EMERGING MARKETS-Stocks claw higher, currencies sags after another hard week

By Chris Vellacott

LONDON Fri Oct 3, 2014 6:20am EDT

LONDON Oct 3 (Reuters) - Emerging market stocks snapped a six-day losing streak on Friday though it made little impact on a fourth straight week of falls as the soaring dollar also kept the pressure on developing economy currencies.

MSCI's emerging equities index was up 0.4 percent as the week's sell-off in global stocks abated ahead of U.S. jobs data. But that did little to dent its 3 percent slide since Monday and 10 percent plunge since early September.

"Everything we are seeing now in emerging markets is very much driven by global monetary policy," said Danske Bank analyst Lars Christensen. "Overall it's hard to see this stopping before we see a stabilisation and a stop to this dollar strengthening,"

Russia's remained in the spotlight as stocks headed for another weekly fall and the rouble weakened to 44.48 against a dollar-euro basket, close to the 44.40 level where the central bank automatically starts unlimited interventions.

The rouble has been under heavy selling pressure for months due to the Ukraine crisis and strong demand for dollars from Russian firms shut out of international capital markets, while falling oil prices are the latest strain.

The currency first breached the 44.40 level on Oct. 1, prompting the central bank's first market interventions since May.

Other dollar-sensitive emerging market currencies also turned lower again on Friday having rallied in the previous session when the greenback had paused for breath.

South Africa's rand weakened 0.3 percent following weak consumer confidence data, while Turkey's lira also slipped around 0.2 percent as consumer prices data showed slower than expected inflation.

In Asia, beaten-down Hong Kong stocks recovered from early falls to close 0.6 percent higher. Leading the way were Chinese real estate firms after Beijing announced measures to support its sagging housing market.

Asian markets were otherwise underwhelmed by Chinese data after a survey showed growth in its services sector eased last month to its slowest rate in eight months.

In a sign that China's cooling property market remained a key drag on the economy, the PMI showed the real estate sector shrank in September, alongside other industries such as logistics and aviation.

Tensions in Hong Kong were soothed a little though by the territory's leadership offering talks with pro-democracy protesters who have taken to the streets demanding a free voting system to appoint a new leader in 2017.

HUNGARY FOR YIELD

In the currency markets, Brazil's real steadied near a six-year low against the dollar as incumbant president Dilma Rousseff, who has a poor image with investors, extended a poll lead ahead of national elections on Sunday.

In eastern Europe, Hungary's forint led a firming of the region's currencies against the euro after the European Central Bank on Thursday detailed its plans for buying secured debt assets in the next couple of months.

The forint was also lifted by comments from Economy Minister Mihaly Varga, who said the country needed "a favourable" exchange rate to continue to reduce its debt this year.

Hungary, which has the highest debt to GDP ratio in the region at around 80 percent, would risk cuts in funding from the European Union if its debt rises.

Hungarian stocks along with those in Romania were among a tiny selection of global markets looking like dodging a weekly fall, while Polish and Czech shares were also heading for smaller drops than most.

For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Editing by Hugh Lawson)

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German bond yields inch up during nervous wait for U.S. payrolls

Fri Oct 3, 2014 6:11am EDT

* Strategists expecting strong U.S. jobs data

* Bunds yields vulnerable as ECB QE prospects dim

* Periphery claws back after Thursday's sell-off

* Weak business growth supports calls for easing

* Markets prepare for rocky fourth quarter (Adds quotes, updates prices)

By John Geddie

LONDON, Oct 3 (Reuters) - German bond yields edged higher on Friday as investors bet that an expected rebound in U.S. employment in September will hasten monetary tightening in the world's biggest economy.

With little immediate prospect of a European Central Bank government bond-buying scheme, European strategists believe a strong U.S. non-farm payrolls figure for September, due at 1230 GMT, will send yields up further.

"It all depends on the U.S. payroll number, where we see some risk on the upside of the outcome," said Piet Lammens, strategist at KBC.

"It's not so much the payrolls themselves, but how the market reacts. This might give us more clues about what might happen in the next weeks."

A Reuters poll of economists forecast a rise of 215,000 in non-farm payrolls last month, a big jump from August.

