Obama urges Congress to pass migrant funding request quickly

President Barack Obama urged Congress on Wednesday to pass his request quickly for $3.7 billion in funds to address the influx of unaccompanied migrant children from Central America crossing the U.S. border.

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After meeting with Texas Governor Rick Perry, Obama said he would consider deploying the National Guard to the border as Perry and other Republicans have requested.

Obama told reporters he urged Perry to press Texas lawmakers in the U.S. Congress to support the White House's funding request.

The president also rejected criticism that he did not visit the border during his Texas visit.

"This isn't theater. This is a problem," Obama said.

(Reporting by Steve Holland in Dallas and Jeff Mason in Washington; Editing by Sandra Maler)

New Orleans-area school district agrees to rules protecting Hispanics

A New Orleans-area school district reached a deal with federal officials on Wednesday to make changes that address allegations of discrimination against Hispanic students and parents.

The settlement, which ends a federal probe, stems from a formal complaint filed against the Jefferson Parish Public School System in 2012 alleging it required proof of U.S. citizenship or immigration status from Hispanic students, failed to provide interpreters for parents with limited English and overlooked racially charged bullying.

“We applaud Jefferson Parish for ensuring that all students will have access to their public schools and that all parents... are equipped with the information necessary for their children to fully participate,” Department of Education Assistant Secretary for Civil Rights Catherine E. Lhamon said in a statement.

The three-year agreement between the U.S. Departments of Justice and Education and the school district will require it to change any policies dissuading non-citizens from enrolling, provide interpreters for parents and mandate that it investigate and resolve allegations of discrimination.

Roughly 21 percent of students in the school district are Hispanic and 11 percent are English-language learners, according to figures published by the district.

The complaint from which the investigation stemmed was filed by the Southern Poverty Law Center, together with 16 students and their parents.

"The agreement is incredibly comprehensive and addresses all the allegations we made in 2012," said Jennifer Coco, staff attorney for the Southern Poverty Law Center. "Now we have reforms that are going to affect thousands of students."

District officials did not immediately respond to messages seeking comment.

(Editing by Eric Walsh)

Obama rejects criticism over border crisis

President Barack Obama rejected demands from Texas Governor Rick Perry and others that he visit the border where a child migrant crisis is unfolding and said his critics should get behind his request for $3.7 billion if they want to solve the problem.

"Are folks more interested in politics or are they more interested in solving the problem," Obama said he told Perry. "If they are interested in solving the problem then this can be solved. If the preference is for politics then it won’t be solved."

Obama visited Texas for the first time since the influx of child migrants from Central America overwhelmed border resources. He had talks with Perry aboard his Marine One helicopter and in a group meeting with local officials that Obama called constructive.

In a brief news conference after the meeting, Obama dismissed criticism from Perry, a potential 2016 Republican presidential candidate, that he should personally visit the border region for a first-hand look.

"This isn’t theater. This is a problem. I’m not interested in photo ops. I’m interested in solving a problem," he said.

The president, on a three-day trip out of Washington, is spending much time raising money for Democratic congressional candidates, leading to criticism that he should spend some time visiting the border. Obama said he is getting plenty of information from top advisers who are visiting the area.

"There’s nothing that is taking place down there that I am not intimately aware of and briefed on," he said.

Obama is battling political pressure from supporters and opponents alike to halt a growing humanitarian crisis along the Texas border with Mexico.

His request for emergency funds on Tuesday was the most aggressive step yet by his administration to take care of the children who have come from Central America illegally while accelerating the process to have them deported.

The money, however, must be approved by the Democrat-controlled Senate and Republican-led House of Representatives. Republicans, who have pressed the White House to do more to tackle the crisis, gave the proposal a wary reception.

“The House is not going to just rubber-stamp what the administration wants to do," said Representative Mario Diaz-Balart of Florida, who is a member of Speaker John Boehner's border crisis task force.

Republican Representative Mick Mulvaney criticized the funding request and suggested foreign aid should be docked to pay for it.

"I think it’s a charade. I think the president has set it up to make it look as though the only reason he’s not enforcing the border is because he doesn’t have the money. And that’s not accurate," Mulvaney said.

Obama said he emphasized to Perry that he was largely in agreement with the Republican's suggestion that more border patrol agents be moved to the crisis zone.

Perry quickly issued a statement after the talks saying he demanded that Obama dispatch 1,000 National Guard troops to the border.

“Securing the border is attainable, and the president needs to commit the resources necessary to get this done," Perry said.

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Obama said he would consider Perry's demand that National Guard troops be deployed to the area.

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"The bottom line actually is there is nothing the governor indicated that he'd like to see that I have a philosophical objection to," Obama said.

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The greater challenge, he said, is whether Congress is prepared to approve his funding request. He urged Perry to appeal to the Texas congressional delegation to seek passage of the $3.7 billion package.

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"These days in Washington everybody is always concerned about everything falling victim to partisan politics," Obama said. "If I sponsored a bill declaring apple pie American, it might fall victim."

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The child migrant crisis has made the debate over immigration reform even more divisive. Without government action, the administration projects more than 150,000 unaccompanied children under the age of 18 next year could be fleeing to the United States from poverty and drug- and gang-related violence in Honduras, El Salvador and Guatemala.

