Palestinian death toll tops 900: Gaza official

GAZA (Reuters) - Israeli troops fought fierce gun battles with Hamas fighters on Monday, keeping military pressure on the Islamist group while avoiding all-out urban warfare that would complicate ongoing diplomatic efforts to end the Gaza war.

Medical officials said the Palestinian death toll in the offensive Israel began 17 days ago had risen past 900 and included at least 380 civilians. Israel says 13 Israelis -- three civilians hit by rockets and 10 soldiers -- have died.

An Israeli military spokesman said army reservists had been thrown into the campaign that Israel launched with the declared aim of ending cross-border rocket attacks from the Hamas-ruled territory to its south.

But Israeli forces were still holding back from a threatened third stage of their deadliest assault on Palestinian militants in decades -- a push into the city of Gaza and other urban areas to add more punch to an air campaign and ground offensive.

Israeli Foreign Minister Tzipi Livni, a candidate for prime minister in a February 10 election, said the surprise bombing of the Gaza Strip at the start of operations on December 27 and an armored thrust a week later had "restored Israel's deterrence."

Morning radio programs in Israel, however, continued to be interrupted by announcements of "Color Red" alerts, heralding rocket attacks on towns where residents have only seconds to find shelter before salvoes hit. Ten rockets landed in the first half of the day, the army said. No one was hurt.

Israeli soldiers battled Hamas militants east and north of the rubble-strewn city of Gaza in what residents called ferocious fighting.

The Israeli military said its aircraft carried out more than 25 attacks, fewer than on many previous days. They struck Hamas gunmen, weapons caches, rocket and mortar launching positions and a smuggling tunnel under Gaza's border with Egypt, it said.

"Ground forces were involved in a number of incident in which gunmen were hit," the army said in a statement.

Medical workers said Israeli forces killed eight Palestinians, including at least four civilians, in Monday's violence.

In interview on Israeli Army Radio, Livni gave no indication when the assaults might end.

Political sources said Livni, chairman of the ruling Kadima party, and her main coalition partner Defence Minister Ehud Barak, head of center-left Labour, wanted to halt the operation in the Hamas-ruled territory as soon as possible.

But the sources said outgoing Prime Minister Ehud Olmert, who resigned as Kadima chief in September, disagreed and planned to present the issue in a cabinet forum where he has support.

CIVILIAN CASUALTIES

The Palestinian death toll since Israel's "Operation Cast Lead" began stood at 908, Gaza medical officials said. About 3,600 Palestinians have been wounded.

The health minister in the Hamas-run government in Gaza, Bassem Naeem, told reporters that 42 percent of those killed -- or about 380 -- were women and children. Israel, which says it has killed "hundreds" of fighters, has questioned civilian casualty figures from Gaza but has not offered its own estimate.

Reuters journalists covering sites of attacks and hospital facilities have seen dozens of bodies of women and children. Israel has accused Hamas, operating in densely populated areas, of using civilians as human shields.

"Every child and adult not involved with terror who has been caught as a casualty of our military efforts is a victim for which we apologize, which we want to prevent," Olmert said on Monday.

Egypt's state news agency MENA said more talks in Cairo with a Hamas delegation on an Egyptian plan for a ceasefire were planned for Monday after "positive" discussions a day earlier.

Hamas official Osama Hamdan said some delegates had returned to Damascus for consultations with the group's leadership.

Israel, which rejected a U.N. ceasefire resolution last week as unworkable, wants a halt to rocket attacks and measures to stop Hamas from rearming via the tunnels under the Egypt-Gaza border, in an area known as the Philadelphi corridor.

Western and Israeli officials said diplomats were discussing an internationally-assisted technical monitoring system to help Egypt stop weapons smuggling and intercept rocket shipments.

Egypt, concerned for its sovereignty, opposes stationing an international force on its side of the frontier.

International Middle East envoy Tony Blair said after talks with Egyptian President Hosni Mubarak in Egypt on Monday that "the elements of an agreement of the immediate ceasefire are there and are now being worked on very hard in great detail.

"This is a sensitive and delicate time in the negotiation but I hope they will bear fruit and I hope so soon. I hope we can achieve it (the ceasefire) within the coming days," Blair told reporters.

Hamdan said Hamas was working on a final position on the Egyptian proposal: "The movement has essential concerns over some aspects of this initiative and there are issues the movement cannot accept," he told Lebanon's al-Manar television.

Hamas leader Khaled Meshaal has said the group would not consider a ceasefire until Israel ended its air, sea and ground assault and lifted its blockade of the Gaza Strip.

Israeli warplanes have repeatedly bombed the Philadelphi corridor along Gaza's 14-km (nine-mile) border with Egypt, sometimes using "bunker buster" munitions that explode underground and cause shockwaves to try to collapse the tunnels.

Western diplomats, speaking on condition of anonymity, described a ground operation to retake the corridor and parts of the town of Rafah as one of Israel's leading "third phase" options if talks over a ceasefire founder.

A ground assault would allow Israel to use bulldozers and sonar equipment to root out tunnels that have yet to be destroyed with air power alone.

Local Palestinian tunnel operators estimated that several hundred of the secret passages have been disabled but that many hundreds of others remained intact.

Citi nears Morgan Stanley brokerage deal

LONDON/NEW YORK (Reuters) - The break-up of U.S. banking powerhouse Citigroup moved a step closer, and Britain took control of a big stake in another top lender on Monday as the reshaping of the global financial landscape gathered pace.

Citigroup moved close to a deal to join its Smith Barney business with Morgan Stanley's brokerage operation, people familiar with the matter said.

The move would create the largest retail brokerage and mark the boldest step in dismantling what was the world's biggest financial services conglomerate.

