Second Taliban bomb attack kills 13 near Pakistan army HQ

A Taliban suicide bomber killed 13 people in a crowded market near the Pakistani army headquarters on Monday, a day after the Taliban killed 20 soldiers near the largely lawless, tribal region of North Waziristan, police said.

The market, a short walk from the army headquarters in Rawalpindi, near the capital, Islamabad, was in one of the most secure areas of the city. The area was cordoned off by the military immediately after the blast.

Two college students wearing blue uniforms were among the dead, their bodies lying near wreckage of a bicycle and pools of blood. Rescue workers struggled to help the wounded. Windows were shattered several hundred meters away.

The attacks come after a couple of months of relative calm as the Taliban regrouped following the death of leader Hakimullah Mehsud in a drone strike in November. A drone had killed his deputy earlier in the year.

After protracted negotiations, Mehsud was replaced by Mullah Fazlullah, a ruthless commander who has made large-scale attacks on Pakistani security forces his trademark.

Police Superintendent Muhammad Maqbool said five of the 13 killed on Monday were soldiers. Fourteen were wounded, he said.

Taliban spokesman Shahidullah Shahid claimed responsibility for the blast on behalf of the Islamist insurgents.

"We will continue attacks on the government and its armed forces as the government has neither announced a ceasefire nor peace talks with us," he said.

Monday's attack came a day after a bomb planted by the Taliban ripped through a vehicle carrying Pakistani troops on Sunday, killing 20. Prime Minister Nawaz Sharif cancelled his trip to the World Economic Forum in the Swiss resort of Davos this week to address the violence.

The government is keen to pursue peace talks with the Taliban to end the insurgency but there has been an upsurge in attacks since Sharif won elections in May 2013.

(Additional reporting by Amjad Ali and Syed Raza Hassan in Islamabad, Saud Mehsud in Dera Ismail Khan and Jibran Ahmad in Peshawar.; Writing by Katharine Houreld; Editing by Nick Macfie)

Missionary Bae jailed in North Korea 'wants U.S. to help him get home': Kyodo

U.S. missionary Kenneth Bae, imprisoned in reclusive North Korea for more than a year, said on Monday he wants to return to his family as soon as possible and hopes the United States will help, Japan's Kyodo news agency reported.

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The appeal came after North Korea signaled last week it was prepared to reach out to South Korea if it abandoned military drills with the United States that start next month and as Pyongyang appeared to embark on a charm offensive.

Bae, a 45-year old ethnic Korean, was jailed for 15 years of hard labor for state subversion in North Korea, where he was detained in 2012 while leading a tour group.

North Korea's Supreme Court said he used his tourism business to form groups aimed at overthrowing the government.

Bae met "a limited number of media outlets" in the North Korean capital Pyongyang and expressed hope of the United States securing his release, Kyodo said. He admitted he had broken North Korean laws.

Footage released by Kyodo showed Bae in a drab grey prison uniform and baseball cap as he was escorted into the brief press conference.

The footage was less than a minute long (here)

and Bae appeared to be in reasonable health before he was escorted out by uniformed North Korean officials.

It was not immediately clear why the North Korean authorities allowed the press conference, Bae's second media appearance since he was jailed.

An attempt to secure Bae's release by a U.S. emissary was called off by Pyongyang in August and there has been no official contact between the United States and North Korea since then.

Bae is believed to be in ill-health and led missionary groups into North Korea, according to speeches he made that were posted on the Internet.

North Korea said Bae was plotting to overthrow the state and that his crimes deserved the death penalty.

On one of his trips, Bae recalled singing hymns together with his mission tourists at a beach surrounded by North Koreans.

(Reporting by Kiyoshi Takenaka; Writing by Nick Macfie and David Chance)

Five killed by snipers in Lebanon's Tripoli

Five people have been killed by sniper fire since Saturday in the northern Lebanese city of Tripoli, medical and security sources said.

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The deaths are the latest round of violence fuelled by sectarian tensions over neighboring Syria's civil war.

Tripoli, 30 kilometers (20 miles) from the Syrian border, has been subject to sharp divisions between the Sunni Muslim majority and small Alawite community for decades.

The Lebanese army used "rockets" for the first time to quell the fighting between rival neighborhoods, one security source said, without specifying which weapons were used. Normally, soldiers use assault rifles to target snipers.

The sources said three of the dead belonged to the Sunni Muslim Bab al-Tabbaneh district, whose residents overwhelmingly support the Sunni Muslim rebels battling Syrian President Bashar al-Assad.

Two others killed were from the Alawite neighborhood of Jebel Mohsen, which supports fellow Alawite Assad.

Sniper attacks are common along Syria Street, which divides the rival neighborhoods, and adjacent streets.

Sources said 45 people have also been wounded in the past 48 hours in related clashes, including four soldiers. The army has been deployed across the city for months in an effort to quell the violence.

But Tripoli also saw some of the heaviest violence last year. Sectarian fighting in Tripoli killed more than 100 people in the city in 2013. Dozens of people died in gun battles, and twin car bombs at Sunni Muslim mosques in Tripoli killed 42 people in August.

(Reporting By Nazih Saddiq in Tripoli and Stephen Kalin in Beirut Editing by Jeremy Gaunt)

Thai government considers state of emergency after weekend violence

Thai authorities are "very seriously" considering a state of emergency after a weekend of violence in the capital where protesters have been trying for more than two months to bring down the government, the security chief said on Monday.

The violence is the latest episode in an eight-year conflict that pits Bangkok's middle class and royalist establishment against poorer, mainly rural supporters of Prime Minister Yingluck Shinawatra and her brother, ex-premier Thaksin Shinawatra, who was toppled by the military in 2006.

"We're prepared to use the emergency decree ... Everyone involved including the police, the military and the government is considering this option very seriously, but has not yet come to an agreement," National Security Council chief Paradorn Pattantabutr told Reuters after meeting Yingluck.

"The protesters have said they will close various government offices. So far, their closures have been symbolic, they go to government offices and then they leave." he said.

"But if their tactics change and they close banks or government offices permanently, then the chance for unrest increases and we will have to invoke this law."

The emergency decree gives security agencies broad powers to impose curfews, detain suspects without charge, censor media, ban political gatherings of more than five people and declare parts of the country off limits.

The size of the demonstrations in Bangkok has declined, but the Centre for the Administration of Peace and Order (CAPO), a body grouping government and security officials, said small protests had spread to 18 other areas.

"The protesters haven't threatened to shut down government buildings but they are taking their orders from protest leaders in Bangkok so we're keeping an eye on them," CAPO deputy spokesman Anucha Romyanan told Reuters.

One man was killed and dozens of people were wounded, some seriously, when grenades were thrown at anti-government protesters in the city center on Friday and Sunday.

"I think these attacks have been designed to provoke an army reaction," said Paul Chambers, director of research at the Institute of South East Asian Affairs in Chiang Mai, predicting a measured increase in the violence.

That in turn could prompt the Election Commission to refuse to oversee an election called for February 2, which the main opposition has said it will boycott, he said.

FISCAL POLICY CRIPPLED

The protests led by opposition firebrand Suthep Thaugsuban were triggered by Yingluck's move last year to attempt to push through a political amnesty that would have allowed her brother Thaksin to return home.

The billionaire former telecoms tycoon lives in Dubai to avoid a jail sentence for abuse of power, but is thought to run his sister's government. The protesters want to remove his influence through ill-defined political reforms.

The upheaval threatens economic growth and a small majority of economists polled by Reuters thought the central bank would cut interest rates by 25 basis points to 2 percent this week.

"Fiscal policy is pretty much crippled right now and the onus is on the central bank to boost the economy," DBS Bank in Singapore said in a note, although it did not expect a rate cut this time, saying it would do little to help confidence under present circumstances.

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Business is getting nervous. Kyoichi Tanada, president of Toyota Motor Corp's Thai unit, said on Monday he was unsure the Japanese car maker would increase investment in Thailand if the crisis was drawn out.

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The government has mostly avoided direct confrontation with protesters while the army, which has staged or attempted 18 coups in 81 years of on-off democracy, has stayed neutral.

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The violence is the worst since 2010 when Suthep, at the time a deputy prime minister in charge of security, sent in troops to end mass protests by pro-Thaksin activists.

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Suthep faces murder charges related to his role in that crackdown, when more than 90 people were killed, and for insurrection in leading the latest protests.

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Yingluck faces legal charges from the anti-corruption agency, which said last week it would investigate her role in a loss-making government rice purchase scheme.

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The scheme has won her party huge support in the rural north and northeast. But there is growing discontent among farmers who say they have not been paid for their rice and are threatening to block major roads.

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Chambers said the rise in violence could suck the police into the fray.

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"(That would provide) Suthep with an excuse to accuse Yingluck of repressing the demonstrators, the army may suggest that the Yingluck government step aside or judicial cases against Yingluck's government may be expedited to push (her party) Puea Thai from power," he said. ($1 = 32.8500 Thai baht)

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(Writing by Jonathan Thatcher and Amy Sawitta Lefevre; Editing by Nick Macfie and Alan Raybould)

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Hong Kong woman held on suspicion of abusing Indonesian maids

A Hong Kong woman was arrested on Monday on suspicion of abusing her Indonesian maids in a case that has sparked widespread outrage and drawn fresh attention to the risks faced by the migrant community.

A housewife surnamed Law, 44, was arrested at the airport when she was trying to leave for Thailand, Hong Kong police said at a briefing.

Erwiana Sulistyaningsih, a 23-year-old maid who said she had been badly beaten by her employer, is recovering at a hospital in Sragen, a city in central Java, after flying out from Hong Kong in early January.

A second maid, identified only as Susi, who claimed to have been abused by the same employer, also gave a statement to police, saying she had frequently been beaten and abused.

Law was believed to have a connection with the two cases, which would be dealt with as wounding cases, the police said. No formal charges have been laid against her.