Strong economic data will be needed to convince the U.S. Federal Reserve to begin raising interest rates after it winds up its massive stimulus programme later this month.

German 10-year yields opened 1 basis point higher at 0.93 percent, pulling away from lows of 0.87 percent hit at the end of last month. Lammens said yields could rise as high as 1.12 percent in the coming weeks.

This all points to what could be a rocky road for financial markets in the fourth quarter.

"Simply put when the central banks step away from dampening risk, investors need to be compensated by higher yields," said Chris Iggo, chief investment officer for fixed income at AXA Investment Managers.

PERIPHERY PRESSURE ABATES

Elsewhere, the sell-off that struck weak euro zone government bonds after Thursday's ECB meeting appears to have arrested.

Italian and Spanish yields - the bellwether for the so-called peripheral countries - dipped 1 bp and 3 bps lower, respectively, at 2.32 and 2.10 percent.

Weaker-than-expected services data from both countries, dragged down business growth in the euro area to a ten-month low, lends further weight to calls for future ECB easing.

Business activity in Italy's service sector shrank in September for a second month in a row, as new business continued to contract, a survey showed on Friday.

"The Italian PMI surveys provided little by way of positive take-aways this month...there should be no mistake that the risks are now tilted towards a further decline," said RBC's European economist Timo del Carpio.

Spain's services sector remains comfortably in expansionary territory, but data on Friday showed this slowing as growth in new orders fell to an 11-month low.

Credit Agricole's European head of fixed income, Luca Jellinek, said strong U.S. growth data should be positive for exporters like Spain and Italy even if a near-term rise in U.S. Treasury yields were to import some temporary jitters.

While the ECB may be in policy limbo as it waits for existing measures to take effect, KBC's Lammens said its accommodative stance should cushion the blow for euro zone securities from any U.S.-imported weakness.

While the ECB kept silent on the prospect of buying sovereign debt on Thursday, it outlined a plan to buy rebundled packets of debt even from some of the bloc's weakest states. (Editing by Catherine Evans and Toby Chopra)

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UPDATE 1-Euro zone retail sales much stronger than expected in August

Fri Oct 3, 2014 6:34am EDT

(Adds economist comment)

By Jan Strupczewski

BRUSSELS Oct 3 (Reuters) - Euro zone retail sales increased much more than expected in August, data showed on Friday, pointing to stronger demand from households that could help economic growth in the third quarter.

The European Union's statistics office Eurostat said retail sales in the 18 countries sharing the euro rose 1.2 percent month-on-month in August for a 1.9 percent year-on-year gain.

Economists polled by Reuters had expected a 0.1 percent monthly and a 0.5 percent annual rise after sales contracted 0.4 percent month-on-month in July and rose 0.5 percent on the year.

"August's jump in retail sales fuels hopes that consumer spending could make a decent contribution to euro zone GDP growth in the third quarter," said Howard Archer, economist at IHS Global Insight.

"Retail sales volumes were up by 0.6 percent in the three months to August compared to the three months to May. Barring a very sharp correction in September, retail sales volumes look likely to have grown by around 0.7 percent quarter-on-quarter in the third quarter," Archer said.

Although volatile, retail sales data is a proxy for household demand, a central element of the euro zone's economic recovery that stalled in the second quarter.

Eurostat data showed sales of non-food products and fuel at petrol stations contributed most to the monthly rise of the index in August, with the euro zone's biggest economy Germany reporting the biggest gain of 2.5 percent.

"It may be that retail sales were lifted in August by people determined to enjoy their summer holidays after a difficult year. There may also have been a boost to retail sales coming from squeezed consumers looking to make the most of the summer sales in some countries," Archer said.

Economists said that among other reasons for the improvement could be the very low euro zone inflation shoring up purchasing power, and the fact that over the 14 months to August, unemployment in the euro zone declined by 768,000 people.

Economists also point to the strong month-on-month growth in spending in Germany, where unemployment is very low and real wages are good, compared to other countries.

Other economists, however, preferred to point out risks, saying this rebound might not last.

In annual terms, sales of non-food products played an even bigger role as their 3.6 percent year-on-year rise offset a 0.2 percent fall in the sales of food and the same drop in the sales of petrol.

