U.S. appeals judges quiz lawyers on rules for patenting software

By Diane Bartz

WASHINGTON (Reuters) - Lawyers squared off on Friday over U.S. rules for granting patents for software, or if software should be patented at all, in arguments in a case closely watched by Google Inc , Facebook Inc and other technology companies.

The full U.S. Court of Appeals for the Federal Circuit heard arguments in the case, which involves whether patents for a computerized system for exchanging financial obligations are valid. The case has drawn wide interest because it could help determine parameters for software patent protection.

Disagreement was apparent among the 10 judges on the panel, and experts said they expected a divided decision, which could land the case before the U.S. Supreme Court.

The case began in 2007 when Alice Corp of Melbourne, Australia, sued CLS Bank International for patent infringement. Alice is owned in part by National Australia Bank Ltd.

CLS, which runs a foreign-exchange settlement system, argued that the Alice patents were invalid because they were nothing more than an abstract idea.

Under patent law, an abstract idea - such as the idea of a self-driving car - cannot be patented but the engineering that creates a self-driving car can be patented.

Mark Perry, the attorney who argued for CLS Bank, said that the U.S. Patent and Trademark Office initially rejected one patent as too abstract but did approve it after Alice Corp re-wrote it to add the use of a computer.

But in the case of at least one of Alice's claims, an impatient Judge Kim Moore strongly disagreed. "Wow! This is so far from ... an abstract idea!" she said, referring to a portion of one patent.

Adam Perlman, the attorney who argued for Alice Corp, said that the patent should be held valid because a machine performs the function.

But Judge Timothy Dyk pressed on the question of whether the patent was abstract and whether it was obvious. An idea that is an obvious, small improvement is not considered patentable.

Referring to a system of tallying trades done over the course of a day, he suggested that it may be impossible to do such work without infringing a patent.

Patent experts at the hearing expected a divided ruling.

"I think everyone walked out of the room with the thought that there's a real difference of opinion from those judges," said Erika Arner, a patent attorney with Finnegan, Henderson, Farabow, Garrett & Dunner LLP, who is not involved in the case.

In July, a panel of the appeals court agreed with Alice in a 2-1 decision.

Google, Dell Inc and Facebook filed a friend-of-the-court brief criticizing the decision, arguing that patents like Alice's do not innovate enough to deserve patent protection. LinkedIn Corp , Twitter and others agreed.

International Business Machines Corp , on the other hand, filed a brief saying most software inventions qualify for patent protection. IBM, which has topped the list of U.S. patent recipients for 20 years, cautioned the court against creating a strict rule that would further limit protection.

The case comes after two Supreme Court decisions involving similar issues of patent eligibility.

In Bilski v. Kappos, the high court found in 2010 that a business-method patent for guarding against investment risk was an abstract idea and could not be patented. Last March, in Mayo v. Prometheus, the court ruled that a company could not patent a diagnostic process involving blood tests because observations about natural phenomena cannot be protected.

The case is CLS Bank International et al v. Alice Corporation Pty Ltd, U.S. Court of Appeals for the Federal Circuit, No. 11-1301.

(Reporting By Diane Bartz and Erin Geiger Smith)

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Club owners should be allowed to splash cash: Mancini

MANCHESTER, England (Reuters) - Soccer club owners should be allowed to spend as much money as they want, Manchester City manager Roberto Mancini said as he gave new financial fair play rules a big thumbs down.

The Premier League announced measures on Thursday that will mean top flight clubs could be docked points if they fail to comply with limits on financial losses and curbs on increases in player wages.

"No, I do not agree (with financial fair play rules) because if I'm a rich man I want to spend all my money on my team, it's my job. I do not agree with this in general," Mancini told a news conference.

Given the Italian is manager at the world's richest club, which has been pumped with exactly the kind of quickfire investment that would not be allowed under the new regulations, he can hardly be expected to love the idea of spending cuts.

"It's life," he replied when asked if clubs should be allowed to spend what they liked.

What irritates Mancini - and what he thinks needs some regulation - is the way transfer fees for players are bumped up as soon as they are courted by wealthy clubs such as City.

"Every time Manchester City moves to buy a player if this player is valued at 10 million, for Manchester City (clubs) ask 30 million," he said.

"Is this correct? I think there should be other rules for this."

City's rise to the top has been bankrolled by Abu Dhabi's Sheikh Mansour bin Zayed Al Nahyan, who took over in 2008 and has spent hundreds of millions of pounds on players such as Sergio Aguero, Yaya Toure, David Silva and Carlos Tevez.

The big spending has yielded trophies with the club lifting the FA Cup in 2011 before winning the Premier League on goal difference from neighbours Manchester United last season.

(Reporting by Sonia Oxley; Editing by Pritha Sarkar)

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U.S. clears Boeing 787 for test flights, as delays loom

By Jim Wolf and Alwyn Scott

WASHINGTON/NEW YORK (Reuters) - U.S. agencies cleared Boeing Co to restart test flights of its grounded 787 Dreamliner in order to get more data on potentially faulty batteries, but they also demanded a closer look at how the batteries were approved, which may delay resuming delivery of Boeing's newest aircraft.

The 50 Dreamliners in service were grounded worldwide on January 16, after a series of battery incidents, including a fire on board a parked 787 in Boston and an in-flight problem on another plane in Japan. The groundings have cost airlines tens of millions of dollars, with no end in sight.