Hong Kong, an ex-British territory that returned to Chinese rule in 1997, has around 300,000 foreign domestic helpers, most of them from the Philippines and Indonesia. They are excluded from a minimum wage and other basic rights and services.

Ill-treatment of foreign domestic workers in Asian and Gulf regions such as Hong Kong, Singapore, Taiwan and Dubai has been a longstanding problem.

In September a Hong Kong couple were jailed for repeatedly assaulting and torturing their Indonesian maid over a two-year period until she escaped.

Thousands of people rallied in Hong Kong on Sunday to demand justice for Erwiana.

Six officers from the city's police and labor bureau have flown to Indonesia to interview Erwiana, who suffered extensive injuries from head to foot, and collect evidence.

Erwiana said she would be willing to go back to Hong Kong to help with investigation or testify in court if needed but would not return for work, local media reported.

"Hong Kong is a society with the rule of law. For any unlawful act, especially those involving inflicting violence on others mentally or physically, we will not put up with it," Chief Executive Leung Chun-ying said with respect to the case earlier on Monday afternoon.

(Additional reporting by Venus Wu)

Baghdad bomb blasts kill 26, Iraqi troops fight Sunni rebels

Seven bomb explosions killed 26 people and wounded 67 in the Iraqi capital on Monday, police and medics said, as security forces battled Sunni Muslim militants around the western cities of Falluja and Ramadi.

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The bloodiest attack occurred in the mainly Shi'ite Muslim Abu Dsheer district in southern Baghdad, where a car bomb near a crowded market killed seven people and wounded 18.

No group claimed responsibility for the blasts. But Sunni insurgents, some of them linked to al Qaeda, are widely blamed for a surge in violence in the past year apparently aimed at undermining the Shi'ite-led government and provoking a return to all-out sectarian strife.

Al Qaeda militants and their local allies seized control of Falluja and parts of Ramadi on January 1, exploiting resentment among minority Sunnis against the government for policies perceived as unfairly penalizing their once-dominant community.

Five of Monday's bombs targeted mainly Shi'ite districts of the capital, while two were in mostly Sunni areas.

Sporadic fighting again flared around Falluja and Ramadi.

Anti-government tribesmen attacked an army barracks in Saqlawiya, 10 km (six miles) northwest of Falluja, and destroyed two Humvee vehicles, before army helicopter gunships forced them to retreat. One of the attackers was killed and two wounded, police said. There was no word on casualties among the army.

Prime Minister Nuri al-Maliki, who faces a parliamentary election on April 30, has ruled out a full-scale army assault on Falluja, urging tribesmen to drive al Qaeda militants from the city, where U.S. troops occupying Iraq fought some of their toughest battles with Sunni insurgents in 2004.

An Iraqi journalist, Firas Mohammed, was killed by a roadside bomb that exploded near a police station in Khaldiya, a town between Falluja and Ramadi, on Sunday, police said. He had worked for the local television channel in Falluja.

Ten journalists were killed in Iraq last year, the highest number anywhere except Syria, according to the New York-based Committee to Protect Journalists.

(Reporting by Ahmed Rasheed; Writing by Alistair Lyon; Editing by Mike Collett-White)

Exclusive: Syrian opposition sets deadline for Iran peace talks invite withdrawal

Syria's main opposition body, the National Coalition, will not attend peace talks in Switzerland scheduled for this week unless the United Nations retracts its invitation to Iran by 2:00 PM EST on Monday, a senior coalition member said.

Late on Sunday, U.N. Secretary-General Ban Ki-moon invited Iran to the conference, dubbed "Geneva 2", prompting the Coalition to quickly issue an ultimatum, on which it has now set a time limit.

"We are giving a deadline of 1900 GMT (2:00 PM ET) for the invitation to be withdrawn," Anas Abdah, member of the National Coalition's political committee, told Reuters.

Reading an official coalition statement, Abdah reiterated that the Coalition would accept Iran's participation only if it "publicly states that it is withdrawing its forces, committing to the Geneva 1 agreement in full and committing to implementing any results of Geneva 2".

The accord reached in Geneva in 2012 calls for a transitional government for Syria, which Western countries and the opposition say means Syrian President Bashar al-Assad must leave power.

Coalition members privately told Reuters that no one expected Iran, Assad's main backer, to meet any of these terms.

The National Coalition has been under immense pressure from the international community to attend the talks aimed at ending the conflict in which more than 100,000 people have been killed and millions displaced.

Over the weekend, following a series of delays, it finally said it would participate in the talks which are set to start on Wednesday in Montreux and are seen as the most serious international effort to end the near three-year conflict.

Iran's attendance has been one of the most hotly debated issues in the run-up to the conference, with Russia insisting that it would be a mistake if Iran did not take part.

Iran accepted the invitation on Monday "without preconditions".

There was no immediate comment from the United Nations or Iran on the ultimatum.

(Reporting by Dasha Afanasieva and Yesim Dikmen; Editing by Nick Tattersall and Alison Williams)

EU to send military force to Central African Republic

The European Union will send up to 1,000 soldiers to help stabilize Central African Republic, deploying its first major army operation in six years, EU foreign ministers decided on Monday.

The EU has been spurred into action by communal bloodshed in Central African Republic that led a senior U.N. official to warn last week of a risk of genocide there without a more decisive international response.

Meeting in Brussels, the ministers approved an outline plan to send a battalion-sized force to the violence-torn country but detailed military plans still need to be worked out. It is not yet clear which countries will provide the troops.

Donors at another meeting in Brussels pledged nearly half a billion dollars in humanitarian aid for Central African Republic amid concern among aid officials at the deteriorating situation there.

"This has been for far too long a forgotten crisis, (but it is) forgotten no more," EU humanitarian aid commissioner Kristalina Georgieva told reporters after the meeting with governments, the United Nations and other international organizations.

EU officials hope the EU force, which will be based around the capital Bangui and its airport, will start arriving in Central African Republic by the end of February.

It will stay for up to six months before handing over to an African Union (AU) force that is building up its strength on the ground.

EU foreign ministers said the aim was to protect civilians and to create conditions for supplying humanitarian aid.

"We do face an emergency there and we need to act," Swedish Foreign Minister Carl Bildt told reporters.

FRENCH INTERVENTION

The plan to send an EU force will please France, which has urged its allies to do more to bolster the 1,600 troops it sent to its former colony last month to stop massacres between Muslim and Christian militias triggered by a March coup.

More than a million people have been displaced by the violence and more than 1,000 people were killed last month alone in Bangui.

The French troops are operating under a U.N. mandate to assist an AU force that is due to increase to 6,000 peacekeepers.

EU officials will seek United Nations Security Council authorization for the EU mission on Thursday.

It is not yet clear which EU countries will contribute troops. Estonia has promised soldiers, and Lithuania, Slovenia, Finland, Belgium, Poland and Sweden are among countries considering sending troops, diplomats say.

Large EU countries such as Britain, Germany and Italy have said they will not send ground troops.

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Bildt said the EU should send its rapid reaction force, known as battle groups, to Central African Republic.

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Battle groups have been on standby since 2007, rotating between different EU countries, but have never yet been deployed, leading defense experts to question their usefulness.

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However, military officials told ministers that the battle groups would not be suitable for Central African Republic because they were equipped to deploy for just 120 days.

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The EU has 7,000 staff deployed around the world on 12 civilian missions and four military operations, including combating piracy off Somalia and training the Mali army.

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But this will be the EU's first land operation since it sent a force to eastern Chad and northeastern Central African Republic in 2008 as part of regional efforts to deal with the Darfur crisis in Sudan, an EU official said.

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(Additional reporting by Tom Koerkemeier; Editing by Tom Heneghan)

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Al Qaeda offshoot imposes strict Islamic rules in north Syria

A group linked to al Qaeda, emboldened by its recent victory over rival rebels in Syria, has imposed sweeping restrictions on personal freedoms in the northern province of Raqqa as it seeks to consolidate control over the region.

Reuters obtained copies of four statements issued on Sunday by the Islamic State in Iraq and the Levant (ISIL) prohibiting music from being played in public and photographs of people being posted in shop windows.

The sale of cigarettes and shisha water pipes are banned, women must wear the niqab, or full face veil, in public and men are obliged to attend Friday prayers at a mosque.

The directives, which cite Koranic verses and Islamic teaching, are the latest evidence of ISIL's ambition to establish a Syrian state founded on radical Islamist principles.

ISIL is widely considered the most radical of the rebel groups fighting forces loyal to President Bashar al-Assad, and increasingly each other, in Syria's civil war.

The first and only city to have fallen completely under rebel control, Raqqa has been held up by many ordinary Syrians as an example of what Syria might look like in a post-Assad era.

The anti-Assad Syrian Observatory for Human Rights, a Britain-based monitoring group with sources across the country, said ISIL was turning its attention to setting up such a state after repelling an offensive earlier this month by rival Islamists and more moderate rebels.

The Observatory said ISIL was posting the statements at mosques and other public places on Monday. The statements gave residents three days to start complying or face unspecified punishments "in accordance with sharia", or Islamic law.

"ISIL was strong before in Raqqa, but now it's the only force there," said Rami Abdulrahman, head of the Observatory.

Ahrar al-Sham and the Nusra Front, two Islamist rebel factions fighting to bring down Assad's government, tried to prevent the sale of tobacco when they ruled the city briefly last year.

But ISIL emerged as the dominant player and outraged residents by carrying out executions in a public square, patrolling the streets in black masks and turning government buildings into headquarters and prisons.

The group's statements - its most extensive yet - were unlikely to face opposition given last week's expulsion of Ahrar, Nusra and other rebel factions.

ISIL had pulled out of Raqqa and other towns in northern Syria earlier this month after an Islamist rebel alliance attacked its strongholds, taking advantage of popular resentment of the group's foreign commanders, its killing of other rebels and the drive to impose a strict interpretation of Islamic law.