The financial services sector is in a state of constant flux as banks recoil under the threat of a long and deep downturn, with governments bailing out the worst-hit lenders while relatively strong banks look for bargain acquisitions.

Britain found itself with another stake in a top bank after investors in Lloyds TSB and its takeover target HBOS shunned a pair of rights issues, leaving the government to supply almost all of the 17 billion pounds ($25.6 billion) they need to rebuild capital.

"The landscape is going to change, and it's unlikely that large banks can go into government hands and come out the other side unchanged," said Simon Maughan, analyst at MF Global in London.

"Whether it's the U.S. government with Citi, the Swiss with UBS or the UK with Royal Bank of Scotland, governments are going to say, 'You are very big institutions to be bailed out, and it would be good if you were a degree smaller and much more manageable'," he added.

Britain will get a 43.4 percent stake in Lloyds Banking Group, the enlarged bank to be formed this week, adding to the 58 percent holding it took in RBS last month.

The U.S. and Britain are not alone in taking potentially long-term stakes in lenders as part of moves to shore up the troubled sector.

Greece's third-largest lender, Alpha Bank, on Monday won approval to raise up to 950 million euros ($1.3 billion) by selling preference shares to the government as part of a 28 billion euro state-backed support package.

Germany last week pumped 10 billion euros into Commerzbank, and though the bank's CEO Martin Blessing said over the weekend he aimed to repay the capital as soon as possible, he expected Berlin would keep its holding for some years.

LEHMAN CARVE-UP

Other deals in the sector were also simmering, with South African billionaire Johann Rupert's investment vehicle in talks about buying out Lehman Brothers' merchant banking business, and UK fund manager New Star Asset Management in receipt of proposals including a possible offer.

RBS was buoyed by a report it might attract interest for the sale of its insurance arm. It had been expected to scrap the insurance sale, but private equity firms Apollo Management and BC Partners are mulling a late bid, a report said.

RBS is expected to shrink its balance sheet and sell assets as part of a strategic review by its new CEO.

By 1100 GMT (6 a.m. EST) RBS shares were up 6 percent, the top performing stock in a flat European bank sector.

For Citi, securing a joint venture deal with Morgan Stanley would be an easier move than selling assets at a bad time. Few buyers have the cash available to buy Smith Barney outright.

The creation of the joint venture would lead to Morgan Stanley making a cash payment to Citi of about $2.5-$3 billion, a source familiar with the situation said on Sunday.

A deal between Citi and Morgan Stanley could be announced this week, two sources said, though one said it was unlikely to come as early as Monday.

Obama weighs decision about bailout funds

WASHINGTON (Reuters) - President-elect Barack Obama vowed to restructure a financial rescue plan to save more U.S. families from home foreclosures, as he considered on Sunday whether to seek additional funds from a $700 billion bailout program.

Obama's aides have been in discussions with the White House over whether President George W. Bush should ask Congress for permission to use the remaining $350 billion of the funds, which are aimed at stabilizing the financial system.

The purpose of the request, which would be formally submitted by Bush, would be to have the funds in place soon after Obama takes office on January 20.

But it may prove difficult to get approval from Congress because the bailout program is unpopular with many lawmakers who feel too much of the money has already been given to Wall Street firms with few strings attached.

The legislators want some of the remaining money to be used instead to help struggling homeowners.

Massachusetts Sen. John Kerry, after leaving a meeting with other senators and some of Obama's top aides, said the president-elect was close to a decision on the bailout fund, known as the Troubled Asset Relief Program, or TARP.

"It's my understanding that the president-elect is going to make a judgment somewhere in the next hours," Kerry told reporters. "I think the president-elect will make known -- because he's the one who's going to be controlling that -- what he would like to see happen on that."

Top Obama aides Larry Summers and Jason Furman were holding closed-door meetings with Kerry and other senators to discuss, not only the bailout funds but also a proposed $775 billion stimulus package that Obama and the Democrats say is needed to pull the U.S. economy out of a deep slump.

A COLLABORATIVE EFFORT

Senate Democrats said the plan was undergoing changes from an original outline that called for setting aside 40 percent of the money for tax cuts. Much of the rest of the package would go toward public works projects such as road and school construction and social safety-net programs like unemployment insurance.

Some Democrats want to see more energy-related tax breaks and also questioned the structure of some of the tax cuts for families and businesses.

"There are significant changes already being put in place and being contemplated," Kerry said. "I think it's moving in the right direction and I think we're making a lot of progress."

He said he believed there would be changes to the proposed $1,000 tax cut for middle-class families and to the credits aimed at encouraging businesses to hire.

After facing some resistance from Democrats last week on some aspects of the package, Obama emphasized his staff was working closely with the Democratic-led Congress.

"We're going to have a collaborative, consultative process with Congress over the next few days," Obama said in an interview on ABC's "This Week." "We're not trying to jam anything down people's throats."

Government figures last week showed the U.S. unemployment rate surged in December to 7.2 percent, capping a year in which employers slashed 2.6 million jobs, the most since 1945.

Obama says passage of the stimulus plan by mid-February is crucial to avoiding further job losses.

The Obama team sees a reworking of the bailout program as another way to throw the economy a lifeline.

He emphasized in the ABC interview that he agreed with lawmakers' concerns about how the program had been managed.

"When you look at how we have handled the home foreclosure situation and whether we've done enough in terms of helping families ... we haven't done enough there," Obama said.

Congress must give its approval to unlock the rest of the TARP funds and lawmakers who have been skeptical about the program have said they may oppose that.

"Until there is a demonstrated need in our economy and a plan to address that need, I think it would be irresponsible for them to release that money," House Minority Leader John Boehner, an Ohio Republican, told CBS's "Face the Nation".