Both Germany and France, the second biggest euro zone economy, recorded hefty gains of 3.1 and 2.1 percent respectively. (Editing by Mark Heinrich)

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GLOBAL MARKETS-Stocks succumb to growth fears; ECB trillion euro question awaits

Thu Oct 2, 2014 6:47am EDT

  * Global PMIs dent risk appetite      * Europe stocks drop as global sell-off continues      * Tokyo stocks hit hard, safe-haven yen, gold benefit      * Spotlight on Draghi as ECB meets        By Marc Jones      LONDON, Oct 2 (Reuters) - World stocks and oil were knocked  hard on Thursday after global manufacturing data and an Ebola  health scare in the United States spooked markets, sending  investors scurrying to the safety of U.S. bonds, the yen and  gold.      European markets had been sucked into the storm, anxious  about the European Central Bank's monthly meeting where it is  under pressure to launch an aggressive government bond purchase  programme to revive the euro zone's stodgy recovery.         Investors flocked to the yen and safe-haven bonds following  a slew of surveys on Wednesday that had shown German factory  activity shrinking for the first time in 15 months, China's  manufacturing sector barely growing and the United States  slowing more than expected.       Confirmation of a case of Ebola in the United States joined  a growing list of bearish news stories, with geo-political  tensions in Ukraine, the Middle East and Hong Kong, and growth  concerns around China and the euro zone sapping risk appetite.      All that pushed MSCI's 45-country world stock index   to a five-month low as a fourth day of  back-to-back falls left it down more than 5 percent in the last  month.      There was little sign of the rout coming to end in Europe  either. Britain's FTSE, Germany's DAX and  France's CAX saw 0.3-0.6 percent falls while Italy   and Portugal were down more than 1 percent.      "The market is quite nervous," said Alvin Tan, a strategist  at Societe Generale in London.       "What we are most concerned by is the risk backdrop. The S&P  500 appears to be in the process of breaking below the 100-day  moving average and on top of that we see volatility picking up  in not only equities but also currencies."      On top of all the geopolitical and growth concerns, markets  are also struggling with the fact the Federal Reserve is about  to end years of pumping billions of dollars of stimulus into the  U.S. and global economy each month.      After Wall Street had dropped 1 percent Japanese  equities had led the selloff in Asia overnight. A rebound in the  yen after a sudden loss of altitude for the high-flying  dollar pushed Tokyo's Nikkei down a sharp 2.1 percent to  three-week lows.                    TRILLION EURO QUESTION          Markets in both China and Hong Kong had been closed for  public holidays but sustained civil unrest in Hong Kong is also   weighing on investor confidence, although the city's streets  were calm for most of Thursday.       The risk-averse global mood had pushed 10-year U.S. Treasury  yields -- the benchmark for world debt markets --  into their biggest drop in just over a year on Wednesday. They  were steady at 2.4 percent in European trading as German Bunds   sat not far from all-time lows at 0.9 percent.         The dollar subsequently slipped back below 110 yen - a   threshold breached for the first time since 2008 this week. It  was last down 0.3 percent at 108.61 yen and on course for  its biggest drop in over a month against major currencies.      The euro was a shade higher at $1.2638 having crawled  away from a two-year low of $1.2571 hit earlier in the week.      Traders were focused on the European Central Bank meeting  later in the session with the divergence in U.S. monetary policy  from those of Europe and Japan now an established market theme.      ECB head Mario Draghi is set to give details at the bank's  1230 GMT post-meeting news conference of a new plan to buy  asset-backed securities and covered bonds, hoping this will  finally revive the euro zone economy.       It hopes the plans will add a trillion euros to its balance  sheet, but poor demand for a new round of cheap loans last month  is raising the pressure for it too be more aggressive.      "In the longer term people are still hoping for full-scale  quantitative easing," said Robert Kuenzel, euro area economist  at Daiwa Securities in London.      "But it is unlikely to come in the near future. I think the  first line of defence is the TLTRO (cheap long-term loans to  banks) and the covered bond and ABS purchase programmes, but  there is a risk that both of those components disappoint."            OIL PLUNGE      With the focus on damage limitation, gold added to small  gains to rise 0.5 percent to $1,219.27 an ounce.       In commodities though, Brent crude oil tumbled below  $92 a barrel, extending a three-month losing stretch as weak  economic signals from China and Europe and ample global supply  continue to weigh.       It has now lost 20 percent since June and sharp cuts in  official selling prices from Saudi state producer Saudi Aramco  on Wednesday gave the clearest sign yet that the world's largest  exporter is trying to compete for crude market share.      "This is a structural change in the oil market, with Saudi  Arabia explicitly stating that they are willing to compete on  price," said Bjarne Schieldrop, chief commodities analyst at SEB  in Oslo.      "I think Brent will fall below $88 before we see the bottom  of the market."        (Reporting by Marc Jones; Editing by Ruth Pitchford)  