But ISIL regrouped, using snipers, truck-mounted commando units and suicide bombers to retake much of the lost territory.

Its expansion has alarmed Western nations and helped Assad portray himself as the only secular alternative to Islamist extremism.

Fighting among rebels has killed hundreds of people in the last three weeks and challenged ISIL's grip over large swathes of northern Syria. Rival rebel factions continue to clash over territory in Aleppo and Idlib provinces.

(Editing by Mike Collett-White)

Hunted Greek convict vowing revenge for crisis by video

A convicted member of a Greek guerrilla group that waged a 27 year campaign of killing appeared in a video on Monday promising to avenge the country's debt crisis and calling for a revolution against the state.

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Christodoulos Xiros, 56, was serving multiple life terms in Athens for being a member of the dismantled Marxist group November 17, when he was let out for a week over New Year.

However, he never reported back to prison - triggering a massive police hunt and acute embarrassment for the authorities.

A video uploaded on the leftist Indymedia website on Monday showed Xiros speaking to the camera with pictures of revolutionary Che Guevara, two Greek independence fighters, and a Communist World War Two resistance leader.

"It is our job to light the fuse," he said calling on leftists and anarchists to unite against politicians, journalists and police.

"What are we waiting for? If we don't react immediately, now, today, we will cease to exist as people."

The Greek debt crisis plunged the country into a six year-recession, forcing thousands of businesses to close and making one in five of the workers jobless.

November 17, Greece's most lethal guerrilla group, was named after the date of a crushed 1973 student uprising against the then-ruling military junta, was dismantled in 2002 after a bomb exploded in the hands of Xiros's brother Savas.

More than 10 members of the group were convicted for 23 killings - including of Greek, U.S. and British businessmen, politicians and diplomats - and dozens of bomb attacks spanning three decades.

Greece has a history of leftist violence. In recent years, a number of previously unknown far-left and anarchist groups have claimed a series of small-scale bomb attacks against police, politicians and businessmen in retaliation for austerity measures.

In a separate written statement uploaded on Indymedia, Xiros said that convincing prison authorities to give him leave was "a personal success" and warned he would "wield my rifle again".

"Your kingdom is over but you don't know it," he said.

(Reporting by Renee Maltezou; Editing by Alison Williams)

Serbia to reconsider labor law in face of union opposition

Serbia's government, facing union opposition, said on Monday it would look again at draft legislation to liberalize the labor market, a move likely to further stoke concern among investors over the coalition's commitment to reform.

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Trade unions had called a one-day strike for January 23, angry at proposed changes to working hours and rules on hiring and firing.

After a meeting with union leaders, the government said in a statement that it would form a joint working group with unions and business representatives to "consider the draft labor law, after which it will enter government and parliamentary procedure."

It gave no time frame.

The new consultations may fuel calls from some in the government for a snap parliamentary election, with the largest party - the Serbian Progressive Party (SNS) - poised to take a decision this week on whether to go to voters in mid-March.

The SNS is riding high in opinion polls and several senior party officials have said a new and stronger mandate would help accelerate the pace of reforms crucial to overhauling an economy suffocated by red tape, a bloated public sector and dozens of loss-making state firms.

With Serbia due to formally begin European Union accession talks on Tuesday, investor interest in the biggest market to emerge from the ashes of federal Yugoslavia is growing.

Economy Minister Sasa Radulovic, an SNS appointee, warned last week that early elections would be preferable to delays in adopting laws on labor, privatization and bankruptcy.

Delays have already cost Serbia a downgrade of its long-term local and foreign currency ratings by Fitch ratings agency last week from BB- to B+, nudging Serbian debt deeper into the speculative category.

Fitch cited a rise in the country's consolidated budget deficit to 7.1 percent of output and stalled reforms.

(Writing by Matt Robinson; Editing by Mike Collett-White)

Nigerian Islamists kill 18, burn houses in northeast

Islamist militants stormed a village in remote northeast Nigeria on Monday, torching houses and spraying them with bullets in an attack that killed 18 people, witnesses said.

The latest Boko Haram assault, on Sunday night, came hours before Nigeria's four top military chiefs handed over to fresh commanders in a ceremony on Monday.

President Goodluck Jonathan announced the reshuffle of his entire military leadership last week in a bid to reinvigorate the fight against the insurgents.

"Most of those who survived the attack have fled the village as they do not know if they will be attacked again," said Bulama Ibrahim, the chief of Alau Ngawo village, which was attacked sometime after 10 p.m. on Sunday. He said he had counted 18 bodies after the shooting and many houses burned.

A former local councilor, Mustapha Galtimare, who was on the scene after the attack, concurred with the numbers of dead.

The village lies in remote northeastern Borno state, the epicenter of the insurgency and relic of Nigeria's oldest medieval Islamic caliphate, which once prospered from trans-Saharan trade routes passing though the largely Muslim north.

Boko Haram is fighting to re-establish an Islamic kingdom in northern Nigeria, breaking away from the largely Christian south. Its fighters have killed thousands of people since they launched an uprising in mid-2009.

"They had been in the village for nearly two hours without any security personnel coming to the aid of the villagers," Ibrahim said.

A military spokesman in Borno state, Colonel Muhammadu Dole, said he was aware of the attack but had no details.

Jonathan declared a state of emergency in the northeast last May and ordered in extra troops and air strikes on Islamist bases. It appeared to quell the violence at first, but as is often the case, the insurgents reemerged from the shadows and are now more open in their targeting of civilians.

Boko Haram remains the most serious security headache to Africa's top oil producer and second biggest economy, although the military offensive has squeezed them into smaller pockets along the Cameroon border.

On December 2 Boko Haram gunmen stormed the air force base and military barracks around the airport of the northeastern city of Maiduguri. The group was also blamed for a car bomb in the city this week that killed 29 people.

(Reporting by Ibrahim Mshelizza; Writing by Tim Cocks; editing by Ralph Boulton)

Warnings of economic boycott rile Israeli minister

Economy Minister Naftali Bennett dismissed on Monday a growing chorus of alarm that Israeli business will face international isolation if peace talks with the Palestinians fail.

Indicating rising friction within the government, Bennett urged Prime Minister Benjamin Netanyahu to ignore the warnings, saying an independent Palestine would become a haven for militants and represent a serious threat to Israeli stability.

"A Palestinian state would crush Israel's economy," Bennett told supporters of his right-wing nationalist 'Jewish Home' party that has threatened to quit Netanyahu's coalition if peace negotiations progress.

Bennett's dire vision came on the day a group of prominent Israeli and Palestinian corporate leaders said they would fly to the Davos World Economic Forum this week to throw their weight behind U.S. efforts to secure an unlikely peace accord.

Itamar Rabinovich, a former ambassador to Washington and a member of the Israeli-Palestinian 'Breaking the Impasse' group, said the business community recognized the potential rewards to be reaped if the talks succeed, and the risks posed by failure.

"A deal would mean Israel could invest less in defense and would open up huge economic opportunities with the Arab world," he told Reuters. "But an economic boycott and loss of international legitimacy is undoubtedly a major threat."

Direct peace talks aimed at ending the decades-old Middle East conflict resumed last July, and have reached a critical moment, with U.S. Secretary of State John Kerry trying to draw up a framework deal meant to open the way to a final accord.

Kerry, who has visited the region 11 times in less than a year in his drive to bridge the divisions, is due to meet Netanyahu in Davos later this week.

NIGHTMARE VISION

More moderate members of the coalition government have warned of catastrophe if Netanyahu, whose party is openly skeptical about the talks, walks away from the table.

"The negotiations are the wall stopping a wave (of economic boycotts) right now," said Justice Minister Tzipi Livni, who heads the Israeli negotiating team.

Interviewed on local television at the weekend, Livni was asked if Israel faced the sort of isolation imposed on South Africa during the years of apartheid. "Yes," she said.

Companies in Israel's largest economic partner, the European Union, have already started to signal their concern.

One of the largest pension funds in the Netherlands, PGGM, announced earlier this month that is was divesting from five Israeli banks because of their business dealings with Jewish settlements that dot the occupied West Bank and East Jerusalem.

A Scandinavian diplomat in Jerusalem said representatives from two major Nordic investment companies had recently visited Israel to discuss their concern over businesses tied to settlements and were considering pulling funds.

Another Western diplomat said EU leaders were passing on the message to Netanyahu.

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"The specter of (economic) boycotts is out there. We are telling Israel we are against boycotts, but we are flagging the specter of isolation. This is a nightmare vision for them," said the senior diplomat, who declined to be named.

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Bennett acknowledged seeing the "buds of economic boycott", but said an independent Palestine represented a far greater threat because it would become a launch pad for attacks.

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"We need to raise our head, stop being scared," he said.

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"We know how to fight back. We fought against terror, and we won. We fought against conventional wars, and we won. Now there is a new kind of war, of delegitimisation against the state of Israel ... and we need to fight back and win."

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(Additional reporting by Ari Rabinovitch and Maayan Lubell; Editing by Robin Pomeroy)

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Sixteen killed by twin bombs at Syria-Turkey border post

Two car bombs hit a rebel-held post on the Syrian border with Turkey on Monday, killing at least 16 people and closing the frontier, opposition activists and fighters said.

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The Bab al-Hawa crossing is held by a rebel alliance called the Islamic Front, which has been fighting with the Islamic State in Iraq and the Levant (ISIL), a small but powerful affiliate of al Qaeda with a core of foreign fighters.

It was not immediately clear who had planted the bombs. The attack occurred a few days after a car bomb that killed 26 in the eastern city of Jarablus and which activists blamed on ISIL.

More than 1,000 rebels have died in clashes between rival groups in the last three weeks in an upsurge of internecine violence that has weakened the nearly 3-year-old armed campaign to topple President Bashar al-Assad.

The anti-Assad Syrian Observatory for Human Rights, a Britain-based monitoring group, said at least six of the dead from Monday's bombing were Islamist fighters. It said the rest were likely civilians, and that about 20 others were wounded in the blasts.