Late on Thursday, the U.S. Federal Aviation Administration said it would allow test flights, under more stringent rules, to monitor the batteries in flight. That followed an earlier, one-time flight to move a 787 from Texas to Washington state.

Earlier in the day, Deborah Hersman, head of the U.S. National Transportation Safety Board, said regulators must review the "special conditions" used in approving lithium-ion battery technology on the Dreamliners.

"There have now been two battery events resulting in smoke, less than two weeks apart, on two different aircraft," Hersman said. "The assumptions used to certify the battery must be reconsidered," she added.

Boeing investors took the news in stride, pushing shares slightly higher on the day. Analysts said the market was focusing on the wrong issue: the short-term question of fixing the battery, versus the longer-term prospect that the entire battery system might need to be approved again.

If the battery needs to be re-certified, "you're talking about changes to the 50 they've delivered, significant amount of engineering commitment on the 787-9. I see this as still having a significant amount of question marks," said Ken Herbert, an analyst at Imperial Capital in San Francisco.

Boeing shares are 3 percent higher since the 787 was grounded on January 16, despite the headaches it has caused the planemaker and the demands for compensation.

Even short sellers - investors who seek out shares that are likely to fall - have largely left the stock alone. According to Markit's Data Explorers, just 0.3 percent of shares available for borrowing were being used for short bets as of Wednesday.

"The market is focusing on the battery short circuit, which implies a simple fix," said Carter Leake, analyst at BB&T Capital Markets. "But they're missing the much bigger issue, which is the questioning of the certification process. Hersman is basically saying we're questioning the original certification altogether."

TIME TO RECONSIDER

The NTSB's Hersman mentioned nine so-called special conditions the FAA set in 2007 in approving Boeing's use of the battery, and its plan to allow the battery to burn itself out if it caught fire, because the risk was considered extremely remote.

Boeing's certification tests put the chances of smoke from a 787 battery at one in every 10 million flight hours.

"The 787 fleet has accumulated less than 100,000 flight hours yet there have now been two battery events," Hersman said.

The special conditions and the design assumptions are part of a broad review that the FAA launched last month, before the second battery incident. Hersman said the NTSB was not yet making any further recommendations.

Hersman also said on Thursday that the NTSB has isolated the source of a January 7 battery fire in Boston to one of the battery's eight cells, but still has not found the root cause of the fire.

The NTSB plans to issue an interim factual report in 30 days, though the decision of returning the plane to regular flight rests with the Federal Aviation Administration.

In a joint statement, Transportation Secretary Ray LaHood and FAA Administrator Michael Huerta reiterated that the FAA's comprehensive review was ongoing.

"We must finish this work before reaching conclusions about what changes or improvements the FAA should make going forward. The leading experts in this field are working to understand what happened and how we can safely get these aircraft back into service," they said.

In the meantime, analysts have expressed concerns about a build-up of inventory, soaking up several billion dollars of cash, as Boeing continues to produce the 787.

"For Boeing, it is encouraging to see that there has been concrete progress in the investigation but the (NTSB's) point that there is still a long road ahead ultimately appears more important," said Nick Cunningham, aerospace analyst at UK-based Agency Partners, an independent research firm.

'FERRY' FLIGHT

As Hersman was addressing the news conference in Washington DC, the first 787 flight since mid-January left Texas, with no commercial passengers and a minimum crew, and landed safely in Washington with no visible issues. Ultimately scheduled for delivery to China Southern Airlines <600029.SS>, the aircraft has not yet been handed over to the customer.

The FAA had approved the single flight separately from Boeing's request to run a series of test flights, placing a number of conditions, mostly having to do with testing and monitoring the plane's battery.

Later in the day, the FAA cleared Boeing to resume test flights, stating that their primary purpose "will be to collect data about the battery and electrical system performance while the aircraft is airborne."

Boeing said it would resume limited 787 test flights soon, without specifying a date, adding that it was "confident that the 787 is safe to operate for this flight test activity."

While the investigation continues, Boeing is pursuing a number of ways to mitigate and contain a fire, if one starts in the batteries, one source familiar with the probe told Reuters. Three or four approaches would be pursued to ensure the batteries did not breach their containment systems, even if they caught fire, said the source.

(Additional reporting by Tim Hepher in Paris, Mari Saito and Tim Kelly in Tokyo, David Gaffen in New York and Bill Rigby in Everett, Washington; Writing by Ben Berkowitz; editing by Edward Tobin, Carol Bishopric and Gunna Dickson)

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Asian shares capped after Draghi, China data in focus

By Chikako Mogi

TOKYO (Reuters) - Asian shares were capped on Friday after European Central Bank President Mario Draghi noted risks still facing the euro zone economy, turning investor sentiment more cautious ahead of Chinese trade data for January due out during the session.

China's economic rebound should show signs of strengthening on Friday with the trade data for January due during the day, although distortions caused by the Lunar New Year holiday will make it difficult to gauge momentum.

The euro was off its two-week lows hit the previous session as investors took Draghi's comments as signalling concerns about the euro and Europe's growth outlook, boosting the dollar to a one-month high against a basket of key currencies.

The MSCI's broadest index of Asia-Pacific shares outside Japan edged down 0.1 percent, hovering near a one-week low. The index rose to a 18-month high on Monday. U.S. stocks edged lower while disappointing results from French drugmaker Sanofi sent European shares down to 2013 closing lows.