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CORRECTED-Sears to sell most of its Sears Canada stake via rights issue

Thu Oct 2, 2014 6:36am EDT

(Corrects paragraph 4 to say Edward Lampert will exercise his rights, not sell shares)

Oct 2 (Reuters) - Sears Holdings Corp said it would sell most of its stake in Sears Canada Inc through a rights issue that would raise up to $380 million ahead of the holiday season.

Sears Holdings held a 51 percent stake in its Canadian unit as of March 13.

Sears Holdings will sell 40 million shares of Sears Canada, after which its stake would fall to about 12 percent, or around 12 million shares.

Edward Lampert, Sears Holdings' chief executive and largest shareholder, will exercise his rights in the offering. (Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Kirti Pandey)

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New Issue- IADB adds 250 bln Indonesian Rupiah to 2018 bond

Thu Oct 2, 2014 6:41am EDT

Oct 2(Reuters) -Following are terms and conditions

of a bond increased on Thursday.

Borrower Inter-American Development Bank

(IADB)

Issue Amount 250 billion Indonesian Rupiah

Maturity Date September 12, 2018

Coupon 7.35 pct

Payment Date October 16, 2014

Lead Manager(s) Citi

Ratings Aaa (Moody's), AAA (S&P),

AAA (Fitch)

Listing London

Full fees Undisclosed

Denoms (M) 10

Governing Law New York

Notes The issue size will total 1.25 trillion

when fungible

Launched under issuer's DIP programme

ISIN XS1106486936

Security details and RIC, when available, will be

on

Customers can right-click on the code for

performance analysis of this new issue

For ratings information, double click on

For all bonds data, double click on

For Top international bonds news

For news about this issuer, double click on the issuer RIC,

where assigned, and hit the newskey (F9 on Reuters terminals)

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UPDATE 2-UK events organiser UBM to buy Advanstar for $972 mln

Wed Oct 1, 2014 6:24am EDT

* Deal makes UBM No.1 in U.S. events market on revenue basis - CEO

* Deal expected to immediately add to earnings

* Expects deal to add 135 mln stg to events revenue in 2015

* Shares fall 4.6 pct, top percentage loser on midcap index (Adds CEO, analyst comments; updates share movement)

By Noor Zainab Hussain

Oct 1 (Reuters) - Communications and events company UBM Plc said it would buy trade show organiser Advanstar Communications for $972 million, becoming the top events organiser by revenue in the United States, but its shares fell on concern it had overpaid.

News that UBM would fund the deal through a 563 million pound ($912 million) rights issue also dampened sentiment.

Reuters reported last month that UBM was looking to buy Advanstar for about $900 million.

Many in the market had thought the company would pay for Advanstar by selling its PR Newswire business, analysts said.

Investec analyst Steve Liechti said the deal was "a big and brave strategic move" for Chief Executive Tim Cobbold, who joined from currency printer De La Rue Plc in May.

"Key questions now relate to the quality and growth potential of the asset acquired given what looks a high price paid," Liechti said in a note.

UBM's shares fell as much as 4.6 percent, making them the top percentage loser on the FTSE-250 midcap index.

Up to Tuesday's close, the company's shares had fallen 11 percent this year, largely due to the pound's strength. About 90 percent of UBM's revenue comes from outside the UK.

UBM said the deal would immediately add to earnings upon completion at the end of the year and add about 135 million pounds to events revenue in 2015.

Liberum analysts said the deal made strategic sense.