Syrian rebels in Bab al-Hawa, in the northwestern province of Idlib, said the border was shut on the Turkish side. A Syrian activist at Bab al-Hawa said the two car bombs exploded within 10 minutes of each other.

The governor's office in neighboring Turkish Hatay province said the explosion was on the Syrian side of the border. Its press spokesman Cahit Dogan said there were no reports of damage or injuries on the Turkish side.

(Reporting by Oliver Holmes and Stephen Kalin in Beirut and Ayla Jean Yackley in Istanbul; Editing by Robin Pomeroy)

Al Qaeda offshoot imposes strict Islamic rules in north Syria

A group linked to al Qaeda, emboldened by its recent victory over rival rebels in Syria, has imposed sweeping restrictions on personal freedoms in the northern province of Raqqa as it seeks to consolidate control over the region.

Reuters obtained copies of four statements issued on Sunday by the Islamic State in Iraq and the Levant (ISIL) prohibiting music from being played in public and photographs of people being posted in shop windows.

The sale of cigarettes and shisha water pipes are banned, women must wear the niqab, or full face veil, in public and men are obliged to attend Friday prayers at a mosque.

The directives, which cite Koranic verses and Islamic teaching, are the latest evidence of ISIL's ambition to establish a Syrian state founded on radical Islamist principles.

ISIL is widely considered the most radical of the rebel groups fighting forces loyal to President Bashar al-Assad, and increasingly each other, in Syria's civil war.

The first and only city to have fallen completely under rebel control, Raqqa has been held up by many ordinary Syrians as an example of what Syria might look like in a post-Assad era.

The anti-Assad Syrian Observatory for Human Rights, a Britain-based monitoring group with sources across the country, said ISIL was turning its attention to setting up such a state after repelling an offensive earlier this month by rival Islamists and more moderate rebels.

The Observatory said ISIL was posting the statements at mosques and other public places on Monday. The statements gave residents three days to start complying or face unspecified punishments "in accordance with sharia", or Islamic law.

REBEL INFIGHTING

The expansion of ISIL last year alarmed Western nations and helped Assad portray himself as the only secular alternative to Islamist extremism.

"ISIL was strong before in Raqqa, but now it's the only force there," said Rami Abdulrahman, head of the Observatory.

Ahrar al-Sham and the Nusra Front, two Islamist rebel factions fighting to bring down Assad's government, tried to prevent the sale of tobacco when they ruled the city briefly last year.

But ISIL emerged as the dominant player and outraged residents by carrying out executions in a public square, patrolling the streets in black masks and turning government buildings into headquarters and prisons.

The group's statements - its most extensive yet - were unlikely to face opposition given last week's expulsion of Ahrar, Nusra and other rebel factions.

ISIL had pulled out of Raqqa and other towns in northern Syria earlier this month after an Islamist rebel alliance attacked its strongholds, taking advantage of popular resentment of the group's foreign commanders, its killing of other rebels and the drive to impose a strict interpretation of Islamic law.

But ISIL regrouped, using snipers, truck-mounted commando units and suicide bombers to retake much of the lost territory.

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Fighting among rebels has killed hundreds of people in the last three weeks and challenged ISIL's grip over large swathes of northern Syria.

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Rival rebel factions continue to clash over territory in Aleppo and Idlib provinces, where ISIL has been weakened in the past three weeks.

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The Daoud Brigade, a rebel faction composed mainly of Syrians which has pledged loyalty to ISIL, issued a statement on Monday calling for an end to fighting among rivals.

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The group said it had reached a "partial solution to end the bloodshed in the eastern suburbs of Idlib" through a ceasefire with other rebels and a renewed focus on fighting the government.

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The statement said the Daoud Brigade sought to expand the ceasefire to the rest of Syria, but the impact of the call was not immediately clear.

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(Editing by Robin Pomeroy)

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South Sudan says retakes oil state capital Malakal, rebels deny

South Sudan's president said his soldiers had seized the regional capital Malakal back from rebels on Monday, a report dismissed by insurgents battling in the world's newest country.

If confirmed, it would be the second major centre retaken in the past three days by government forces, who have been backed by troops from neighboring Uganda.

The United Nations says thousands of people have been killed in a month of clashes pitting troops loyal to President Salva Kiir against rebels supporting Riek Machar, who was sacked as vice president in July.

Initially triggered by a political row, battle lines have increasingly followed ethnic lines with Kiir's Dinka battling Machar's Nuer.

"They took Malakal and other areas around in the Upper Nile region," Kiir told a news conference, referring to his forces.

He did not say if the soldiers who retook Malakal, capital of oil-producing Upper Nile region, had received any help from Ugandan troops.

Kampala's involvement has angered the rebels and raised the specter of the conflict in one of the Africa's poorest states overflowing its borders.

BP says South Sudan holds the third-largest oil reserves in sub-Saharan Africa after Angola and Nigeria.

MALAKAL "NEARLY DESTROYED"

A rebel spokesman in Addis Ababa, where talks aimed at securing a ceasefire have been grinding on, dismissed Kiir's statement.

"It is true that they made an attempt to capture the town around 1pm this afternoon, but they were defeated. Malakal is still in our hands," Lul Ruai Koang told Reuters.

Witnesses say Malakal, a major transit hub on the White Nile, has been nearly destroyed by weeks of heavy shelling between both sides.

Control of the town has changed hands at least three times since the fighting started in mid-December and there have been conflicting statements about who controls it in the past.

Kampala had said its soldiers were instrumental in the recapture of Bor, administrative centre of neighboring Jonglei state, over the weekend.

Both Kiir and rebels have declined to sign a ceasefire agreement in Ethiopia due to disagreements over the fate of 11 detainees held by authorities in Juba and the involvement of foreign troops.

Rebels insist the detainees be freed before a deal can be signed while the government maintains that they will only be released when the due process of law has been followed.

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South Sudan seceded from Sudan in 2011 under a peace agreement to end decades of war with the Khartoum government. That conflict also saw fighting between southern factions, including one splinter group led by Machar.

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(Additional reporting by Aaron Maasho in Addis Ababa; Writing by Duncan Miriri; Editing by Andrew Heavens)

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Kerry to meet Israeli, Palestinian negotiators

U.S. Secretary of State John Kerry will meet Israeli negotiators in Washington on Monday and Palestinian officials later next week in U.S.-brokered peace talks to end their decades-long conflict, the State Department said.

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Kerry and U.S. negotiator Martin Indyk will meet with Israeli justice minister Tzipi Livni and envoy Itzik Molho later on Monday "to continue the discussion on a framework for negotiations," the State Department said in a statement.

Meetings between Indyk and Livni, who heads the Israeli negotiating team, will continue on Tuesday when Kerry travels to Switzerland for a Syria peace conference.

"We expect the Palestinian negotiating team to travel to Washington early next week," the State Department said.

Israeli-Palestinian negotiations resumed in July after a three-year halt, with Kerry leading the push for an accord within nine months. But both Israeli and Palestinians have expressed doubts about his efforts.

Palestinians see a major obstacle in Israel's settlements of the occupied West Bank where they seek statehood. Many Israelis doubt Palestinian President Mahmoud Abbas's credibility as a peace partner, especially as Gaza, the other Palestinian territory, is governed by rival Hamas Islamists who oppose peacemaking.

While details of the talks have been kept secret, Kerry has often said progress is being made in the talks. But both Israel and the Palestinians have predicted the nine-month target date for a deal will not be met.

(Reporting by Lesley Wroughton)

Ukrainian leader urges dialogue after street battles

President Viktor Yanukovich, reeling from the worst violence for decades in the Ukrainian capital, appealed for compromise on Monday as police and demonstrators clashed again in the streets.

Yanukovich is battling to reassert his authority after scores of people were injured in Kiev on Sunday in pitched battles between protesters and police that could seriously hurt his chances of re-election next year.

With tension still high, about 1,000 protesters confronted police on Monday near Kiev's main government headquarters. Scores of mainly young people hurled projectiles at police throughout the day and ignored appeals to disperse.

After weeks of mass protests over Yanukovich's decision to shun a trade pact with the European Union and turn instead towards Russia, demonstrators have been further enraged by sweeping laws rammed through parliament to curb public protest,

"I ask you not to join those who seek violence, who are trying to create a division between the state and society and who want to hurl the Ukrainian people into a pit of mass disorder," Yanukovich said in an appeal on his website.

He called for "dialogue and compromise" to end the unrest. But he made no mention of possible concessions, nor did he refer to peace talks with the opposition which were to have got under way on Monday.

The opposition warned him not to use these as an effort to buy time, while boxer-turned politician Vitaly Klitschko, one of its leaders, insisted he wanted Yanukovich to take part personally in the talks. As of Monday evening it was unclear if and when talks would take place.

MASKED YOUTHS

The violence, the worst civil unrest anyone could remember in post-war Kiev, stemmed from a rally on Sunday attended by more than 100,000 people in defiance of a court ban.

Despite opposition calls for only peaceful action, the rally descended into violence when masked youths broke away and tried to march on parliament before being stopped by police.

In the ensuing clashes, more than 60 police were injured, with 40 being taken to hospital, police said. Kiev's medical services said about 100 civilians had sought medical attention.

Streets on Monday were littered with bricks and debris, including burned-out buses and trucks from Sunday's mayhem in which protesters bombarded police with fireworks, flares and later petrol bombs. Police replied with rubber bullets, stun grenades and water cannon.

Seeking to keep the advantage established on the streets, the opposition on Monday warned Yanukovich that he should not try to buy time in the hope protesters would lose heart.

"It's important that these talks have a real result," said Klitschko, who met Yanukovich late on Sunday at his country residence as the clashes raged.

"If the authorities again break their word, the situation will inevitably escalate," he said, adding that the president must be part of any dialogue.