Australian shares inched up 0.2 percent while South Korean shares opened down 0.1 percent.

Japan's Nikkei stock average opened 1.6 percent lower. A pause in yen selling has prompted investors to take profits after the index surged to its highest level since October 2008 on Wednesday.

"The market is prone to profit-taking as there needs to be more positive catalysts to rise above the recent high," said Hiroichi Nishi, an assistant general manager at SMBC Nikko Securities. "But the massive trading volume posted yesterday suggests that the Japanese market is still in the spotlight where both foreign investors and retail investors are willing to invest."

The ECB kept interest rates at a record low 0.75 percent at its policy meeting on Thursday. Draghi said the ECB will monitor the economic impact of a strengthening euro, feeding expectations the currency's climb could open the door to an interest rate cut.

While Draghi said the exchange rate was not a policy target but is important for growth and price stability, he also noted the euro's appreciation was a sign of returning confidence in the currency.

Spain sold more debt than planned on Thursday, auctioning over 18 percent of its full-year medium- and long-term funding target. The strong demand indicated easing worries about Madrid's financing ability despite political uncertainty over a corruption scandal.

The euro steadied around $1.3390, after slumping to a two-week low of $1.33705 on Thursday, and away from a 14-1/2-month high against of $1.3711 hit last week.

The yen remained near lows against the dollar and the euro.

Data showed on Friday Japan logged a current account deficit for a second straight month in December, resulting in its smallest annual surplus on record in 2012, with evidence of deteriorating trade balances supporting the yen's weakening trend.

The dollar was steady around 93.64 yen after reaching 94.075 yen, its highest since May 2010 on Wednesday. The euro also steadied at 125.35 yen, having hit its strongest since April 2010 of 127.71 yen on Wednesday.

"Currencies are increasingly becoming part of the policy debate...In the case of the EUR, we believe that the bullish 'overshooting' trend will remain intact as ECB policy continues to promote an asset market friendly environment," Morgan Stanley said in a note.

Morgan Stanley added that the anticipation of the Bank of Japan taking bolder easing steps is set to keep the weak yen trend going, supporting global risk appetite.

U.S. crude futures were barely changed at $95.80 a barrel after falling on Thursday amid pressure from growing domestic stockpile in the Midwest.

Brent crude oil rose to a near five-month high above $117 a barrel on Thursday after Iran rejected calls for direct talks with the United States over Tehran's nuclear program.

(Additional reporting by Ayai Tomisawa in Tokyo; Editing by Eric Meijer)

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Iran's Ahmadinejad seeks strategic axis with Egypt

By Tom Perry

CAIRO (Reuters) - President Mahmoud Ahmadinejad, on the first visit to Cairo by an Iranian leader in more than three decades, called for a strategic alliance with Egypt and said he had offered the cash-strapped Arab state a loan.

In a step by Iran to advance ties that were broken in 1979, the Iranian foreign minister said Egyptian tourists and merchants would no longer require visas to visit, Egypt's state news agency reported.

The effort drew a cool response, however. Shi'ite Islamist Iran is still looked on with suspicion by many in Egypt, a predominantly Sunni Muslim nation. Points of contention include Iran's support for Syrian President Bashar al-Assad and its policies elsewhere in the Arab world.

Ahmadinejad said outside forces were trying to prevent a rapprochement between the Middle East's two most populous nations, at odds since Iran's 1979 Islamic revolution and Egypt's signing of a peace treaty with Israel in the same year.

"We must all understand that the only option is to set up this alliance because it is in the interests of the Egyptian and Iranian peoples and other nations of the region," the official MENA news agency quoted him as telling Egyptian journalists.

The two countries have not restored diplomatic ties since Egypt overthrew its long term leader Hosni Mubarak in 2011, but its first Islamist president, Mohamed Mursi, gave Ahmadinejad a red-carpet welcome on Tuesday to a summit of Islamic nations.

"There are those striving to prevent these two great countries from coming together despite the fact that the region's problems require this meeting, especially the Palestinian question," Ahmadinejad said.

Egypt's foreign minister played down the significance of the visit, telling Reuters the Iranian leader was in Cairo chiefly for the Islamic summit beginning on Wednesday, "so it's just a normal procedure. That's all."

He had earlier reassured Gulf Arab countries that Egypt would not sacrifice their security.

Egypt's leading Sunni Muslim scholar scolded Ahmadinejad on Tuesday when he visited the historic al-Azhar mosque and university over Tehran's attitude to its Gulf Arab neighbours and attempts to spread Shi'ite influence in Sunni countries.

In his meeting with Egyptian reporters, MENA said Ahmadinejad denied accusations Iran was interfering in Bahrain, where a Shi'ite majority lives under minority Sunni rule.

Three Egyptians and a Syrian were detained on suspicion of trying to attack the Iranian president at another mosque, security sources said. They were held overnight but released on bail of 500 Egyptian pounds each on Wednesday.

Video footage showed what appeared to be a bearded man trying to throw a shoe at Ahmadinejad as he was mobbed by wellwishers on leaving the Hussein mosque. The president was not hit but was hustled to his car by security men, stopping to wave before he was driven away.

The security sources said the three Egyptians held were all members of the al-Gamaa al-Islamiya, a hardline Islamist group that took up arms against the state in the 1990s but has moved into mainstream politics since Mubarak was toppled.