"It weights UBM towards North America and away from China, where there have been concerns re competition; it makes it more weighted towards Events, which should drive a re-rating; it should reduce its leverage; and it is accretive," Liberum said in a note.

"...We see management's purchase of Advanstar and its implications as heralding something of a new dawn for UBM."

Advanstar operates 54 trade shows and about 100 conferences annually, including the biannual Magic fashion trade show in Las Vegas, the largest U.S. fashion convention.

Cobbold told Reuters the deal would give UBM a 2 percent share of the fragmented U.S. events market, overtaking Emerald Expositions and Reed Elsevier Plc's exhibitions unit.

The company's events revenue from the United States will increase to just over 40 percent from about 26 percent once Advanstar is absorbed, Cobbold said.

UBM bought Advanstar from hedge fund Anchorage Capital Group and private equity firms Ares Management LP and Veronis Suhler Stevenson. The company has changed hands several times over the years between various private equity firms.

JP Morgan advised UBM on the financial aspects of the deal, while JP Morgan and Credit Suisse are joint brokers and underwriters for the rights issue.

UBM shares were down 4.2 percent at 558.5 pence at 1005 GMT.

(1 U.S. dollar = 0.6173 British pound) (Additional reporting by Karen Rebelo and Richa Naidu in Bangalore; Editing by Sunil Nair and Ted Kerr)

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UPDATE 1-Lacklustre factory data hits world stocks, dollar strong

Wed Oct 1, 2014 6:36am EDT

* Manufacturing data weighs on stocks at Q4 start

* Hong Kong unrest saps risk appetite

* Dollar tops 110 yen for first time in six years (Updates, adds quotes)

By Nigel Stephenson

LONDON, Oct 1 (Reuters) - Stocks worldwide began the fourth quarter on a negative note on Wednesday, as lacklustre economic data and civil unrest in Hong Kong kept investors cautious before a European Central Bank meeting later this week.

The dollar held close to a four-year high, helped by the weak factory activity data, pushing commodity prices lower.

The pan-European FTSEurofirst 300 equity index was down 0.2 percent after final September purchasing manager numbers from France, Germany and the euro zone as a whole underlined the fragility of the European recovery.

The numbers, along with slowing euro zone inflation data on Tuesday, highlighted the divergent monetary policy outlook between the U.S. Federal Reserve on the one hand and the European Central Bank and Bank of Japan on the other.

"Since the Fed meeting on Sept. 17, we've seen a 'risk-off' trade, with the fixed income market playing its role of 'safe-haven' while equities and commodities have been slipping in negative territory," said Ycap Asset Management's head of quantitative strategies in Paris, Gregory Raccah.

The European Central Bank meets on Thursday.

"Once again, the central bank will have to convince investors that it has the firepower to stave off deflation risks. We'll wait for Thursday's ECB meeting before buying the market," said Barclays France director Franklin Pichard.

Manufacturing stumbled across most of Asia in September. The closely watched Chinese PMI stayed stuck at 51.1, only modestly above the 50 level that separates growth from contraction.

MSCI's main index of Asia-Pacific shares outside Japan fell 0.2 percent. In Tokyo, the Nikkei stock index closed 0.6 percent lower. Big Japanese manufacturers were slightly more optimistic in the third quarter, but service-sector sentiment worsened, a central bank survey showed.

Chinese stock markets were closed for a national holiday but investors warily monitored thousands of pro-democracy protesters in Hong Kong, where demonstrations spread.

U.S. shares closed the third quarter on a downbeat note, dragged lower by energy and materials shares as consumer confidence fell in September for the first time in five months and home prices rose less than expected in July.

The dollar, riding high in recent weeks, topped 110 yen for the first time in six years. The Japanese currency was last down 0.1 percent at 109.77 yen.

The euro, which plumbed a two-year low under $1.26 on Tuesday after the euro zone inflation data was seen making ECB monetary stimulus more likely, was down 0.2 percent at $1.2612 .

PAYROLLS

Analysts said U.S. jobs data due on Friday would be crucial for the dollar's near-term prospects.

"Friday's non-farm payrolls will be key, as it could raise rate hike expectations another notch," said Barclays Bank chief Japan FX strategist in Tokyo, Shinichiro Kadota.