Klitschko, seen as a strong potential contender for the presidency, later urged people outside Kiev to come to the capital to swell the ranks of protesters.

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WAVE OF PROTESTS

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The protests convulsing the ex-Soviet republic stem from Yanukovich's decision to spurn the EU's free trade deal in favor of closer economic ties with Russia, Ukraine's former Soviet overlord. He has been rewarded by a $15 billion aid package from Moscow including credits and much cheaper gas.

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Apart from the violence near the government building, hundreds of protesters remain camped on Kiev's main Independence Square, which has become a platform of resistance to Yanukovich's rule.

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The trigger for Sunday's large rally was the passage of new laws which outlaw virtually all anti-government protest and, the opposition says, pave the way for a dictatorship.

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The laws ban unauthorized installation of tents, stages or loudspeakers in public and allow heavy jail sentences for participation in "mass disorder". They outlaw dissemination of "extremist" or libellous information about Ukraine's leaders.

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In Washington, the White House expressed "deep concern" that criminalizing peaceful protests would weaken Ukraine's democratic foundation. It threatened sanctions against Kiev.

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Swedish Foreign Minister Carl Bildt said in Brussels: "It is the most solid package of repressive laws that I have seen enacted by a European parliament for decades."

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Bildt and his Lithuanian counterpart, Linas Linkevicius, said further violence could lead to EU sanctions against Ukraine, although no official discussions had been held so far.

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"Personally, I should say that if something goes wrong, it cannot be ignored. It will not be ignored by EU member states," Linkevicius told Reuters on the sidelines of an EU foreign ministers' meeting.

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In practice it might be hard for EU governments to agree on sanctions. Any measures would probably be limited to asset freezes or visa bans against individuals deemed responsible for violence.

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Up to now, Yanukovich has refused to yield to any of the opposition's core demands to sack his government and the interior minister over heavy-handed police action against demonstrators in December.

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(Additional reporting by Pavel Polityuk in Kiev and Adrian Croft in Brussels; Writing By Richard Balmforth; Editing by Mark Trevelyan)

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Italy's Renzi outlines electoral reform plan, defies critics

Italian center-left leader Matteo Renzi promised on Monday to reform an electoral system blamed for creating chronic political deadlock, defying party critics who had attacked him for sealing a deal on the proposals with arch-enemy Silvio Berlusconi.

The 39-year-old mayor of Florence, who won the leadership of the Democratic Party (PD) in December, said he would eliminate the fragmentation that has made it impossible for successive Italian governments to survive a full term in office.

"We are saying no to giving small parties the power of holding us hostage," he told a meeting of the PD party leadership, which approved the proposals by 111 votes in favor with 34 abstentions but no votes against, despite criticism from some on the left of the PD.

"I don't rule out alliances but only if they're made for governing, not just winning an election," he said, adding that settling the thorny issue of voting rules would clear the way for vital economic reforms.

Analysts say electoral reform is vital for Italy to achieve the stable government needed to reform a chronically sluggish economy that has not grown for over two years and tackle the euro zone's second highest debt burden after Greece.

In last year's election, no party gained enough votes to govern alone, plunging the country into stalemate before the creation of a broad-based coalition government which has constantly bickered and struggled to produce reforms.

The proposals would see a party or coalition that won an election with at least 35 percent of the vote boosted by a winner's bonus of up to 18 percent that would give it a majority in parliament of between 53-55 percent.

If no side won at least 35 percent, a second round vote would be held between the two biggest groups with the winner awarded a majority of at least 53 percent.

The proposals would leave one widely criticized element of the current system in place, the so-called "blocked lists" that allow party bosses the power to appoint candidates.

But it would replace the current single nationwide list with a series of 120 electoral colleges in which the candidates would be chosen by primary and more clearly identified, answering objections from Italy's top court which has ruled the single list system unconstitutional.

In a separate move, which Renzi said could be approved by the party by mid-February, he proposed cutting the powers of local regions by reforming Article 5 of the constitution, removing most of the Senate's powers and transforming the upper house into an unelected chamber for regional issues.

Such changes would require parliamentary approval and constitutional amendment, a lengthy process which should ensure that the current left-right coalition led by Prime Minister Enrico Letta survives until at least 2015.

HOSTILITY

Renzi, a dynamic and ambitious young politician and a gifted communicator, has pressed ahead with the proposals despite marked hostility from many sections of the left suspicious of his impatience with many of the party's traditional values.

He warned against attempts to water down the package, which he said were not "a la carte reforms" and said his victory in the party primary gave him full legitimacy to act.

Renzi's meeting on Saturday with Berlusconi, the leader of the center-right Forza Italia party who is barred from parliament after a conviction for tax fraud, sparked unease within the PD and small parties backing Letta's government.

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Stefano Fassina, from the left-wing of the PD, who resigned as deputy economy minister this month after a dispute with the more moderate Renzi, said he was "ashamed" to see Renzi meet a convicted criminal at the PD's headquarters.

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Renzi dismissed the criticism as "quite bizarre", saying there was no way round consulting Berlusconi on the issue, which will require broad consensus in parliament. "Berlusconi is the head of the center-right ... it's just a fact," he said.

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For his part, Berlusconi welcomed Renzi's proposals. "We want to achieve a clear two party system in a climate of clarity and mutual respect," he said in a statement.

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However they have been regarded with some suspicion by small governing parties, including the New Center Right (NCD) of Deputy Prime Minister Angelino Alfano and the Civic Choice of ex-premier Mario Monti, which fear being eliminated.

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Alfano said he would be willing to agree as long as they awarded the winner's bonus to a coalition and not a single party, kept the threshold for entering parliament no higher than 4 percent, ended the single "blocked list" system and made each electoral coalition identify its candidate for prime minister.

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"Even three out of four would be enough, otherwise there'll be the risk of a government crisis," he told Radio 24.

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Renzi, who makes no secret of his ambitions to become prime minister, frequently criticizes Letta - who is also from the PD - and says he is determined to push ahead with electoral reform even if it increases strains among the ruling coalition.

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(Additional reporting by Valentina Consiglio; Editing by Alison Williams)

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West, Iran activate landmark nuclear deal

Iran has halted its most sensitive nuclear operations under a preliminary deal with world powers, winning some relief from economic sanctions on Monday in a ground-breaking exchange that could ease a threat of war.

The United States and European Union both suspended some trade and other restrictions against the OPEC oil producer after the United Nations' nuclear watchdog confirmed that Iran had fulfilled its side of an agreement made on November 24.

The announcements, which coincided with a diplomatic row over Iran's role at peace talks on Syria [ID:nL5N0KU1X2], will allow six months of negotiation on a definitive accord that the West hopes can end fears of Tehran developing nuclear weapons and Iran wants to end sanctions that are crippling its economy.

Iranian officials hailed a warming of ties that will also see their new president make a pitch to international business leaders at Davos later this week: "The iceberg of sanctions against Iran is melting," the head of Iran's Atomic Energy Organisation, Ali Akbar Salehi, told Iranian state television.

Iran should be able to recover $4.2 billion in oil revenues frozen in foreign accounts over the six months of the interim deal, as well as resume trade in petrochemicals and gold and other precious metals. But EU and U.S. officials stressed that other sanctions will still be enforced during the six months of talks and that reaching a final accord will be difficult.

Israel, which has called the interim pact a "historic mistake" and has repeatedly warned it might attack Iran to prevent it developing nuclear arms, said any final deal must end any prospect of Tehran building an atomic bomb - something Iran insists it has never had any intention of doing.

The interim accord was the culmination of years of on-off diplomacy between Iran and six powers - the United States, Russia, China, Britain, France and Germany. It marks the first time in a decade that Tehran has limited nuclear operations that it says are aimed mainly at generating electricity and the first time the West has eased its economic pressure on Iran.

TALKS AHEAD

"This is an important first step," said EU foreign policy chief Catherine Ashton. "But more work will be needed to fully address the international community's concerns regarding the exclusively peaceful nature of the Iranian nuclear program."

Ashton, who coordinates diplomatic contacts with Iran on behalf of the six world powers, said she expected talks on the final settlement to start in February.

U.S. State Department spokeswoman Jen Psaki said those negotiations would be "even more complex" and added: "We go into it clear-eyed about the difficulties ahead."

A White House spokesman said the "aggressive enforcement" of the remaining sanctions would continue.

A senior U.S. official said: "This temporary relief will not fix the Iranian economy. It will not come close.

"Iran is not and will not be open for business until it reaches a comprehensive agreement."

President Barack Obama's administration faces opposition to the easing of sanctions from Israel and from some members of Congress who have threatened to tighten some restrictions.

Israeli Prime Minister Benjamin Netanyahu told parliament the temporary pact fell short of preventing Iran from working on nuclear arms. He said: "In the final deal, the international community must get the Iranian nuclear train off the track. Iran must not have the capability to produce atomic bombs."

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Israel, assumed to be the only nuclear power in the Middle East, has been discomfited by U.S. detente with Iran since the election last year of President Hassan Rouhani, a relative moderate. He is expected to court global business this week at the World Economic Forum in Davos.

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The deal took months of secret negotiations between Washington and Tehran and marks a new thaw in relations that have been generally hostile since the 1979 Islamic revolution.

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IAEA

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Under the interim deal, Iran agreed to suspend enrichment of uranium to a fissile concentration of 20 percent, a short technical step away from the level needed for nuclear weapons.

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It also has to dilute or convert its stockpile of this higher-grade uranium, and cease work on the Arak heavy water reactor, which could provide plutonium, an alternative to uranium for bombs.

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The IAEA said Tehran had begun the dilution process and that enrichment of uranium to 20 percent had been stopped at the two facilities where such work is done.

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"The Agency confirms that, as of January 20, 2014, Iran ... has ceased enriching uranium above 5 percent U-235 at the two cascades at the Pilot Fuel Enrichment Plant (PFEP) and four cascades at the Fordow Fuel Enrichment Plant (FFEP) previously used for this purpose," its report to member states said.