In the Arab world, throwing a shoe is a serious insult.

Al-Ahram daily quoted Ahmadinejad as saying in an interview that Iran had offered to lend money to Egypt despite being under international economic sanctions over its nuclear programme.

"I have said previously that we can offer a big credit line to the Egyptian brothers, and many services," he said.

He did not say if there had been any response.

The president said the Iranian economy had been affected by sanctions but it is a "great economy" that was witnessing "positive matters", saying exports were increasing gradually.

The United States and its Western allies have sought to choke off Iran's vital oil exports by embargoing imports from the Islamic republic and cutting its access to shipping, insurance and finance.

Egypt disclosed on Tuesday that its foreign reserves had fallen below the $15 billion level that covers three months' imports despite recent deposits by Qatar to support it.

Tourism has been badly hit by unrest since the uprising that toppled the authoritarian Mubarak, and investment has stalled due to the ensuing political and economic uncertainty.

Ahmadinejad said there had been scant progress on restoring ties between the two countries.

"No change happened in the last two years but discussions between us developed and grew, and His Excellency President Mohamed Mursi visited Iran and met us, as he met the Iranian foreign minister. And we previously contacted Egypt to know about what is happening with Syrian affairs," he said.

One persistent obstacle to ties in Cairo's eyes was the naming of a street in Tehran after an Egyptian Islamist militant who led the 1981 assassination of President Anwar Sadat, who signed the treaty with Israel.

"On the question of the street name or its removal, these are matters that will be dealt with gradually," Ahmadinejad said.

(Writing by Paul Taylor; Editing by Philippa Fletcher and Angus MacSwan)

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U.S. singer Rihanna attends boyfriend Brown's community service hearing

By Eric Kelsey

LOS ANGELES (Reuters) - A Los Angeles judge on Wednesday ordered a new report on singer Chris Brown's community service after prosecutors said he cut corners while fulfilling work requirements imposed after his 2009 assault on girlfriend Rihanna.

Rihanna accompanied Brown, 23, to court in a show of support for the man who pleaded guilty to punching and beating her four years ago. The couple have recently rekindled their romance.

Brown is serving five years probation and last year was deemed by the Los Angeles court to have completed 180 days of community service and domestic violence counseling.

During Wednesday's brief hearing, Brown sat expressionless with his hands folded in a dark sport coat. Rihanna sat behind him dressed in a white top and black pants.

Los Angeles Superior Court Judge James Brandlin ordered Brown to meet with his probation officer to address claims by prosecutors that his community service records contain "significant discrepancies, indicating, at best, sloppy documentation and, at worst, fraudulent reporting."

The "Don't Wake Me Up" singer was ordered back to court on April 5 at which time Brandlin will set a date for another hearing on whether or not to revoke his probation.

Brown's community service involved tasks like cutting grass, picking up trash and removing graffiti. He was allowed to complete it in his home state of Virginia.

But Los Angeles Deputy District Attorney Mary Murray this week accused Virginia authorities of poor management of the singer's service and records, and said his community service case should be transferred to Los Angeles.

"Frankly, I'm a little disturbed how the (district attorney) handled this," Mark Geragos, Brown's attorney, told the judge on Wednesday.

Geragos had previously termed the allegations "scurrilous, libelous and defamatory."

(Reporting by Eric Kelsey; Editing by Jill Serjeant and Stacey Joyce)

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Asian shares rise on positive euro zone data

By Chikako Mogi

TOKYO (Reuters) - Asian shares recovered on Wednesday as solid euro zone data calmed nerves jarred by potential political turmoil derailing the region's efforts to resolve its debt crisis, while the prospect of a dovish new governor for the Bank of Japan weakened the yen.

The MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.3 percent after falling 0.8 percent the day before.

As prices approached their highs, trade became choppy as investors sought to book profits, but analysts and traders say any dip was likely to be seen as a chance to buy back into the market. The pan-Asian index scaled a 18-month high on Monday.

Australian shares jumped 0.8 percent and South Korean shares opened up 0.3 percent after slipping for a fourth straight day to a two-month closing low on Tuesday.

Data showed on Tuesday the vast U.S. services sector extended a three-year expansion in January, while business activity in the euro zone, Markit's euro zone composite PMI, climbed to a 10-month high in January.

The Standard & Poor's 500 Index and the Nasdaq Composite Index gained over 1 percent, recouping most of their losses after a sharp sell-off the previous session.

Japan's benchmark Nikkei stock average opened up 1.7 percent after closing down 1.9 percent to snap a five-day winning streak the day before. Nikkei hit a 33-month high on Monday.

Yen selling resumed after Bank of Japan Governor Masaaki Shirakawa said he would step down on March 19, three weeks earlier than the official end of his five-year term, leaving at the same time as his two deputies, and raising the prospect that the next BOJ governor will more readily adopt the expansionist monetary policy demanded by Prime Minister Shinzo Abe.

"The Bank of Japan is about to get a lot more dovish, and sooner than previously thought," said Christopher Vecchio, a currency analyst at DailyFX.

Early on Wednesday, the dollar touched 93.79 yen to its highest since May 2010, while the euro also rose to 127.43 yen, its loftiest since April 2010. The Aussie reached a 4-1/2 year peak around 97.42 yen. The pound touched a 3-year high near 147.25 yen.

The euro drew support from growing confidence in the region's economy and improving funding conditions for deeply-indebted euro zone members.

