARRING FACTIONS

Pakistan's powerful army chief has made reconciling warring factions in Afghanistan a top priority, Pakistani military officials and Western diplomats told Reuters, the clearest signal yet that Islamabad means business in promoting peace with the Taliban.

General Ashfaq Kayani, arguably the most powerful man in Pakistan, is backing dialogue partly due to fears that the end of the U.S. combat mission in Afghanistan in 2014 could energize a resilient insurgency straddling the shared frontier, according to commanders deployed in the region.

The senior Afghan government official has a similar assessment.

"I think there is a sense that we are also getting, that cooperation from Pakistan now is bound to be meaningful, substantive," he said.

"The reason is frankly, most in Pakistan, in our view, have reached the conclusion that time is running out. That it is no longer just about Afghanistan's instability and Afghanistan's insecurity but it's very much a question of security for themselves."

The Haqqani network -- which has far more experience in guerrilla warfare than the Afghan Taliban - would be welcomed to the peace process as long as it met certain conditions, said the official.

"From our point of view, the door of peace is open to anyone. The Haqqanis are a pretty challenging group of people," he said.

"But if they choose to come over to the peace process, then I am sure the peace process will include them."

Pakistan's intelligence agency denies Afghan accusations that it uses the Haqqani network and other militant groups as proxies to counter the influence of rival India in Afghanistan.

The Haqqanis are blamed for a number of high-profile attacks on Western targets, including embassies, in Kabul, highlighting the resilience of insurgents after years of fighting Western forces equipped with superior firepower and technology.

(Additional reporting by Mehreeen Zahra Malik in WANA and Matthew Green in ISLAMABAD; Editing by Sanjeev Miglani)

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1 of 2. Italian caretaker Prime Minister Mario Monti gestures during an end of the year news conference in Rome December 23, 2012. Monti said on Sunday that he would be ready to offer his leadership to political forces that adopt his agenda of reforms the country needs.

ROME | Sun Dec 23, 2012 4:13pm EST

ROME (Reuters) - Two days after stepping down, Mario Monti announced on Sunday he would consider seeking a second term as Italian prime minister if approached by allies committed to backing his austere brand of reforms.

The former European commissioner, appointed to lead an unelected government of experts to save Italy from financial crisis a year ago, resigned on Friday but has faced growing calls to seek a second term at a parliamentary election on February 24-25.

At stake is the leadership of the world's eighth largest economy, where recession and public debt of more than 2 trillion ($2.63 billion) have aggravated investor concerns about growth and stability in the euro zone.

"If a credible political force asked me to be candidate as prime minister for them, I would consider it," said Monti, who has imposed repeated tax hikes and spending cuts to shore up Italy's strained public finances.

He had kept his position a closely guarded secret for weeks, and in recent days had appeared to be have strong doubts about whether to continue in front-line politics. He made clear that if he ran, it would probably be at the head of a centrist grouping.

Monti held back from committing himself fully to the race, and said he was aware any decision to stay in politics carried "many risks and a high probability of failure".

"I am not in any party. I am ready to give my appreciation and encouragement, to be leader and to take on any responsibility I may be given by parliament," he said.

As a senator for life, Monti has no need to run for election to parliament but he said he would publish a detailed agenda of recommendations for a future government and would potentially be willing to lead a party that adopted it as its own.

Still serving as caretaker leader, Monti is widely respected for restoring Italy's reputation after the scandal-plagued era of his predecessor Silvio Berlusconi.

The former economics professor is backed strongly by Italy's business establishment and by EU allies including German Chancellor Angela Merkel. He has been urged to stay by centrist groups ranging from disaffected former Berlusconi allies to the small UDC party, which is close to the Catholic church.

But there is little sign of enthusiasm for a second term among voters weary of his austerity policies. A survey last week showed 61 percent did not think he should stand. It said a potential centrist alliance under his leadership was likely to gain around 15 percent support.

BITTER ELECTION

Both Berlusconi's center-right People of Freedom (PDL) party and the center-left Democratic Party (PD), which is leading in the opinion polls, have urged Monti not to stand in the election.

Berlusconi, who left office last year with fraud charges and a juvenile prostitution scandal hanging over him, has accused Monti's "Germano-centric" government of worsening recession with austerity measures, including a deeply unpopular housing tax he has promised to scrap.

In an exchange which may give a taste of bitter campaigning to come, Berlusconi said his nightmare would be a government with Monti at its head and Gianfranco Fini, a former ally turned bitter foe who supports the premier, "coming out of the sewers".

Fini's lieutenant Fabio Granata responded by saying Berlusconi's remark was "fitting for his court of thieves, mafiosi, corrupt politicians, slaves and prostitutes."

Monti was also scathing about Berlusconi, whom he replaced as Italy teetered on the brink of disaster in November 2011.

He said he had been "bewildered" by the 76-year-old media tycoon's frequent changes of position. And, in an interview with La Repubblica daily, he expressed incredulity that Italians might re-elect Berlusconi "after seeing the damage he did to the Italian economy and the credibility of the country".