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(Additional reporting by Susan Cornwell, Susan Heavey, and Richard Cowan; Editing by Caren Bohan, Jonathan Oatis and Ken Wills)

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Colorado puts annual marijuana demand at 130 tonnes

Total marijuana demand in Colorado, where the nation's first recreational pot shops opened in January, is estimated at 130 tonnes this year, a study for the state's revenue authority said on Wednesday.

A day after Washington became only the second state to allow recreational sales of the drug to adults, the report said the projected demand in Colorado was much higher than anticipated.

More than 90 percent of it came from residents, while out-of-state visitors accounted for only about 9 tonnes.

"The primary difference is caused by much heavier dosage amounts consumed by the state's 'heavy user' population – those who consume marijuana on a daily basis," said the report, prepared for the Colorado Department of Revenue.

It said tax figures showed that the retail supply of marijuana was growing in the state, while supply via medical

marijuana dispensaries had remained relatively constant.

"The retail demand is derived primarily from out-of-state visitors and from consumers who previously purchased from the Colorado black and gray markets," the report said.

And it estimated that out-of-state visitors currently accounted for about 44 percent of retail sales in the Denver metro area, compared with about 90 percent in mountain resorts.

(Reporting by Daniel Wallis; Editing by Lisa Shumaker)

Shooting at Tennessee National Guard armory leaves one soldier dead

A 20-year-plus veteran of the Tennessee National Guard was shot to death on Wednesday by an intruder at an armory outside Nashville, and a man described as a "person of interest" in the case was detained hours later for questioning, authorities said.

The shooting occurred about 5 p.m. local time in the National Guard armory in Lobelville, a town in Perry County, Tennessee, about 75 miles (120 km) southwest of Nashville.

Tennessee Bureau of Investigation spokesman Josh Devine said late Wednesday night that detectives were probing how the shooter gained access to the building, which is normally kept locked to outsiders for security reasons.

The victim was a sergeant first-class in the Tennessee Guard who was rushed to Perry County hospital but died of his wounds while being prepared for a helicopter flight to Vanderbilt University Medical Center in Nashville, authorities said.

Authorities did not identify the detained man, but Devine said he was not a member of the Guard.

The Tennessee National Guard did not respond to requests for additional information.

The shooting prompted an intense manhunt in the surrounding area, and the sheriff's department cautioned residents to stay indoors and lock up their homes as a precaution.

The man being questioned was taken into custody at a house a short distance from the armory, about 3 1/2 hours after the shooting, Devine said.

(Reporting by Tim Ghianni in Nashville; Writing by Steve Gorman; Editing by Eric Walsh and Michael Perry)

Parched California proposes steep fines for over-watering lawns

Regulators in drought-stricken California are proposing stringent new conservation measures to limit outdoor water use, including fines of up to $500 a day for using a hose without a shut-off nozzle.

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The most populous U.S. state is suffering its third year of drought and in January Governor Jerry Brown declared a drought emergency, allowing the state to request federal aid.

In some cities and towns about half the water residents use is for lawns and cleaning cars, according to the State Water Resources Control Board, which made the proposal public on Tuesday. Voluntary measures do not go far enough, it said.

"It's not meant to spank people, it's meant to make people aware and say, 'This is serious; conserve'," said agency spokesman Timothy Moran, noting that the rules authorize local law enforcement agencies to write tickets imposing fines.

The new restrictions prohibit watering gardens enough to cause visible runoff onto roads or walkways, using water on driveways or asphalt, and in non-recirculating fountains.

Urban water agencies would be subject to daily fines of up to $10,000 for not implementing water-shortage contingency plans, which restrict how many days a week residents can engage in outdoor watering, among other limits on their customers.

Moran said the regulations, which constitute the first such statewide mandates for residents and urban water agencies, are subject to public comment and regulators will vote on July 15. If passed, they would take effect in August and remain in place for nine months with the possibility of being extended.

"California has been subject to multi-year droughts in the past and there is no guarantee that precipitation this winter will lift the State out of current drought conditions," the proposal says.

(Reporting by Madeleine Thomas; Writing by Eric M. Johnson; Editing by Louise Ireland)

Florida set to execute convicted murderer of 11-year-old girl

A Florida man who confessed to the rape and murder of a child is scheduled to die by lethal injection on Thursday, while another convicted murderer in Georgia had his death sentence, also due to be carried out on Thursday, commuted to life imprisonment.

Their cases follow a string of executions in the U.S. South last month, including those of two other men in Florida and Georgia, in the wake of a botched Oklahoma execution in April that sparked an uproar among death penalty opponents.

Florida's Eddie Wayne Davis, 45, was sentenced to death in Florida after he admitted to taking an 11-year-old girl from her mother’s home, sexually assaulting and strangling her in 1994.

Davis confessed three times to the murder of Kimberly Waters, who was found strangled in a dumpster. He was 25 years old at the time of her killing, but his defense team claimed that he was mentally still a juvenile.

The Georgia man, Tommy Lee Waldrip, was convicted of the 1991 shooting death of a man who had been scheduled to testify against his son in an armed robbery trial.

Waldrip, 68, shot Keith Evans, then beat him to death and set his truck on fire, according to trial testimony. Evans had worked as a clerk in the store Waldrip’s son had allegedly robbed.

Both Davis and Waldrip lost court appeals this week seeking to halt their executions. But the Georgia Board of Pardons and Paroles on Wednesday granted Waldrip clemency and commuted his death sentence to life without parole.