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It was referring to Iran's two enrichment plants, at Natanz and Fordow. Cascades are linked networks of centrifuge machines that spin uranium gas to increase the concentration of U-235, the isotope used in nuclear fission chain reactions, which is found in nature at concentrations of less than 1 percent.

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The U.S. government estimates the value to Iran of sanctions relief at about $7 billion in total, although some diplomats say much will depend on the extent to which Western companies will now seek to re-enter the Iranian market.

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DOUBTS

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Analysts said much was still unclear about how world powers could achieve their goal of ensuring Iran cannot, secretly or otherwise, develop the capability to build a nuclear weapon.

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Mark Dubowitz, head of the Foundation for Defense of Democracies in Washington and a proponent of tough sanctions on Iran, said that by providing short-term economic relief, the West was losing future bargaining power with Tehran.

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"The interim deal does nothing over the next 12 months to prevent Iran from proceeding with the nuclear-weapon and ballistic-missile research that are the keys to a deliverable nuclear weapon," he said. "Ahead of final negotiations, Tehran will be in a stronger position to block peaceful Western efforts to dismantle its military-nuclear program."

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The U.N. nuclear watchdog will play a key role in checking that Iran implements the deal, but its increased access falls short of what it says it needs to investigate suspicions that Tehran may have worked on designing an atomic bomb in the past.

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"The accord gives the powers and Iran plenty of flexibility in going about reducing Iran's nuclear threat to a level the world will accept," said Mark Hibbs of the Carnegie Endowment. "But it hasn't spelled out how they will work with the IAEA to resolve allegations Iran has been working on nuclear weapons."

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(Additional reporting by Parisa Hafezi in Ankara, Lesley Wroughton, Jeff Mason and Steve Holland in Washingon, Adrian Croft in Brussels and Maayan Lubell in Jerusalem; Writing by Justyna Pawlak; Editing by Peter Graff and Alastair Macdonald)

German minister asks bankers to help with regulation

German Finance Minister Wolfgang Schaeuble on Monday urged financiers to use their knowledge to improve international rules aimed at preventing future financial crises.

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Schaeuble told a group of some 1,000 commercial and central bankers, brokers and politicians at exchange operator Deutsche Boerse's New Year's reception there could be no end to regulation because financial markets continue to innovate.

Regulators are aware of the need for strong capital markets, Schaeuble said, pledging to take the arguments of the financial sector seriously and try to proceed with moderation.

"So don't invest your energy and competence only in warding off new regulation, but rather help to find better solutions and to put them in place internationally," Schaeuble said.

"I am asking you simply to pitch in," he added.

Schaeuble's appeal struck a more conciliatory tone following a spat last year with Deutsche Bank Co-Chief Executive Juergen Fitschen over how far regulation should go.

Schaeuble argued in a newspaper interview in December last year that banks remained creative in getting around regulation.

Fitschen, in his capacity as head of Germany's BDB banking association, had responded: "It's unacceptable for people to stand there and say that banks are still circumventing the rules."

(Reporting by Jonathan Gould, editing by David Evans)

Ban Ki-moon withdraws Iran's invite to Syria talks

U.N. Secretary-General Ban Ki-moon on Monday withdrew an offer for Iran to attend Syria peace negotiations after Tehran declared it does not support the June 2012 political transition deal that is the basis for the talks.

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"He (Ban) continues to urge Iran to join the global consensus behind the Geneva communiqué," Ban's spokesman Martin Nesirky said. "Given that it has chosen to remain outside that basic understanding, (Ban) has decided that the one-day Montreux gathering will proceed without Iran's participation."

Ban said earlier that Iran's public statement that it did not support the 2012 Geneva deal calling for a transitional government for Syria was "not consistent" with assurances he had been given by Iran's Foreign Minister Mohammad Javad Zarif.

(Reporting by Michelle Nichols and Louis Charbonneau)

U.N. invitation to Iran throws Syria talks into doubt

U.N. chief Ban Ki-moon withdrew a last-minute invitation to Iran to attend peace talks on Syria on Monday after the Syrian opposition threatened to boycott this week's conference if President Bashar al-Assad's main sponsor took part.

Ending nearly 24 hours of confusion that dismayed diplomats who have spent months cajoling Assad's opponents to negotiate, Ban's spokesman said Iran was no longer welcome at the initial day of talks at Montreux, Switzerland on Wednesday.

The opposition immediately withdrew its threat to stay away from the conference known as Geneva-2. But the uproar over Iran, which has provided Assad with money, arms and men, underlined the difficulties of negotiating an end to a bloody, three-year civil war that has divided the Middle East and world powers.

Ban, his spokesman said, made the invitation to Iran after Iranian officials assured him they supported the conclusion of a U.N. conference in 2012, known as Geneva-1, which called for a transitional administration to take over power in Syria - something neither Assad nor Tehran have been willing to embrace.

Throughout Monday Iranian officials made clear that they were not endorsing that conclusion as a basis for the talks.

"The secretary-general is deeply disappointed by Iranian public statements today that are not at all consistent with that stated commitment," Ban's spokesman Martin Nesirky told reporters at a briefing.

"He continues to urge Iran to join the global consensus behind the Geneva Communique. Given that it has chosen to remain outside that basic understanding, he has decided that the one-day Montreux gathering will proceed without Iran's participation.

While rebels and their Western and Arab allies see the 2012 accord as obliging Assad to step down, the Syrian leader has support from Iran in rejecting that view. Russia, too, though a participant in the 2012 accord and co-sponsor of this week's first direct peace negotiations, says outsiders should not force Assad out. Moscow has said Iran should be at the talks.

Syria's opposition National Coalition had said it would not take part if Iran did, threatening to wreck painstaking months of diplomatic effort in bringing representatives of the two sides to the table. It welcomed Ban's change of heart.

"We appreciate the United Nations and Ban Ki-moon's understanding of our position. We think they have taken the right decision," Monzer Akbik, chief of staff of the coalition's president, told Reuters.

"Our participation is confirmed for 22 January.

Expectations are low all round, but Western diplomats, some of whom had spoken of a "mess" and "disaster" after Ban's unexpected invitation to Iran late on Sunday, said the talks could now provide some start to easing a conflict that has killed over 130,000 Syrians and made millions refugees.

"We are hopeful that, in the wake of today's announcement, all parties can now return to focus on the task at hand, which is bringing an end to the suffering of the Syrian people and beginning a process toward a long-overdue political transition," U.S. State Department spokeswoman Jen Psaki said in a statement.

Washington had earlier called on the United Nations to rescind the invitation to Tehran.

Adding to clouds over prospects for accord, however, Assad said he might seek re-election this year, effectively dismissing any talk of negotiating an end to his rule.

DISPUTE OVER 2012 ACCORD

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Ban has said his invitation was based on an assurance from Foreign Minister Mohammad Javad Zarif that "Iran understands that the basis for the talks is the full implementation of the 30 June 2012 Geneva communique."

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But other officials appeared to contradict him before Iran's U.N. ambassador issued Tehran's unambiguous statement saying that the country would definitely not take part if it was required to accept a June 2012 deal agreed in Geneva.

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"If the participation of Iran is conditioned to accept Geneva I communique, Iran will not participate in Geneva II conference," Mohammad Khazaee said.

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Russia said there was no point in a conference without Iran. It did not immediately react to Ban's change of heart.

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"Not to ensure that all those who may directly influence the situation are present would, I think, be an unforgivable mistake," Foreign Minister Sergei Lavrov said.

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Saudi Arabia, Iran's regional foe and the rebels' main sponsor, had said Iran should not be permitted to attend because it had troops on the ground aiding Assad.

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ASSAD TO SEEK RE-ELECTION

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The conference had already appeared highly unlikely to produce any major steps toward ending the war. Western and rebel demands that Assad end four decades of rule by his family seem less realistic now after a year that saw Assad's position improve both on the battlefield and in the diplomatic arena.

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His forces recovered ground, rebels turned against one another and Washington abandoned plans for air strikes, ending two years of speculation that the West might join the war against him as it did against Libya's Muammar Gaddafi in 2011.

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In an interview on Monday with news agency AFP, Assad declared that he was likely to run for re-election later this year, making clear that his removal was not up for discussion.

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"I see no reason why I shouldn't stand," Assad said. "If there is public desire and a public opinion in favor of my candidacy, I will not hesitate for a second to run for election."

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He ruled out accepting opposition figures as ministers in his government, saying that was "not realistic" and said the Swiss talks should aim to "fight terrorism" - his blanket term for his armed opponents.

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A powerful alliance of Islamist rebel groups has denounced the Switzerland talks and refused to attend. Even securing the attendance of the main political opposition National Coalition was a fraught affair, with many groups voting not to go.

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Syria is now divided, with mainly Sunni Muslim rebels controlling the north and east, Kurds controlling the northeast and Assad's forces, led by members of his Alawite minority sect, controlling Damascus and the coast.

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Western leaders who have been calling for Assad to leave power for three years have curbed their support for his opponents over the past year because of the rise of Islamists linked to al Qaeda in the rebel ranks.

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The al Qaeda-linked Islamic State in Iraq and the Levant, which fought battles with other groups and controls the town of Raqqa, imposed sweeping restrictions on personal freedoms in recent days, banning music and images of people.

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No faction has the muscle to win a decisive victory on the ground. Rich Sunni Muslim Arab states led by Saudi Arabia are funding and arming the rebels, while Iran and its Lebanese Shi'ite allies Hezbollah back Assad. Violence is spreading into Iraq and Lebanon, and survival is becoming increasingly difficult for the millions of Syrians forced from their homes.

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Syria is one of the biggest issues dividing Tehran from the West at a time when relations marked by decades of hostility have otherwise started to thaw with the election of comparatively moderate president Hassan Rouhani in Tehran.