News the European Central Bank's balance sheet fell to an 11-month low of 2.8 trillion euros as markets unwound some of the ECB's crisis funding measures underpinned the euro, coming as it does in stark contrast to the U.S. Federal Reserve and the BOJ which keep expanding asset buying.

"Flows matter more than stock in currency markets when comparing central bank balance sheets...highlighting the euro's outperformance over the last few months," said Ashraf Laidi, chief global strategist at City Index, in a note to clients.

The euro was steady at $1.3578, still below Friday's 14-1/2-month peak of $1.3711, but above a key technical support of its 14-day moving average at $1.34653.

The ECB is expected to keep interest rates unchanged at its policy meeting on Thursday, but its president may face a grilling over an Italian banking scandal.

Spanish and Italian yields fell on Tuesday after jumping on worries over a corruption scandal in Spain and polls showing Italy's former prime minister Silvio Berlusconi regaining ground before elections this month.

Brent crude hit a 20-week high on Tuesday on heightening demand prospects after positive economic data and strong corporate earnings reports. U.S. crude was barely changed at $96.65 a barrel.

(Additional reporting by Ian Chua in Sydney; Editing by Eric Meijer)

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U.S. deficits to shrink through 2015, but debt to deepen: CBO

By David Lawder

WASHINGTON (Reuters) - The U.S. budget deficit will drop below $1 trillion this year for the first time during Barack Obama's presidency, the Congressional Budget Office said on Tuesday, but it warned that debt will swell to unsustainable levels without further action by lawmakers.

CBO forecast that the deficit for fiscal 2013, which ends September 30, will shrink slightly to $845 billion after four straight years above $1 trillion. The reason is an improving economy and higher taxes paid by wealthy Americans.

The CBO analysis, which will feed into Congress' bitter debate over how to tame deficits, assumes that $85 billion in automatic spending cuts will launch as scheduled on March 1.

It said the fiscal tightening from those across-the-board cuts and from higher taxes will slow economic growth to an anemic 1.4 percent by the end of 2013, causing the unemployment rate to edge higher to 8.0 percent by then from about 7.9 percent currently.

The analysis is the first from the non-partisan budget agency to incorporate the New Year's deal to avert the "fiscal cliff," which restored pre-2001 tax rates on income above $450,000 for couples and let a temporary payroll tax reduction expire. The automatic spending cuts were only delayed for two months until March 1.

But after absorbing these headwinds, the economy will regain momentum in 2014 and fill federal coffers at a faster pace, even without further spending cuts or tax hikes, CBO said. It forecast a $616 billion deficit in fiscal 2014 and a $430 billion deficit in fiscal 2015, equivalent to 2.4 percent of U.S. gross domestic product at that time, a level that many economists view as sustainable.

But deficits will rise steadily from mid-decade, nearing $1 trillion again by 2023, according to the forecast. The 10-year cumulative deficit is forecast at $6.958 trillion.

"Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt," the CBO said in the report.

DEBT LOAD MOUNTS

The CBO warned that U.S. debt held by the public would continue to mount, staying at the highest levels as a percentage of GDP since about 1950 through the next decade, reaching 77 percent of GDP by 2023.

It argued that this would crowd out private investment and seriously limit lawmakers' flexibility to deal with challenges such as a new recession or a future war.

"Such a large debt would increase the risk of a financial crisis, during which investors would lose so much confidence in the government's ability to manage its budget that the government would be unable to borrow at affordable rates," the CBO said.

Republicans seized upon the report as evidence that their worst fears -- a European-style debt crisis - will come true without deep spending cuts to expensive health care programs such as Medicare and Medicaid.

"The CBO's report is yet another warning that we need to get spending under control. The deficit is still unsustainable," Paul Ryan, the House Budget Committee Chairman and former Republican vice presidential candidate, said in a statement.

"By 2023, our national debt will hit $26 trillion. We can't let that happen. We need to budget responsibly, so we can keep our commitments and expand opportunity," Ryan said.

Democrats put the emphasis on the progress made in reducing deficits and in fostering economic recovery.

"The report confirms that the economy has made important progress over the last few years, but there is clearly more to do," said Representative Chris Van Hollen, the top Democrat on the House Budget Committee. "Our first priority must be putting Americans back to work, but unfortunately, congressional Republicans have blocked progress at every turn.

The report comes as President Barack Obama called for another temporary delay in the automatic spending cuts, an overture that was quickly rebuffed by House Republicans.

If Congress were simply to cancel the cuts with no savings to offset them, that would add about $1.2 trillion to the cumulative projected 10-year deficit, pushing it to over $8 trillion.

Republicans in the House of Representatives are preparing a budget that aims to achieve balance within 10 years - a phenomenon not seen since 2001.

In a separate report, CBO said that would require about $4 trillion in additional fiscal tightening through tax hikes, spending cuts or both over the next decade -- while leaving in place or replacing the automatic sequester cuts.

It forecast that if $4 trillion in additional 10-year budget savings were achieved, output would be reduced by 0.6 percentage point in 2014 compared with its current-law "baseline." But it would add 1.7 percentage points to growth in 2023 by reducing debt service costs and freeing up investment capital.

A more modest deficit reduction plan of $2 trillion also would have some near-term pain and long-term gain, reducing 2014 growth by 0.3 percentage point, while adding 0.9 percentage point to 2023 growth.