It was the fifth death sentence commuted by the Parole Board since 2002 and the first since April 2012.

The board typically does not cite reasons for its decisions. Age could have been a factor in the decision as Waldrip would have been the oldest person to be executed in Georgia since the U.S. Supreme Court reinstated the death penalty in 1976.

The Florida Supreme Court on Monday rejected Davis' claim that a metabolic blood disorder known as porphyria might cause him to have a painful reaction to midazolam, the first of three drugs used by the state in executing convicted killers.

Davis would be the seventh person executed in Florida this year, while Waldrip would have marked Georgia's second death row execution of 2014.

(Reporting by Bill Cotterell in Tallahassee, Fla. and David Beasley in Atlanta; Writing by Letitia Stein and David Adams; Editing by Eric Walsh)

Six killed, including four children, in Houston-area shooting

A man accused of fatally shooting four children ages 4 to 14 and their parents after entering their suburban Houston home disguised as a FedEx delivery man while looking for his former wife was charged with capital murder on Thursday.

Ronald Lee Haskell, 33, went to the home searching for his former wife, who is related to the victims, and held the children at gunpoint until their parents returned, authorities said. He then brought all seven family members into a room and shot them, killing all except a teenage girl, authorities said.

"I've not personally in 40 years seen a tragedy in one family this horrific," Harris County Constable Ron Hickman told reporters.

Haskell, who formerly worked for a contractor used by FedEx, is being held without bail. In Texas, the charge of capital murder carries the possibility of the death penalty.

Police in Logan, Utah, said in a statement that Haskell and his then-wife lived in the city from 2006 to 2013. They said they had once arrested him for domestic assault and violence but the charges were dropped after he accepted a plea deal. Police in Texas said Haskell carried a California driver's license.

Haskell is alleged to have killed two boys ages 4 and 14, two girls ages 7 and 9, and their parents Stephen Stay, 39, and Katie, 33. Five of them were found dead and one of the children died after being flown to a hospital for treatment. A 15-year-old daughter survived the attack, the sheriff's office said.

Local media reported that the family was bound and each member shot execution style, but police would not confirm the reports.

"Stephen and Katie Stay and their beautiful children were an amazing and resilient family. They lived to help others, both at church and in their neighborhood. We love them beyond words," Katie Stay's father, Roger Lyon, said in a statement issued by the family.

"We are shocked and devastated by this tragedy that has taken these precious souls away from us," Lyon said, adding the teenage daughter who survived the shooting, Cassidy Stay, was expected to make a full recovery.

The suspect's former wife did not live at the house and was not harmed in the incident.

'IN AWE OF HER BRAVERY'

Another shooting spree may have been thwarted by Cassidy, who suffered a bullet wound to the head and called police to alert them about the gunmen, police said. Cassidy, left for dead, managed to call the 911 emergency number and informed authorities the gunman was headed to the home of relatives nearby, police said.

"We are in awe of her bravery and courage in calling 911, an act that is likely to have saved all of our lives. She is our hero," the family statement said.

Police intercepted Haskell, sparking a slow-speed car chase through tree-lined roads and past houses with wide yards that came to a halt when he was trapped on a dead-end street.

Haskell was taken into custody after a four-hour standoff on Wednesday night.

Neighbors described the Stay family as kind and cheerful, and expressed shock at what had unfolded in their normally quiet suburb.

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"We don't know why this happened," said neighbor Paul Anthony Slawinski. "This man, his wife and children were the definition of compassion and charity."

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A February 2013 post on Stephen Stay's Facebook page said he was able to open his own real estate company with the help of his wife. Katie Stay's page has a picture of the smiling family dressed in light blue shirts sitting together on a swing.

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FedEx said in a statement that Haskell was once employed by a contractor used by the shipping company but had not worked for that company since January. "Our heartfelt thoughts and condolences go out to all those involved in this tragic incident," FedEx said.

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Haskell's arraignment was scheduled for Friday.

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(Reporting and writing by Jon Herskovitz; Additional reporting by Jim Forsyth in San Antonio and Curtis Skinner in New York; Editing by Will Dunham and Peter Cooney)

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Exclusive: U.S. grills suspects in new strategy to build bank laundering cases

U.S. prosecutors are using a new tactic to crack down on banks that fail to fight money laundering: systematically asking suspects in a wide range of criminal cases to help them follow the money back to their bankers.

The efforts are paying off in probes of banks and other financial institutions now filling the prosecution pipeline, according to Jonathan Lopez, who last month left his post as deputy chief of the Justice Department’s Money Laundering and Bank Integrity Unit (MLBIU).

"Asking criminals the simple question 'Who is moving your money?' can lead the Department of Justice to a financial institution's doorstep," said Lopez, who declined to identify specific targets.

The department confirmed the stepped up reliance on criminal informants in anti-money laundering investigations, but also declined to discuss probes underway.

The four-year-old MLBIU, which includes a dozen prosecutors, is responsible for insuring that financial institutions adhere to U.S. laws including the main U.S. anti-money laundering law, the Bank Secrecy Act (BSA). It has filled in an enforcement gap among federal financial regulators who lack the capacity or expertise to aggressively pursue money-laundering cases.