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Global powers agreed in November to ease U.S. and European Union sanctions on Iran in return for curbs to its nuclear program, and some sanctions were suspended on Monday, but the thaw has so far had little impact on Syria diplomacy.

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(Additional reporting by Michelle Nichols at the United Nations, Oliver Holmes in Beirut, Ali Abdelatti in Cairo, Lesley Wroughton in Washington, John Irish in Paris and Tim Heritage and Gabriella Baczynska in Moscow; Writing by Peter Graff, Philippa Fletcher and Alastair Macdonald; Editing by Jonathan Oatis)

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Super Bowl turns spotlight on New Jersey

When New Jersey steps into the spotlight next month to host its first Super Bowl, it hopes to alter its international reputation beyond stereotypes from TV shows such as mob drama "The Sopranos" and the vapid 20-somethings of "Jersey Shore."

One problem for the state, which has long lived in the shadow of its superstar neighbor New York, is that the new MetLife Stadium, site of the February 2 National Football League championship game, is in an industrial area that belies New Jersey's designation as "The Garden State."

Officials in East Rutherford, some 10 miles west of New York City, will roll out the red carpet for an expected 400,000 visitors, with economic activity forecast at $500 million.

"New Jersey has been fighting a negative stereotype for a long, long time," said Michael Rockland, a professor of New Jersey history at Rutgers University. It "was kind of the national joke there for a while, with a reputation for corruption, being called the armpit of America."

New Jersey is a state of contrasts. Home to the largest number of Superfund toxic waste sites in the country, it also takes pride in 120 miles of shoreline - some of which is still recovering from the devastation of Superstorm Sandy in 2012 - and about 15 percent of its land is freshwater wetlands.

The state was at the forefront of the 19th century American industrial revolution, and its major cities remain dotted with long-abandoned warehouses and smokestacks.

It is home as well to some of America's wealthiest communities, including the borough of Alpine, with a median home price of $4.5 million, the most expensive in the country, real estate experts say.

Many of the residents who live in New Jersey's toniest areas commute to New York City for work, and the state has been seen as an annex of its more famous neighbor. In fact, two sports teams that call MetLife Stadium home are, in name, from New York - the Giants and Jets.

East Rutherford, where the new stadium was completed in 2010, might not put the state's best face forward.

"People coming to New Jersey for the Super Bowl are basically seeing the ugliest part of the state," Rockland said.

SPRUCING UP THE AREA

One of the first orders of business is to ready the 82,500-seat stadium for the game, with thousands of workers upgrading security, building a new broadcast center and creating decorations for the two competing teams, the NFL said.

With an expected attendance of nearly a half million, local officials have spent months making preparations to handle crowds moving between New York City and the stadium area.

"Every Super Bowl is different," said NFL spokesman Brian McCarthy. "The stadiums for the last two Super Bowls, New Orleans and Indianapolis, were in a downtown city setting. But previous Super Bowls were held in somewhat similar situations as this year."

As the stadium undergoes its facelift, officials are also sprucing up the surrounding area, long dominated by a megamall that New Jersey Governor Chris Christie once called "the ugliest damn building in New Jersey, and maybe America."

The American Dream project, formerly called Xanadu, stands out with its blue, white and orange rectangular facade, evoking the towers of shipping containers at New Jersey's cargo ports.

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Dogged for a decade by funding problems, it will remain vacant on game day although Christie has supported its completion, saying it will bring thousands of jobs.

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"It's going to be an embarrassment," said Jeff Tittel, executive director of the Sierra Club in New Jersey, which promotes environmental conservation. "Everyone who shows up for the Super Bowl from all over the world is going to look at that thing, scratch their heads and try to figure out what it is."

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"American Dream is under construction," said Alan Marcus, a mall project spokesman who called the criticism "absolutely unfair."

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New Jersey tourism officials said they are ready for the influx of visitors, emphasizing that the state "has plenty to offer, from historic sites and national parks to world-class entertainment, resorts and gaming in Atlantic City."

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But however much they polish it up, the area around the stadium will still remind visitors of New Jersey's industrial heritage, said Rutgers' Rockland.

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"We aren't the Garden State," he said. "We might have been during the 19th Century but we then became one of the most industrial states in the whole country. The Garden State idea is a total misnomer."

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(Reporting by Victoria Cavaliere; Editing by Scott Malone and Gunna Dickson)

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New trial sought for South Carolina teen executed for 1944 murders

Attorneys in South Carolina say they have fresh evidence that warrants a new trial in the case of a 14-year-old black teenager put to death nearly 70 years ago for the murders of two white girls.

George Stinney Jr. was the youngest person to be executed in the United States in the last century, and attorneys say the request for another trial so long after a defendant's death is the first of its kind in the state.

No official record of the original court proceedings exists; no trial participants are alive, and no evidence was preserved. The law is unclear on whether any statute of limitations would prevent the case from being reopened.

Despite those obstacles, attorneys for Stinney's family will argue at a hearing on Tuesday that the crime that rocked the small mill town of Alcolu in 1944 deserves another look.

"This is a horrific case," defense lawyer Steven McKenzie said. "Whether justice is 70 years old or one year old or one month old, we think justice needs to be done."

The defense filed its motion requesting a new trial in October based on newly discovered evidence. Since then, new witnesses who could help exonerate Stinney have come forward, including a former cell mate who says the teen told him police forced his confession, attorneys said.

The defense also is relying on old newspaper accounts and a few records in state and county archives to make their case to a judge in Sumter, about 20 miles from the town where Stinney was tried and convicted.

Lawyers said they had determined Stinney was convicted solely on testimony by police who said the teen confessed to killing Betty June Binnicker, 11, and Mary Emma Thames, 7. The two girls disappeared on March 23, 1944, after leaving home on their bicycles to look for wildflowers.

The girls rode a distance of about a mile to a railroad track that divided the segregated town, according to the defense's account of the case in court records.

Stinney and his younger sister Amie were sitting on the tracks as their family cow grazed nearby. Stinney's sister recalls the girls asking where they could find flowers before both pairs of children went their separate ways.

Binnicker and Thames never returned home. A search party found their bodies the next morning in a shallow ditch behind a church. Their skulls had been crushed and the bicycles laid on top of them.

After Stinney told someone he had seen the girls along the railroad tracks, he was picked up by police and held for five days before being arrested, said Matthew Burgess, one of the attorneys seeking a new trial.

"Since he became identified as the person who had seen them last before they died, they decided to arrest him," Burgess said.

The teen's family was run out of town, and his siblings never saw him again, Burgess said.

SWIFT COURT PROCEEDINGS

Stinney's lawyers called no witnesses during his daylong trial a month after the murders, according to the current defense team, and a jury of white men deliberated for only 10 minutes before finding him guilty.

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Then-governor Olin D. Johnston refused to grant clemency. Stinney, who weighed just 95 pounds, was executed by electrocution in June 1944.

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Solicitor Ernest "Chip" Finney III, the prosecutor who will appear at the hearing this week for the state, said the case was the most interesting one ever to cross his desk. But he said he will argue that no information about the original trial exists to show it had been conducted improperly.

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"We're talking about procedures and rules 70 years ago that none of us were around to understand," said Finney, son of the first black chief justice on the state's Supreme Court. "There's not going to be enough evidence to open it up."

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Relatives of Binnicker, one of the girls killed, do not want the case revisited without good reason, Finney said.

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"If there was strong evidence to support the fact that this young man was not involved, they would not want to see the case remain closed," the prosecutor said. "But they don't want to see it opened for the fact that South Carolina has a bad history in these kinds of cases."

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Burgess said a member of the search party that found the girls' bodies has offered new testimony that raises questions about where the crime was carried out and whether Stinney was capable of doing it.

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Stinney's sister, Amie Ruffner, now in her 70s and living in New Jersey, will testify that Stinney was with her the entire day of the murders and could not have killed the girls, Burgess said.

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She was never asked to speak on her brother's behalf at the original trial.

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(Editing by Colleen Jenkins and Gunna Dickson)

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Key U.S. senator objects to part of Obama spy data plan

The head of the U.S. Senate Intelligence Committee objected on Sunday to President Barack Obama's proposal for the government to give up control of the storage of the telephone records of millions of Americans it holds as part of its counterterrorism efforts.

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Obama on Friday announced an overhaul of U.S. surveillance activities following criticism sparked by the disclosure of leaked documents exposing the wide reach of National Security Agency spy efforts.

He proposed an overhaul of the government's handling of bulk telephone "metadata" - lists of million of phone calls made by Americans that show which numbers were called and when.

Obama said the government will not hold the bulk telephone records. A presidential advisory panel had recommended that the data be controlled by a third party such as telephone companies, but Obama did not propose who should store the phone information in the future.

Signaling congressional opposition to the change, Democratic Senator Dianne Feinstein, who heads the intelligence panel, criticized the idea of moving the data out of government control.

"I think that's a very difficult thing because the whole purpose of this program is to provide instantaneous information to be able to disrupt any plot that may be taking place," Feinstein told the NBC program "Meet the Press."

"I think a lot of the privacy people (advocates) perhaps don't understand that we still occupy the role of the 'Great Satan,' new bombs are being devised, new terrorists are emerging, new groups - actually, a new level of viciousness. And I think we need to be prepared," she added.

Obama asked Attorney General Eric Holder and the intelligence community to report back to him by March 28 on how to preserve the necessary capabilities of the program without the government holding the metadata.

The usefulness of keeping the metadata records was questioned by a presidential review panel, which found that while the program had produced some leads for counterterrorism investigators, such data had not been decisive in a single case.

Representative Mike Rogers, the Republican chairman of the House of Representatives Intelligence Committee, faulted Obama for creating uncertainty surrounding the program.

"Just in my conversations over the weekend with intelligence officials, this new level of uncertainty is already having a bit of an impact on our ability to protect Americans by finding terrorists who are trying to reach into the United States," Rogers told CNN's "State of the Union."

Democratic Senator Mark Udall, a member of the intelligence panel, urged an end to the collection of metadata.