Dollar strength and concern over growing supply have weighed heavily on Brent crude oil lately. The Chinese PMI data lifted it towards $95 a barrel on Wednesday. It last traded at $94.90, up 0.2 percent on the day.

"The Chinese data is slightly supportive, but Brent is solidly in a downtrend and that could continue," said Tony Machacek, an oil broker at Jefferies Bache in London.

Falling oil prices have hit Russia's rouble. The currency slipped to 44.43 against a dollar-euro basket at Wednesday's opening, moving beyond the level of 44.40 at which the central bank automatically starts unlimited interventions to defend the currency.

The strong dollar also took its toll on gold. The metal traded at $1,208.40 an ounce, having hit a none-month low on Tuesday. (Additional reporting by Lisa Twaronite in Tokyo and Blaise Robinson in Paris; Editing by Louise Ireland and Crispian Balmer)

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UPDATE 2-France defies EU partners with "no austerity" budget

Wed Oct 1, 2014 6:55am EDT

* France postpones deficit reduction by a further two years

* Watchdog says government may still be too optimistic

* Follows news Italy also to ease deficit-reduction effort

* No immediate comment from European Commission (adds watchdog body's response, other details)

By Leigh Thomas

PARIS, Oct 1 (Reuters) - France laid down the gauntlet to EU partners on Wednesday with a 2015 budget setting out how it would bring its borrowing back to within EU limits two years later than promised, a retreat it blamed on a fragile economy.

The announcement from Paris came hours after news that Italy too planned to ease the pace of painful deficit-reduction steps to try to counter another year of recession.

"We have taken the decision to adapt the pace of deficit reduction to the economic situation of the country," French Finance Minister Michel Sapin told a news conference.

"Our economic policy is not changing, but the deficit will be reduced more slowly than planned due to economic circumstances - very weak growth and very weak inflation."

Under the French budget plan, the public deficit is set to fall from 4.4 percent of output this year to 4.3 percent next year, 3.8 percent in 2016 and 2.8 percent in 2017 - below the EU-mandated threshold of 3 percent.

Previously, France had promised EU partners it would bring its deficit below 3 percent by next year, a deadline that had already been extended from 2013. France's spending watchdog doubted even the new targets could be reached.

"No further effort will be demanded of the French, because the government - while taking the fiscal responsibility needed to put the country on the right track - rejects austerity," the budget statement said.

President Francois Hollande is resisting pressure from some in his Socialist Party to ease off even more emphatically on cutbacks but also has to contend with an approval rating at a record low 13 percent and news a week ago that conservative rival Nicolas Sarkozy, the man he beat in the 2012 election, is making a return to frontline politics.

Sapin, who this month conceded the 2015 deficit target was untenable, reaffirmed forecasts that the euro zone's second largest economy would grow at a modest 1.0 percent next year, rising to 1.9 percent in 2017.

Despite the governemnt's decision to lower its sights, the country's independent public finances watchdog, the High Council of Public Finances, said the revised projections still looked optimistic as far as 2016 and 2017 were concerned.

PUBLIC SPENDING

The government described its effort to shave 50 billion euros off projected public spending volumes between now and 2017 as "unprecedented" - while acknowledging the total volume of public spending would still rise by 0.2 percent over the period.

That would imply public debt ticking up to a peak of 98.0 percent of output in 2016 before a slight fall in 2017. French public spending and the total tax burden - among the highest in the world - would fall only modestly as a result.

The so-called structural deficit, a figure closely watched by EU budget watchdogs as it strips out the effects of the economic cycle, will fall less than hoped by France's partners from 2.2 percent of output in 2015 to 1.4 percent in 2017.

Incoming European Commission President Jean-Claude Juncker is now under pressure to react firmly enough to avoid a further loss of confidence in the bloc's already battered budget rulebook. His options include sanctions including hefty fines.

The European Commission, where Sapin's predecessor Pierre Moscovici has just been named Commissioner tasked with keeping tabs on respect for EU budget rules, declined immediate comment in the wake of the budget bill presentation in Paris.