The Justice Department has begun seeking banking information not only from perpetrators of fraud and drug traffickers, but also from suspects linked to the full range of criminal activity, said Lopez, who is now an attorney at Orrick, Herrington & Sutcliffe LLP in Washington. Many criminals seeking reduced punishment have pointed fingers at banks, casinos, money transfer businesses, check cashers, broker-dealers and other financial institutions, he said. 

"Essentially any criminal who moves money can be a potential gateway to a financial institution," he said.

MEDICARE FRAUDSTERS

The money-laundering unit has worked with Justice Department prosecutors and investigators around the country to ensure that grilling suspects for money-laundering leads is a routine part of every investigation, Lopez said.

"We have been telling prosecutors and agents that this is a priority for us," said Justice Department spokesman Peter Carr.

The unit has worked on high-profile cases, including one resolved in 2012 against HSBC, which entered into a $1.9 billion settlement and admitted anti-money laundering failures that allowed drug cartels to wash hundreds of millions of dollars.

In another case, payment transfer company MoneyGram International Inc agreed in November 2012 to forfeit $100 million and admitted it aided in wire fraud and failed to maintain an effective anti-money laundering program in violation of the BSA.

The anti-money laundering unit has also successfully pursued smaller targets, including check-cashing firms in New York.

Some of these cases involved informants. Others drew on leads, such as documents subpoenaed directly from financial institutions during probes of criminal schemes, Lopez said.

He declined to link specific tactics to individual cases, other than to say the charges against the check-cashing firms were the result of information provided by those committing fraud against the government's Medicare health benefits system.

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The unit is also deep into a probe into Citigroup's Banamex USA over possible failures to police money transfers across the U.S.-Mexico border, a source familiar with the matter told Reuters last week. It is not known whether informants led prosecutors to the bank.

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Citigroup declined to comment other than to refer to a filing in March in which the bank said it had received grand jury subpoenas from the U.S. Attorney's Office in Massachusetts concerning compliance with the BSA and federal anti-money laundering requirements. The Federal Deposit Insurance Corp has also subpoenaed Banamex USA concerning BSA and anti-money laundering issues. Citigroup said then that it is cooperating fully with these inquiries.

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Authorities in the United States and other nations have cracked down on money laundering as part of their fight against drug trafficking, terrorism and organized crime. The effort is distinct from the sanctions-violation probes that have led to large fines against foreign banks such as BNP Paribas.

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Among the requirements of the BSA, financial institutions must report to authorities transactions that are suspicious or involve large amounts of cash.

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As borne out by the details of numerous enforcement cases, some institutions have simply ignored their reporting obligations while others balk at the costs of meeting them. Such institutions are attractive to those who want to evade scrutiny of their financial transactions. 

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Yet federal regulators have failed to identify many such firms during routine institutional exams by teams that are too small or lack experience in detecting specific BSA compliance lapses, industry consultants say.

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Before the bank integrity unit was created, criminal investigations only occasionally led to cases against financial institutions for anti-money laundering failures that were considered "willful."

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The new unit has sought to “breathe new life into BSA enforcement,” Lopez said.

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(Reporting by Brett Wolf of the Compliance Complete service of Thomson Reuters Accelus in St. Louis; Editing by Randall Mikkelsen and Martin Howell)

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Former IRS official sought to hide information, lawmakers assert

Congressional Republicans asserted on Wednesday that new emails show a former Internal Revenue Service official deliberately sought to hide information from Congress, opening a new chapter in a probe of IRS treatment of conservative groups.

An email exchange released by House Oversight Committee Chairman Darrell Issa shows the former official, Lois Lerner, asking a colleague whether communications made through an internal messaging system can be searched by Congress. Issa said the exchange, culled from documents provided to Congress last week, showed that Lerner was "leading an effort to hide information from congressional inquiries."

The latest accusation prompted heated questioning of IRS Commissioner John Koskinen at a hearing and angry exchanges among a Democrat and Republicans on the panel.

In the emails, Lerner says she has been telling colleagues to be cautious about what they say in emails and asks whether internal messages are subject to the same data transparency rules. Her colleague replies that even though some messages could be exempt, they should still be treated as if reviewable.

Republicans have been investigating IRS scrutiny of conservative groups seeking tax-exempt status since the practice burst into view in May 2013. That was when Lerner publicly apologized for it at a conference.

Her unexpected statement triggered the worst crisis at the IRS in years, with Republicans accusing the agency of singling out conservative groups, some aligned with the Tea Party, for unfair treatment. Lerner retired from the IRS in September.

The issue had faded from view until last month when the IRS acknowledged losing some of Lerner's emails, which Republicans want for review. Republicans accused the IRS of hiding them and of obstructing the congressional inquiry.

Democrats, for their part, accused Republicans of rehashing baseless accusations for political theater in what has come to be known as the IRS Tea Party targeting affair.

The IRS reviews the activities of non-profit organizations seeking exemptions from paying taxes because U.S. law limits their political involvement. Non-profits have increasingly been used as conduits for political spending, especially by conservatives.

On Wednesday, several Republican lawmakers on the panel grilled Koskinen about when the agency would make officials available to talk about how the emails were misplaced.

Koskinen said he could not do so until an internal investigation is complete. He also said he had never heard of the internal messaging system.

Lerner’s questions about internal messages suggest she had something to hide, Republican Representative Jim Jordan said, prompting an angry exchange with Gerry Connolly, a Democrat.

Connolly said one interpretation of Lerner’s emails could be that she understood that internal messages should be treated as reviewable by Congress.