"We can be effective in protecting our country but we don't need to collect every single phone record of every single American on every single day," he told the CBS program "Face the Nation."

Feinstein expressed doubt that a proposal to end the collection of such data could pass in Congress, adding: "The president has very clearly said that he wants to keep the capability."

(Reporting by Will Dunham; Editing by Jim Loney and Meredith Mazzilli)

Most New Yorkers support Cuomo medical marijuana pilot plan: poll

Most New Yorkers support Governor Andrew Cuomo's plan to allow the use of medical marijuana in a pilot program in up to 20 hospitals, according to a poll released on Monday.

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Nearly half (49 percent) of the New York voters polled thought he should skip the pilot step entirely and legalize its medical use statewide, as has already happened in about 20 other states, the Siena College Poll said.

A total of 28 percent of New Yorkers said the pilot program was the way to go.

A slim majority of 54 percent, however, oppose following the lead of the states of Colorado and Washington and legalizing marijuana for recreational use; 41 percent supported such a move.

"Voters under 35 say yes, as do a bare majority of men. Democrats and independents are closely divided but Republicans are a strong no," Siena College pollster Steven Greenberg said in a statement. "New Yorkers are not yet ready to duplicate what they see in the Mile High City."

Cuomo announced the plan in his annual State of the State address earlier this month, saying that he would allow up to 20 hospitals to prescribe medical marijuana to help manage the pain and to help treat cancer and other serious illnesses.

He said he would use an executive power to set up the program, and that it would not need new legislation.

Siena College spoke to 808 people registered as voters in New York last week for the poll, which had a margin of error of 3.4 percent.

(Reporting By Jonathan Allen; Editing by Bernard Orr)

New trial sought for South Carolina teen executed for 1944 murders

Attorneys in South Carolina say they have fresh evidence that warrants a new trial in the case of a 14-year-old black teenager put to death nearly 70 years ago for the murders of two white girls.

George Stinney Jr. was the youngest person to be executed in the United States in the last century, and attorneys say the request for another trial so long after a defendant's death is the first of its kind in the state.

No official record of the original court proceedings exists; no trial participants are alive, and no evidence was preserved. The law is unclear on whether any statute of limitations would prevent the case from being reopened.

Despite those obstacles, attorneys for Stinney's family will argue at a hearing on Tuesday that the crime that rocked the small mill town of Alcolu in 1944 deserves another look.

"This is a horrific case," defense lawyer Steven McKenzie said. "Whether justice is 70 years old or one year old or one month old, we think justice needs to be done."

The defense filed its motion requesting a new trial in October based on newly discovered evidence. Since then, new witnesses who could help exonerate Stinney have come forward, including a former cell mate who says the teen told him police forced his confession, attorneys said.

The defense also is relying on old newspaper accounts and a few records in state and county archives to make their case to a judge in Sumter, about 20 miles from the town where Stinney was tried and convicted.

Lawyers said they had determined Stinney was convicted solely on testimony by police who said the teen confessed to killing Betty June Binnicker, 11, and Mary Emma Thames, 7. The two girls disappeared on March 23, 1944, after leaving home on their bicycles to look for wildflowers.

The girls rode a distance of about a mile to a railroad track that divided the segregated town, according to the defense's account of the case in court records.

Stinney and his younger sister Amie were sitting on the tracks as their family cow grazed nearby. Stinney's sister recalls the girls asking where they could find flowers before both pairs of children went their separate ways.

Binnicker and Thames never returned home. A search party found their bodies the next morning in a shallow ditch behind a church. Their skulls had been crushed and the bicycles laid on top of them.

After Stinney told someone he had seen the girls along the railroad tracks, he was picked up by police and held for five days before being arrested, said Matthew Burgess, one of the attorneys seeking a new trial.

"Since he became identified as the person who had seen them last before they died, they decided to arrest him," Burgess said.

The teen's family was run out of town, and his siblings never saw him again, Burgess said.

SWIFT COURT PROCEEDINGS

Stinney's lawyers called no witnesses during his daylong trial a month after the murders, according to the current defense team, and a jury of white men deliberated for only 10 minutes before finding him guilty.

_0">

Then-governor Olin D. Johnston refused to grant clemency. Stinney, who weighed just 95 pounds, was executed by electrocution in June 1944.

_1">

Solicitor Ernest "Chip" Finney III, the prosecutor who will appear at the hearing this week for the state, said the case was the most interesting one ever to cross his desk. But he said he will argue that no information about the original trial exists to show it had been conducted improperly.

_2">

"We're talking about procedures and rules 70 years ago that none of us were around to understand," said Finney, son of the first black chief justice on the state's Supreme Court. "There's not going to be enough evidence to open it up."

_3">

Relatives of Binnicker, one of the girls killed, do not want the case revisited without good reason, Finney said.

_4">

"If there was strong evidence to support the fact that this young man was not involved, they would not want to see the case remain closed," the prosecutor said. "But they don't want to see it opened for the fact that South Carolina has a bad history in these kinds of cases."

_5">

Burgess said a member of the search party that found the girls' bodies has offered new testimony that raises questions about where the crime was carried out and whether Stinney was capable of doing it.

_6">

Stinney's sister, Amie Ruffner, now in her 70s and living in New Jersey, will testify that Stinney was with her the entire day of the murders and could not have killed the girls, Burgess said.

_7">

She was never asked to speak on her brother's behalf at the original trial.

_8">

(Editing by Colleen Jenkins and Gunna Dickson)

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Analysis: Gambling revenue at heart of Detroit's dilemmas, new and old

For Detroit, the road in and out of U.S. bankruptcy court is paved with casino money.

An economic lifeline, wagering tax revenue from the city's three casinos is at the heart of the bankruptcy plan submitted by Emergency Manager Kevyn Orr, and it is behind the surprise rejection of a deal with banks last week that has thrown a wrench into Detroit's route and timing to recovery.

Moreover, some $330 million in assistance pledged by a coalition of philanthropic groups, including the Ford Foundation and the Kresge Foundation, will not begin flowing to Detroit until it exits bankruptcy, the head of one group told Reuters.

Michigan voters in 1996 approved casino gambling in Detroit, hoping to revitalize the ghost town. Three glitzy resorts eventually opened, helping to spark a burst of energy and bringing as much as $180 million in annual taxes.

But the funds have been tied up since 2009 by a separate, disastrous deal that Detroit is trying to reverse.

In an effort to reduce its unfunded pension liability, the city sold $1.45 billion of bonds in 2005 and 2006, then used derivatives known as swaps to cut risk. The derivatives deal backfired as interest rates dropped, when Detroit expected them to rise. When Detroit's credit rating was cut to junk in 2009, banks had the option to demand $400 million, and the city fended off immediate payment by pledging casino revenue as collateral.

The deal's continued threat to Detroit's financial future was one of the key elements that pushed the city into the largest municipal bankruptcy in U.S. history in July.

And now with an eye on exiting bankruptcy court, the city is seeking unfettered access to the casino funds to help improve city services - and finance a loan to terminate the derivatives deal.

"Every day that we don't have access to casino revenue, we cannot make the necessary investment in this city to provide for the health, safety and welfare of the citizens," Orr said in a deposition last August, shortly after bankruptcy was declared.

In late December, he negotiated a deal for the banks behind the derivatives deal to take a 43 percent reduction in value, only to have federal bankruptcy Judge Steven Rhodes last week reject the plan, saying the discount was not deep enough.

Orr had hoped to get Detroit out of bankruptcy by September 2014.

"Reports of the quick in and out of Chapter 9 for Detroit may be measurably exaggerated," said William Brandt, president and CEO of Development Specialists Inc, which deals with restructuring and public finance.

"NO WAY" WITHOUT CASINO MONEY

Casino taxes, Detroit's third biggest revenue source after municipal income taxes and state revenue sharing, have been described by Orr and his consultants as the city's most stable source of money.

"They've got to get the revenues. There's no way they can make the plan work without those revenues," said Laura Bartell, a Wayne State University law professor.

As Orr was preparing to take Detroit into bankruptcy last summer, he first negotiated a deal with the banks behind the swaps, Merrill Lynch Capital Services and UBS AG, that would help emancipate the city from the swaps deal at a 25 percent discount to the nearly $300 million estimated cost at the time.

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As the bankruptcy proceedings got under way, under pressure from Rhodes, Merrill and UBS agreed to raise the discount to 43 percent, reducing Detroit's payment to $165 million plus up to $4.2 million in costs.

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But last week Rhodes declared the concessions still were not enough. He called the payment "too high a price" and put the casino money at the center of debate by declaring that Detroit probably did not have a right to pledge that money as collateral in the first place under state law. He suggested Detroit might win in a bid to invalidate the swaps altogether if a court were to find the city had no right to pledge the casino money.

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PAIN TO GO AROUND

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One message from Rhodes' ruling is that all creditors have to lower their expectations, said Richard Ciccarone, president and CEO of Merritt Research Services, a provider of municipal bond credit information. "(The judge) wants everybody to feel the pain. Nobody is getting special treatment," he said.

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James Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler, said Rhodes rejection of the deal may benefit Detroit in the long term.

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"It will motivate people that the emergency manager is negotiating with to rethink their positions," he said.

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Rhodes' ruling Thursday also introduced new questions about whether Detroit can count on casino money to fix its problems.

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His comment from the bench that the original pledge of casino money for the swaps deal may have violated Michigan's gaming law raised questions about Detroit's new plan to get out of the derivatives mess: a loan secured with a pledge of the city's income and casino tax revenue.

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Detroit had planned just such a loan, of $285 million, from Barclays, to pay off the swaps and provide funds for running the city as well.

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When he rejected the plan to end the current derivatives deal, Judge Rhodes effectively swept aside that plan. He also emphasized that he would need to approve any new loan involving casino revenue, to make sure they are not misused.

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(Editing by David Greising, Peter Henderson and Bernard Orr)

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