PD leader Pier Luigi Bersani, whose party has backed Monti in parliament and pledges to maintain the broad course he has set, was more cautious, saying he would look at Monti's reform proposals closely but that it would be up to voters to decide.

Monti said he hoped the next government would have a strong majority to pursue a programme that would extend the reforms his government had begun, in areas ranging from the labor market to justice and cutting the bloated cost of the political system.

He said the next government must not make easy election promises or backtrack on reforms: "We have to avoid illusory and extremely dangerous steps backwards."

During his 13 months in office, Monti hiked taxes severely and chopped backed spending while pushing through reforms of the pension system, labor market and parts of the service sector.

However, many analysts said his efforts were too timid to significantly improve the outlook of a chronically sluggish economy, and Monti himself said that Italy was "only at the beginning of the structural reforms" required.

Italy, the euro zone's third-largest economy, has been in recession since the middle of last year. Consumer spending is falling at its fastest rate since World War Two and unemployment has risen to a record high above 11 percent.

(Editing by Barry Moody and Mark Trevelyan)

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BEIRUT | Sun Dec 23, 2012 3:34pm EST

BEIRUT (Reuters) - Dozens of people were killed and many more wounded in a Syrian government air strike that hit a bakery where a crowd was queuing for bread on Sunday, activists said.

If confirmed, the attack on Halfaya in central Syria, which was seized by rebels last week, would be one of the deadliest air strikes of Syria's civil war.

Videos uploaded by activists showed dozens of bloodstained corpses lying amid rubble and shrapnel. An adolescent boy with both his feet blown off lay flailing in the middle of a road.

"When I got there, I could see piles of bodies all over the ground. There were women and children," said Samer al-Hamawi, an activist in the town. "There are also dozens of wounded people."

Residents of Halfaya told Reuters they estimated 90 dead. The Syrian Observatory for Human Rights, a British-based group with a network of activists across Syria, counted 60 killed.

"The number is likely to rise because there are dozens of wounded being treated in the area and nearby hospitals, among them 50 in critical condition," it said.

Activists say more than 44,000 people have been killed in the 21 months since protests erupted against President Bashar al-Assad, inspired by the Arab Spring revolutions in Tunisia, Egypt and elsewhere.

Amid the latest carnage, United Nations-backed crisis mediator Lakhdar Brahimi arrived for more talks in Syria. He had to drive from neighboring Lebanon because fighting around Damascus International Airport has effectively shut it down.

"TIME IS GETTING SHORT"

The uprising has grown into civil war, with death tolls regularly topping 100 people a day as the army hits back at rebels who have made a string of advances across the country, including around the capital. According to the Observatory, more than 180 Syrians, civilians and fighters, died on Sunday.

A force of 200 rebel fighters seized the 135 Infantry Brigade base in the village of Hawa, a mostly Kurdish area in northern Aleppo province, rebels said on Sunday, as they showed journalists the base.

After overcoming about 150 soldiers in the raid on Saturday, they seized weapons including two field guns, three anti-aircraft guns and dozens of boxes of Kalashnikov assault rifles, they said.

In defiant remarks, Syrian Information Minister Umran Ahid al-Za'bi said rebels and their foreign allies should "forget" trying to topple Assad.

He appeared to move away from the conciliatory tone of the Syrian vice president, who said last week that neither side could win the war and called for a national unity government.

"These military efforts to try to topple the government, of getting rid of the president, of occupying the capital ... Forget about this," al-Za'bi told a news conference in Damascus.

"I have general advice to those political powers that reject dialogue: time is getting short. Hurry and move on to working on a political solution."

Brahimi, who replaced Kofi Annan after the former U.N. chief failed to get Assad and world powers to agree on a way to end the conflict, was expected to meet the president on Monday.

Western powers and some Arab countries have repeatedly demanded that Assad step down.

BREAD SHORTAGE

Witness Hamawi said more than 1,000 people had been queuing at the bakery in the town of Halfaya. Shortages of fuel and flour have made bread production erratic across the country, and people often wait hours to buy loaves.

"We hadn't received flour in around three days so everyone was going to the bakery today, and lots of them were women and children," Hamawi said. "I still don't know yet if my relatives are among the dead."

New York-based Human Rights Watch condemned army air strikes on bakeries earlier this year, arguing that in some incidents the Syrian military was not using enough precision to target rebel sites, and in other instances it may have intentionally hit civilians.

In video from the attack site, women and children cried and screamed as men rushed with motorbikes and vans to carry away victims.

There was no independent media access to the scene, as the government restricts press access in Syria.

In one video, the cameraman could be heard sobbing as he filmed. "God is great, God is great. It was a war plane, a war plane," he cried.

One man was seen stopping to pick up half a corpse lying in the street, wrapping it up in his own jacket and carrying it away. Residents were using their bare hands to dig for bodies underneath blocks of concrete.

"Where are the Arabs, where is the world?" shouted one man. "Look at all of these bodies!"

(Writing by Mark Trevelyan; Additional reporting by Yara Bayoumy in Hawa.; Editing by Kevin Liffey, Stephen Powell and Jason Webb)

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