"You expect us, and more importantly the American people, to believe that, oh yeah, perfect, now we know we need to save these? That is the most ridiculous interpretation," Jordan said.

In response, Connolly said: "As a matter of personal privilege, I would ask that my colleague not question another member as ridiculous."

(Reporting By Mark Felsenthal)

BNP pleads guilty again in $9 billion U.S. sanctions accord

BNP Paribas, for the second time in nine days, pleaded guilty on Wednesday to conspiring to violate U.S. sanctions, as part of a nearly $9 billion settlement in which the French bank admitted to breaking embargoes against Sudan, Cuba and Iran.

Prosecutors had accused the bank of processing billions of dollars through the U.S. financial system on behalf of the Sudanese and others barred because of human rights abuses, support for terrorists and other national security concerns.

U.S. District Judge Lorna Schofield accepted the plea at a hearing in Manhattan federal court. The plea was entered by the bank's general counsel, Georges Dirani.

BNP Paribas admitted to having conspired from 2004 to 2012 to violate the International Emergency Economic Powers Act and the Trading with the Enemy Act.

The U.S. Justice Department unveiled the record settlement on July 1, when the bank pleaded guilty in New York state court to charges of falsifying business records and conspiracy brought by Manhattan District Attorney Cyrus Vance.

Schofield accepted BNP's plea and approved the settlement as fair and appropriate, saying the "severity of the defendant's conduct more than warrants" the size of the penalties. She scheduled sentencing for Oct. 3.

"No financial institution is immune from the rule of law," Schofield said. The plea comes as the Justice Department steps up investigations of other banks for possible money laundering or sanctions violations.

Banks under scrutiny include France's Credit Agricole SA and Societe Generale, and Germany's Commerzbank AG and Deutsche Bank AG, according to sources and public disclosures.

In an unprecedented step, regulators banned BNP for a year from conducting certain U.S. dollar transactions, a key part of the bank's global business. It also agreed to forfeit $8.83 billion and pay a $140 million fine, a record for violating U.S. sanctions.

The criminal charges and plea marked a rarity for a major financial institution, as U.S. authorities sought to combat criticism after the financial crisis that some banks had become "too big to jail."

Manhattan U.S. Attorney Preet Bharara, whose office spearheaded the BNP investigation, said in a speech in March that it is "dangerous" to presume that the collateral consequences of charging financial institutions mean they should never be prosecuted.

(Reporting by Joseph Ax and Nate Raymond in New York; Additional reporting by Aruna Viswanatha in Washington; Editing by Chris Reese and Andre Grenon)

Obama urges Congress to pass migrant funding request quickly

President Barack Obama urged Congress on Wednesday to pass his request quickly for $3.7 billion in funds to address the influx of unaccompanied migrant children from Central America crossing the U.S. border.

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After meeting with Texas Governor Rick Perry, Obama said he would consider deploying the National Guard to the border as Perry and other Republicans have requested.

Obama told reporters he urged Perry to press Texas lawmakers in the U.S. Congress to support the White House's funding request.

The president also rejected criticism that he did not visit the border during his Texas visit.

"This isn't theater. This is a problem," Obama said.

(Reporting by Steve Holland in Dallas and Jeff Mason in Washington; Editing by Sandra Maler)

Gaza rockets land deep in Israel as it bombards Palestinian enclave

Israeli air strikes shook Gaza every few minutes on Wednesday, and militants kept up rocket fire at Israel's heartland in intensifying warfare that Palestinian officials said has killed at least 53 people in the Hamas-dominated enclave.

Missiles from Israel's Iron Dome defense system shot into the sky to intercept rockets launched, for the second straight day, at Tel Aviv, the country's commercial capital. Some were also aimed at Israel's Dimona nuclear plant, 80 km (50 miles) from Gaza, but were either shot down or landed in open country.

With cries of "Allahu akbar" (God is Greatest), Palestinians in the Gaza Strip cheered as rockets streaked overhead toward Israel, in attacks that could provide a popularity boost for Islamist Hamas, whose rift with neighboring Egypt's military-backed government has deepened economic hardship.

Dimona, desert site of a nuclear reactor and widely assumed to have a role in atomic weaponry, was targeted by locally made M-75 long-range rockets, militants said. The Israeli army said Iron Dome shot down one and two others caused no damage. It was unclear how close they came to the town or the nuclear site.

Communities near coastal Tel Aviv and in the south, closer to Gaza, were also targeted. In the longest-range attack since Tuesday, when Israel stepped up its offensive, a rocket hit near Zichron Yaakov, a town 115 km (70 miles) north of Gaza.

At least 45 civilians, including 12 children, were among the 53 Palestinian killed in two days of fighting, and more than 340 people have been wounded, hospital officials said. Forty-five of those killed were civilians, and 12 were under 18 years old.

No Israeli deaths or serious injuries were reported and Israeli news reports hailed as heroes the military crews of the Iron Dome batteries, which are made in Israel and partly funded by the United States. The military said 48 rockets struck Israel on Wednesday, and Iron Dome intercepted 14 others.

With frequent explosions from air strikes echoing through Gaza City, its main shopping street was largely deserted. Residents reported hundreds of attacks on Wednesday.

The Israeli military said it had bombarded 550 Hamas sites, including 60 rocket launchers and 11 homes of senior Hamas members. It described those dwellings as command centers.