FED MAY RUN DRY

The CBO also forecast that a major cash cow for the government in recent years - the Federal Reserve - could run dry as a revenue source in about five years.

Flush with earnings from the massive bond holdings it has accumulated to hold down interest rates, the Fed is expected to contribute some $95 billion a year to federal coffers through 2016. But these will drop off quickly as the U.S. central bank unwinds its holdings and takes some capital losses as rates rise, CBO says. Such remittances are projected to fall to zero between 2018 and 2020, resuming again in 2021 at lower levels.

Interest rates for benchmark 10-year U.S. Treasury notes will average 2.1 percent this year and stay below 3 percent in 2014, but will start to rise thereafter, averaging 4.5 percent in the 2015-2018 period, CBO projects.

(Reporting by David Lawder; Editing by Chizu Nomiyama, Fred Barbash, Dan Grebler and Bob Burgdorfer)

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Rip out Guantanamo microphones to prevent eavesdropping, judge says

By Jane Sutton

GUANTANAMO BAY U.S. NAVAL BASE, Cuba (Reuters) - A military judge on Monday suggested ripping out the defense table microphones to ease concerns that intelligence agents could be eavesdropping on confidential attorney-client conversations in the Guantanamo war crimes tribunal.

The judge also ordered that doctors examine Saudi defendant Abd al Rahim al Nashiri to determine whether his treatment in CIA custody had left him mentally competent to stand trial on charges of orchestrating a deadly attack on a U.S. warship.

The developments signaled further delays in the attempt to prosecute Nashiri, an alleged al Qaeda chieftan accused of directing suicide bombers to ram a boat full of explosives into the USS Cole off Yemen in 2000.

The attack killed 17 U.S. sailors and Nashiri could be executed if convicted of charges that include murder and attempted murder.

A new round of pretrial hearings in the case began on Monday at the Guantanamo Bay U.S. Naval Base in Cuba, where Nashiri was transferred in 2006 after being held for four years in secret CIA prisons.

The hearing was recessed for three hours to give Nashiri's lawyers time to consult their bosses and bar associations about whether it would be an ethical violation for them to proceed without knowing who might be listening to confidential conversations with their client.

The issue arose after a revelation last week that someone outside the courtroom had briefly cut the closed-circuit feed that provides sound and video to public viewing areas during a pretrial hearing for five prisoners accused of plotting the September 11 hijacked plane attacks on the United States in 2001.

The feed operates on a 40-second delay and a court security officer seated beside the judge has a button allowing him to stop it when secret information is disclosed.

The judge, Army Colonel James Pohl, was furious that an entity outside the courtroom had the ability to close the hearing to the public and ordered the outside kill switch disabled. Prosecutors said it was dismantled during the weekend.

The delayed feed is used for all defendants previously held in secret CIA custody. The judge did not identify the outside monitors but said last week it was an agency that originally classified information pertaining to the case as "top secret."

Even if the outside monitors could no longer cut the feed, Nashiri's military lawyer, Navy Lieutenant Commander Stephen Reyes, questioned whether they had the ability to listen to whispered conversations with his client in the courtroom or during meetings elsewhere.

Pohl said interfering in the attorney-client relationship would be "a serious matter generally deserving serious remedies" but that the defense had merely raised suspicions without offering any proof of a breach.

When the hearing resumed, they offered possible proof.

Defense lawyers said they had conducted a test and found that even when their defense table microphones were turned off, other nearby microphones picked up enough sound for stenographers to hear their conversations and include them in the transcript.

"The courtroom is a huge listening device," defense lawyer Rick Kammen said.

Reyes said "if it is the CIA that is conducting the listening, this is the same organization that detained and tortured Mr. al Nashiri. "We can't just say, 'Ignore the man behind the curtain.' This is an ethical issue."

The CIA has acknowledged that interrogators threatened to rape Nashiri's mother, subjected him to the simulated drowning technique known as waterboarding and threatened him with a gun and a power drill while he was naked and shackled.

The CIA also admitted destroying videotapes of the sessions.

Pohl suggested removing the microphones from the defense area of the courtroom and requiring the lawyers to use the courtroom podium if they wanted to speak publicly.

"Unless somebody can explain to me why they're absolutely necessary then let's just get rid of them. Problem solved," he said.

The judge also granted a prosecution request for doctors with top-secret security clearances to examine Nashiri to determine whether he was mentally competent to assist in his defense.

Defense lawyers said they did not intend to offer an insanity defense. But prosecutors said they were bound by the tribunal rules to ask that Nashiri undergo a mental exam once the defense said he suffered from post-traumatic stress disorder "as a result of torture" in the CIA prisons.

Nashiri could not be tried if the doctors find him mentally incompetent. But defense lawyers hope to spare him from the death penalty by showing he was traumatized by his CIA treatment, which could be considered a mitigating factor at sentencing.

"This guy is really, really damaged because of what the United States did to him," Kammen said.

(Editing by Kevin Gray and Christopher Wilson)

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Asian shares drop on euro zone worry, soft U.S. data

By Chikako Mogi

TOKYO (Reuters) - Asian shares eased on Tuesday as investors booked profits from recent strong rallies in the face of weak U.S. data and worries that a potential political shake-up could disrupt the eurozone's efforts to resolve its debt crisis.

The MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.3 percent, dragged lower by a 0.5 percent fall in Australian shares, which scaled a 21-month high on Friday. A fall in overnight U.S. equities on discouraging U.S. factory orders and euro zone jitters spurred more profit-taking after a 6 percent rally so far this year.

South Korean shares opened down 0.8 percent while Japan's benchmark Nikkei stock average also opened 1.4 percent lower, after scaling a 33-month high on Monday.

Spain's opposition party on Sunday called for Prime Minister Mariano Rajoy to resign over a corruption scandal, an allegation Rajoy denies, pushing Spanish 10-year bond yields to six-week highs.

In Italy, 10-year Italian government bond yields hit their highest since late December, as chances of former prime minister Silvio Berlusconi regaining power raised worries about Rome's ability to fix its fiscal problems.

"Markets have been increasingly comfortable with European risks over the past few months and are largely not positioned for this increase in political problems. The outcomes in Spain and Italy are far from certain and may represent stumbling blocks for further expansion in risk appetite," Barclays Capital said in a research note.

The euro traded at $1.3507, retreating further from Friday's 14-1/2-month peak of $1.3711, ahead of the European Central Bank's policy meeting on Thursday.

U.S. stocks slid on Monday, leaving the Standard & Poor's 500 Index at its worst day since November after the index rose just 60-odd points away from its all-time intraday high of 1,576.09 on Friday. European shares plunged on Monday as investors locked in profits on indexes trading close to multi-year highs.

The yen also took a breather, firming from lows against a broad range of currencies.

The dollar was down 0.2 percent to 92.20 yen after scaling its highest since May 2010 of 93.185 on Monday, while the euro fell 0.3 percent to 124.52 yen, off its loftiest since April 2010 of 126.97 hit on Friday.

On Monday, the yen plunged to its lowest since August 2008 against both the Australian dollar, at 97.07 yen, and the New Zealand dollar at 78.80 yen. The Australian dollar traded at 96.28 yen and the New Zealand dollar was at 77.70 yen on Tuesday.

"Markets are broadly undergoing a correction and the euro is definitely facing profit-taking, given the pace of its climb. Worries about the euro zone debt crisis always remain a downside risk for the euro, and could push it lower to $1.32-$1.33," said Hiroshi Maeba, head of FX trading Japan at UBS in Tokyo. "But the trend is still upward for dollar/yen, cross/yen. The dollar could reach 95 yen by the end of the month."

As long as markets hold out expectations for the Bank of Japan to implement aggressive monetary easing to beat decades of deflation in Japan, the yen will stay pressured. Any correction to the dollar's rise against the yen was also be seen as shallow, with many traders and analysts seeing a firm floor around 87-88 yen.

The Reserve Bank of Australia will announce its rate decision at 0330 GMT. The RBA is likely to leave its cash rate steady at 3.0 percent, having just cut in December, but any surprise move could expose the Australian dollar to sharp swings. The Aussie was at $1.0442.

U.S. crude futures eased 0.2 percent to $96 a barrel.

(Editing by Eric Meijer)

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Texas man arraigned on murder charges in shooting of 'American Sniper'

REUTERS - The man accused of gunning down former U.S. Navy SEAL Chris Kyle, a prominent military sniper, and a second man at a Texas shooting range has been arraigned on two counts of capital murder, the Texas Department of Public Safety said on Sunday.

Eddie Ray Routh, 25, was accused of killing Kyle, 38, and Chad Littlefield, 35, a neighbor of Kyle, on Saturday afternoon at the Rough Creek Lodge, about 50 miles southwest (80 km) of Fort Worth, the department said.

"They were shot at close range," said department spokesman Sergeant Lonny Haschel said.

Kyle, considered one of America's deadliest snipers after killing 160 people during his career as U.S. Navy SEAL sniper, wrote the book "American Sniper" about his military service from 1999 to 2009.

Routh, described in local media reports as a former Marine who suffered from post traumatic stress syndrome (PTSD), was arrested at his Lancaster, Texas home several hours after the shooting, having led police on a chase in his pickup truck.

"He was taken into custody after a brief pursuit," Haschel said.

According to a posting on a website run by members of the Special Operations Forces community, Kyle had been volunteering his time to help Marine Corps veterans suffering from PTSD and mentoring them.

"Part of this process involved taking these veterans to the range," said the posting on SOFREP.com.

WFAA-TV in Dallas-Fort Worth reported that the two men had taken Routh to the shooting range for the day to help him deal with his PTSD.

Routh was arraigned at the Lancaster municipal jail on Saturday on two counts of capital murder, a spokesman for the department of public safety said. The Erath County Sheriff's Office planned a news conference later on Sunday.

"It just comes as a shock and it's staggering to think that after all Chris has been through, that this is how he meets his end, because there are so many ways he could have been killed" in Iraq, Scott McEwen, who wrote the book with Kyle, told Reuters.

Kyle served four combat tours of duty in Iraq and elsewhere, and he won two Silver Stars and five Bronze Stars for bravery, according to his book.

After leaving the Navy, Kyle founded Craft International, a firm that provided combat and weapons training to military, police, corporate and civilian clients.

Kyle is the co-author of another book coming out in May titled "American Gun - A History of the U.S. in Ten Firearms."

In the wake of the slayings of 20 children and six adults at a school in Newtown, Connecticut in December, Kyle was interviewed in January about rising calls for curbing U.S. gun violence. He told the website guns.com he favored arming teachers who have been screened and trained and spoke against restrictions on gun owners.