Advocates of budgetary rigour led by Germany believe the time has come for France to taste some of the fiscal austerity and painful structural reform already undertaken by its southern neighbours in the wake of the 2009-2012 debt crisis.

But Paris can count on allies in Rome, Athens, Dublin, Madrid and elsewhere to support its argument that further austerity would be counterproductive by snuffing out the fragile start of recovery across the euro zone.

Italian Finance Minister Pier Carlo Padoan said on Tuesday he expected a third straight year of recession this year. While Rome would honour a pledge to cut its deficit to the 3 percent EU target in 2014, the aim of bringing the budget into balance in structural terms - adjusted for the effects of the business cycle - would be delayed by a year until 2017, he said.

Hollande has charged Sapin and Prime Minister Manuel Valls with imposing spending caps on individual ministries and Sapin said he would recoup a further 4 billion euros in French public asset sales to pay off debt.

In a bid to return some cash to the pockets of low-earners, the budget will also cancel the existing lowest income tax band - a move to be funded with tax proceeds elsewhere.

Despite its fiscal woes, France continues to lend at historically low rates - the yield on its benchmark 10-year bond was unchanged around 1.289 percent in early Wednesday trade.

In an interview with Les Echos newspaper, former conservative Prime Minister Francois Fillon - a possible presidential candidate in 2017 - warned nonetheless that France was "on the verge of serious financial accident".

For table of main budget elements, click on (Editing by Mark John, Brian Love and Alison Williams)

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UPDATE 1-Euro zone inflation slows in Sept, weakens euro vs dollar

Tue Sep 30, 2014 6:28am EDT

* Monthly headline rate down to 0.3 percent year-on-year

* Core inflation 0.7 pct vs 0.9 in August

* Euro falls against dollar after release (Adds economists' comments)

By Jan Strupczewski

BRUSSELS, Sept 30 (Reuters) - Euro zone inflation slowed further in September on falling prices of unprocessed food and energy, a first estimate showed on Tuesday, sending the euro lower against the dollar on expectations of further European Central Bank policy easing.

Eurostat said consumer prices in the 18 countries sharing the euro rose 0.3 percent year-on-year, slowing from 0.4 percent year-on-year increases in August and July. The September was in line with market expectations, according to polling data.

The ECB wants to keep headline inflation below, but close to, 2 percent over the medium term. The persistently low rate underscores the difficulty of hitting that target in a stagnating euro zone economy.

By 1025 GMT, the euro had fallen against the dollar to 1.2609 from 1.2662 before the release. The FTSE Eurofirst 300 share index of leading companies was up 0.56 percent at 1,378.81.

"With actual output below potential and weak wage growth in many euro zone countries, inflation will remain subdued," said Tomas Holinka, economist at Moody's Analytics.

"The euro area economy stalled in the second quarter and the recovery prospects are fading. With tougher sanctions against Russia, risks are weighted to the downside. The euro zone's weaker than expected performance fuels uncertainty about economic recovery and fears about the threat of deflation," he said.

Unprocessed food prices fell 0.9 percent year-on-year in September and energy was 2.4 percent cheaper.

What the European Central Bank calls core inflation - a measure stripping out these two volatile components - was 0.7 percent year-on-year, slowing down from 0.9 percent in August.

To accelerate price growth, the ECB has cut the cost of borrowing to almost zero and pledged further cheap loans to banks and to buy repackaged debt. ECB President Mario Draghi has emphasised that it could do even more.

But going for full-blown quantitative easing, by adding government bonds to the ECB's shopping list, would be politically difficult because of stiff opposition in Germany.

Draghi is expected to give further details of ECB plans to buy reparcelled debt, known as asset-backed securities, when the bank's governing council meets in Naples on Thursday. Investors do not expect new policy decisions yet, after the bank cut all three of its main interest rates in early September.

Draghi has, in the meantime, sought to put the ball back in the court of governments, saying that the central bank cannot single-handedly turn around the bloc's economy, and countries need to make reforms.

The ECB's job may be made easier by a weakening euro, which has broken below its 2013 lows and is down almost 9 percent from the peak it hit against the dollar in May. (Additional reporting by John O'Donnell in Frankfurt; Editing by Alastair Macdonald and Mark Trevelyan)

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