In the latest strikes, Israel targeted a car marked as a media vehicle of a Gaza website which had the letters "TV" on it and killed the driver, four others were killed in the bombing of a cafe in Khan Younis in the southern Gaza Strip, and a 37-year-old man was killed in central Gaza, hospital officials said.

Palestinian officials said at least 25 houses were either destroyed or damaged, and not all belonged to militants.

BARRAGES

The fighting is the most serious between Israel and Gaza militants since an eight-day war in 2012. Violence began building up three weeks ago after three Jewish students were abducted in the occupied West Bank and later found killed. Last week, a teenage Palestinian was kidnapped and found killed in Jerusalem.

Cairo brokered a truce in the conflict two years ago, but the current, military government's hostility toward Islamists in general and to Hamas, which it accuses of aiding fellow militants in Egypt's Sinai peninsula, could make a mediation role more difficult. Hamas denies those allegations.

Palestinian rocket barrages have sent Israelis racing for bomb shelters, with radio stations constantly interrupting broadcasts to announce where sirens have sounded. But the Tel Aviv Stock Exchange seemed untroubled, ending the day with shares slightly higher. [ID:nL6N0PK1BX]

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Israeli leaders, who seem to have wide popular support at home for the Gaza operation, have warned of a lengthy campaign and possible ground invasion of one of the world's most densely populated territories, home to nearly 2 million Palestinians.

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"We have decided to step up even more the attacks on Hamas and terrorist organizations in Gaza," Prime Minister Benjamin Netanyahu said in a statement.

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"The Israel Defence Forces are prepared for every option. Hamas will pay a heavy price for firing at Israeli citizens."

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Netanyahu's security cabinet has already approved the potential mobilization of up to 40,000 reserve troops.

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"This operation could take time. We are resolved to defend our families and our homes," the prime minister said.

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Netanyahu's office said he had discussed the situation with United Nations Secretary-General Ban Ki-moon, German Chancellor Angela Merkel and U.S. Secretary of State John Kerry and that he would speak to other world leaders later.

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Washington backed Israel's actions in Gaza, while the European Union and United Nations urged restraint on both sides. U.S. President Barack Obama, in a German newspaper article to be published on Thursday, said: "At this time of danger, everyone involved must protect the innocent and act in a sensible and measured way, not with revenge and retaliation."

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Life appeared deceptively normal in Israeli cities, where shops were open and roads clogged with traffic. But questions were being asked on radio talk shows about an exit strategy and a timeframe for the offensive.

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At a sidewalk cafe on a fashionable avenue in Tel Aviv, patrons seemed to take an air raid siren in their stride, staying in line for their coffee as joggers and cyclists passed.

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Some 80 km (50 miles) away, outside homes hit by air strikes in Gaza, there were scenes of panicked neighbors, including mothers clutching crying children, running into the street to escape what they feared would be another attack.

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At one convenience store, which had remained open, customer Abu Ahmed, 65, said he was pleased by the militants' resolve. "I am fine, as long as Tel Aviv is being hit," he said as he bought cigarettes.

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HOMES HIT

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In an air strike on a home in the north of the Gaza Strip, a leader of the Islamic Jihad group and five of his family were killed, the Palestinian Interior Ministry said. An 80-year-old woman was killed in an Israeli attack on another target in the center of the 40-km-long (25-mile-long) territory, local officials said.

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A 60-year-old man and his son were killed when two missiles hit their house in Beit Hanoun in the north.

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Israeli strikes on militants' homes, local residents said, are usually preceded by either warning fire or a telephone call telling its inhabitants to flee, in an attempt by Israel to avoid civilian casualties. But such bombing sometimes wounds or kills people in neighboring houses.

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Palestinian President Mahmoud Abbas, who is based in the Israeli-occupied West Bank and entered a power-sharing arrangement with Hamas in April after years of feuding, said he had spoken to Egypt about the Gaza crisis. "This war is not against Hamas or any faction but is against the Palestinian people," the Western-backed leader said.

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Egypt's state news agency said Egyptian authorities had decided to open the Rafah border crossing to Gaza on Thursday to allow wounded Palestinians to receive medical care in Egypt.

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Under President Abdel Fattah al-Sisi, Cairo has secured closures on the Gaza border, increasing economic pressure on Hamas from a long-running Israeli blockade.

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"Sisi stressed Egypt was interested in the safety of the Palestinian people in the Gaza Strip and sparing this grave assault," a statement from Abbas's office said, adding that Cairo would "exert efforts to reach an immediate ceasefire".

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But an Israeli minister appeared to play down any expectations that Egypt would intervene soon.

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In the West Bank, about 400 Palestinian youths, chanting their support for Hamas's armed wing, threw stones at an army checkpoint. Troops responded with teargas and rubber bullets.

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Israel has blamed Hamas for the killing of the three Jewish seminary students who disappeared while hitchhiking in the West Bank on June 12. Hamas has neither confirmed nor denied a role.

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The rocket fire from Gaza began after Israel arrested hundreds of Hamas activists in a West Bank sweep it mounted in tandem with a search for the youths, who were found dead last week. A Palestinian teen was abducted and killed in Jerusalem last Wednesday in a suspected revenge murder. Six Israelis have been arrested in that case.