(Reporting by Barbara Goldberg; Editing by Ellen Wulfhorst and Will Dunham)

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Left should focus on issues of poorest of the poor: Amartya

Kolkata, Feb 3 (PTI) Nobel laureate Amartya Sen today urged the Left parties to raise the issue of sanitation and other basic needs of the poorest of the poor, apart from the issues of food security and LPG price hike. "I am sometimes accused of being critical of the Left parties. I am particularly upset, when they go after the issues of cooking gas (price hike) and other issues. These are the issues of the middle class. But what about the issues of the poorest of the poor?" Sen asked while addressing a session at the Kolkata Literary Meet. He also said that when newspaper headlines were splashed last year with stories of a major power blackout in north India, many missed out on the fact that for a third of the population, "it was not a blackout on that particular night, but an everyday reality". Professor Sen added that he felt particularly upset with the Left parties protesting on issues such as cooking gas and electricity prices and 'aam admi' pursuits rather than the broader picture. 48 per cent of the households in India have no toilets and people have to resort to open defecation, a problem that does not get addressed. The figure for China was one per cent while that of Bangladesh was between 9 and 10 per cent, he said. Earlier on several occasions, Sen has raised the issues of open defecation and child malnutrition in the country. PTI PNT NIK AVT

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Myanmar to hold peace talks in China with Kachin rebels

YANGON (Reuters) - The Kachin Independence Army (KIA) said on Saturday it had agreed to hold talks with Myanmar's government in China next week, to try to end stubborn conflict with the military that has intensified in the past two months.

The KIA said in a statement the Chinese government "will take a role as a witness and mediate during the meeting" adding that it urged "the Kachin community, our friends and supporters around the world to pray for our leaders."

The meeting will be held on Monday in the Chinese border town of Ruili, which has hosted three rounds of talks since a 17-year ceasefire broke down in June 2011. The two sides have met at least eight times but have failed to agree on terms for a permanent truce.

The talks could reduce tensions in a conflict that has displaced tens of thousands of civilians and seen an unprecedented use of fighter jets and helicopter gunships, an escalation that has worried China, which borders Myanmar.

A lasting truce could be hard to reach, however, and would require at least one party to soften its stance. The government first wants a ceasefire deal signed, which the KIA has refused to do until concrete terms of a political deal are offered.

The fighting has also cast doubts over whether President Thein Sein, a former general, has full control over the country's military. He has issued repeated calls for troops not to attack the KIA, which the rebels, witnesses and independent journalists say the army has not heeded.

In an announcement on state-owned MRTV on Friday, the government said it was preparing to hold talks with the KIA and its political arm, the Kachin Independence Organisation (KIO). Other ethnic minority groups that had already agreed truces would help facilitate dialogue.

Since late 2011, Myanmar has agreed ceasefires with 10 rebel groups, including the Karen National Union (KNU), which had fought the central government since 1949 in what was the world's longest-running separatist insurgency. The conflict with the KIA is the only one yet to be halted.

Representatives of two of those groups would assist in Monday's talks, a government negotiator told Reuters, requesting anonymity. He would not identify which groups they were.

(Reporting by Aung Hla Tun; Writing by Amy Sawitta Lefevre; Editing by Stephen Powell)

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Wakaso double helps Ghana end Cape Verde fairytale

By Mike Collett

PORT ELIZABETH, South Africa (Reuters) - Substitute Mubarak Wakaso hit two goals as four-times champions Ghana ended the fairytale run of Cape Verde Islands with a 2-0 African Nations Cup quarter-final victory on Saturday.

Wakaso struck twice in the second half, once from the penalty spot, as Ghana clinched a semi-final meeting with Burkina Faso or Togo.

Ghana were fortunate to break the deadlock after 54 minutes at the Nelson Mandela Bay Stadium.

Referee Rajinjapasad Seechurn of Mauritius harshly ruled against Cape Verde defender Carlitos as he and Asamoah Gyan went for the ball and the Ghanaian went tumbling to the ground.

Wakaso, who had replaced Albert Adomah seven minutes earlier, made no mistake from the spot as he lashed the ball down the middle while goalkeeper Vozinha leapt to his left.

Cape Verde had a chance to equalise within a minute but Heldon's shot went narrowly wide.

Platini also went close for the islanders when he was denied by an acrobatic save from Fatau Dauda who then did even better to deny Djaniny in the closing minutes.

Wakaso added the second goal from a Ghana breakaway in the last minute when he slotted the ball into an empty net after Vozinha had gone up for a set piece at the other end.

Earlier, there was nothing to choose between the teams in a first half in which both sides played some good football in midfield without producing a single shot on target.

Cape Verde, making their debut appearance in the Nations Cup finals, were far from overawed in the biggest game in their relatively brief international history.

The islanders had two excellent opportunities to take the lead in the opening 22 minutes.

Heldon, who scored the winner in the 2-1 victory over Angola on Sunday, fired high and wide from the first and then thumped another chance way over the bar after some good build-up play.

Ghana, despite looking sharper on the ball and weaving some nice flowing patterns around the Cape Verde defence, lacked any incisive threat with the usually dangerous Gyan too much on the periphery.

That changed in the second half when Wakaso came into the midfield and livened things up.

His two goals kept alive Ghana's dreams of a fifth title, 31 years after their last triumph in 1982. (Editing by Tony Jimenez)

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