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While threatening an "earthquake" of escalation against Israel, Hamas said it could restore calm if Israel halted the Gaza offensive, once again committed to a 2012 truce and freed the prisoners it detained in the West Bank last month.

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(Additional reporting by Dan Williams, Maayan Lubell and Ori Lewis in Jerusalem, Noah Browning and Ali Sawafta in Ramallah and Mark Felsenthal and David Brunnstrom in Washington; Writing by Jeffrey Heller; Editing by Will Waterman, Alastair Macdonald and Mohammad Zargham)

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Judge strikes down Colorado gay marriage ban, stays ruling

A state judge struck down Colorado's gay marriage ban on Wednesday, saying the prohibition violated constitutional rights, but put his ruling on hold pending appeal.

It was the latest of several decisions by state and federal judges to strike down state bans on same-sex nuptials and then stay their rulings pending challenges to higher courts.

Adams County District Court Judge C. Scott Crabtree said in his decision that Colorado's prohibition, approved by voters in 2006, conflicted with the fundamental right to marry.

"The Court rejects the State's attempt to too narrowly describe the marital right at issue to the right to marry a person of the same sex," Crabtree wrote.

There are 19 states, plus the District of Columbia, where same-sex marriage is now legal. Several other same-sex marriage lawsuits are moving toward the U.S. Supreme Court.

Two other lawsuits, testing bans in Oklahoma and Virginia, have already been heard by appeals courts.

The attorney general of neighboring Utah said on Wednesday he would appeal directly to the Supreme Court a ruling by a federal appeals court last month that backed gay marriage in the conservative, largely Mormon state.

Responding to Crabtree's ruling, Colorado Attorney General John Suthers said it reaffirmed the fact that the fate of the state's same-sex marriage law now rested with the Supreme Court.

"Judge Crabtree provides additional clarity that until the high court rules on the issue of same-sex marriage, Colorado’s current laws remain in place," Suthers, a Republican, said in a statement.

'FINAL RESOLUTION'

"Adherence to the rule of law will bring about the final resolution with the greatest certainty and legal legitimacy," Suthers added.

He has sued the elected county clerk in Boulder, Colorado, after she issued more than 100 marriage licenses to gay couples following the ruling on Utah by the 10th U.S. Circuit Court of Appeals.

On Wednesday, Boulder County District Court Judge Andrew Hartman held a hearing in the case in which an attorney for the state accused the clerk, Hillary Hall, of flouting the law.

Assistant Solicitor General Michael Francisco said the state's 63 other county clerks had abided by the appellate court's ruling putting its decision on hold.

"Clerk Hall is the only outlier," he said.

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Hall testified briefly, repeating her stance that she could not deny same-sex couples their fundamental right to marry.

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Three lesbians also described the difficulties gay couples face in Colorado because of the ban, including in areas such as making medical decisions for partners, getting approval to adopt children, and being denied federal benefits.

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The question of whether the licenses issued by Hall are valid will be litigated separately.

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Outside the building, gay marriage supporters waved signs reading: "Legalize Love" and "Support Equality."

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Hartman said he would rule on the issue "very shortly," but gave no indication when that might be.

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(Reporting by Keith Coffman; Writing by Daniel Wallis; Editing by Sandra Maler and Peter Cooney)

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Obama rejects criticism over border crisis

President Barack Obama rejected demands from Texas Governor Rick Perry and others that he visit the border where a child migrant crisis is unfolding and said his critics should get behind his request for $3.7 billion if they want to solve the problem.

"Are folks more interested in politics or are they more interested in solving the problem," Obama said he told Perry. "If they are interested in solving the problem then this can be solved. If the preference is for politics then it won’t be solved."

Obama visited Texas for the first time since the influx of child migrants from Central America overwhelmed border resources. He had talks with Perry aboard his Marine One helicopter and in a group meeting with local officials that Obama called constructive.

In a brief news conference after the meeting, Obama dismissed criticism from Perry, a potential 2016 Republican presidential candidate, that he should personally visit the border region for a first-hand look.

"This isn’t theater. This is a problem. I’m not interested in photo ops. I’m interested in solving a problem," he said.

The president, on a three-day trip out of Washington, is spending much time raising money for Democratic congressional candidates, leading to criticism that he should spend some time visiting the border. Obama said he is getting plenty of information from top advisers who are visiting the area.

"There’s nothing that is taking place down there that I am not intimately aware of and briefed on," he said.

Obama is battling political pressure from supporters and opponents alike to halt a growing humanitarian crisis along the Texas border with Mexico.

His request for emergency funds on Tuesday was the most aggressive step yet by his administration to take care of the children who have come from Central America illegally while accelerating the process to have them deported.

The money, however, must be approved by the Democrat-controlled Senate and Republican-led House of Representatives. Republicans, who have pressed the White House to do more to tackle the crisis, gave the proposal a wary reception.

“The House is not going to just rubber-stamp what the administration wants to do," said Representative Mario Diaz-Balart of Florida, who is a member of Speaker John Boehner's border crisis task force.

Republican Representative Mick Mulvaney criticized the funding request and suggested foreign aid should be docked to pay for it.

"I think it’s a charade. I think the president has set it up to make it look as though the only reason he’s not enforcing the border is because he doesn’t have the money. And that’s not accurate," Mulvaney said.

Obama said he emphasized to Perry that he was largely in agreement with the Republican's suggestion that more border patrol agents be moved to the crisis zone.

Perry quickly issued a statement after the talks saying he demanded that Obama dispatch 1,000 National Guard troops to the border.

“Securing the border is attainable, and the president needs to commit the resources necessary to get this done," Perry said.

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Obama said he would consider Perry's demand that National Guard troops be deployed to the area.

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"The bottom line actually is there is nothing the governor indicated that he'd like to see that I have a philosophical objection to," Obama said.

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The greater challenge, he said, is whether Congress is prepared to approve his funding request. He urged Perry to appeal to the Texas congressional delegation to seek passage of the $3.7 billion package.

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"These days in Washington everybody is always concerned about everything falling victim to partisan politics," Obama said. "If I sponsored a bill declaring apple pie American, it might fall victim."

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The child migrant crisis has made the debate over immigration reform even more divisive. Without government action, the administration projects more than 150,000 unaccompanied children under the age of 18 next year could be fleeing to the United States from poverty and drug- and gang-related violence in Honduras, El Salvador and Guatemala.

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(Additional reporting by Susan Cornwell, Susan Heavey, and Richard Cowan; Editing by Caren Bohan, Jonathan Oatis and Ken Wills)

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Japan denies report on North Korea's abduction survivor list

Japan on Thursday denied as "sheer misreporting" a front page newspaper story that North Korea had provided a list of some 30 Japanese survivors still living in the isolated country, including known victims of state-sponsored kidnapping.

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The Nikkei business daily said North Korea produced the list at a July 1 meeting in Beijing to discuss North Korea's plan to resume investigations into the fate of Japanese citizens abducted by North Korean agents in the 1970s and 80s.

North Korea agreed in May to reopen the probe, prompting Japan to ease some sanctions.

"I'm aware of the report, but nothing like that happened during the meeting or during a recess," Chief Cabinet Secretary Yoshihide Suga told a regular news conference.

"It's sheer misreporting."

The Nikkei, citing sources, said Tokyo had matched about two-thirds of the names on the list with domestic records of missing persons.

Prime Minister Shinzo Abe has made the abductees' fate a focus of his political career, and proof that some of them are alive would almost certainly boost his popularity.

Some of those on the list are among the 12 victims of North Korean abductions recognized by Tokyo who have yet to return to Japan, the Nikkei reported.

Pyongyang admitted in 2002 to kidnapping 13 Japanese citizens, and five of those abductees and their families later returned to Japan. North Korea said that the remaining eight were dead and that the issue was closed.

The North promised to reopen the investigation in 2008, but never followed through. It also reneged on promises made in multilateral talks aimed at ending its nuclear weapons program and declared the negotiations had ended.

(Reporting by Hugh Lawson and Kiyoshi Takenaka; Editing by Robin Pomeroy and Ron Popeski)

Three Ukrainian soldiers killed in further clashes in the east

Three Ukrainian soldiers have been killed and 27 wounded in clashes with pro-Russian separatist rebels in the east of the country, the military said on Thursday.

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Government forces have recently gained the upper hand in the three-month conflict against separatists in the Russian-speaking eastern regions in which more than 200 government troops have been killed as well as hundreds of civilians and rebel fighters.

But though government forces pushed the rebels out of a stronghold in Slaviansk at the weekend, the heavily armed separatists have dug in in Donetsk, a city of 900,000 people, and remain active in and around Luhansk on the Russian border.

The government's "anti-terrorist operation" said that one soldier was killed late on Wednesday when rebels fired machine-guns at a truck carrying soldiers at Muratova near Luhansk.

"The vehicle was ambushed. In the course of the fighting one serviceman was killed and three were wounded," it said in a statement.

Separately, two soldiers were killed and six wounded when their armored vehicle was blown up by a landmine near Chervona Zorya, near Donetsk, it said.

Buoyed by the success in Slaviansk, President Petro Poroshenko is pressing forward with a military offensive against the rebels who are appealing, apparently in vain, for help from Russia, though they say they are recruiting new fighters from among the local population.

Poroshenko has ruled out air strikes and artillery bombardment because of the large civilian population in Donetsk.

His military nonetheless say they have a plan to deliver a "nasty surprise" to the rebels and "liberate" Donetsk and Luhansk. The separatists are occupying administrative buildings in the two cities and have dug into positions on the outskirts of Donetsk.

(Writing by Richard Balmforth; Editing by Louise Ireland)

Fed independence questioned as Republicans ramp up pressure

A surge of Republican pressure is bringing the Federal Reserve's long-held independence into question again, as conservative lawmakers seek to place the U.S. central bank under tougher scrutiny.

With Democrats controlling the Senate since the 2008 financial crisis, the bank and its supporters have had the luxury of shrugging off Fed-related laws from the Republican-controlled House of Representatives.

But a Republican takeover of the Senate in November's midterm elections would increase the chances of some of those measures hitting the Senate floor, and changing the way the Fed functions.

Two Republican congressmen proposed a new bill on Monday that would force the Fed to disclose information it has historically kept private. That bill will be discussed at a hearing on Thursday by the House Financial Services Committee, which is convening a panel to discuss reforming the Fed.

"I think there's a chance of legislation that affects us," Richmond Fed President Jeffrey Lacker, told reporters in Lynchburg, Va., last month. "I think it's something that people within the system are aware of. I just hope it's legislation that's constructive and useful."

At least two of the Senate seats up for grabs feature candidates who strongly support auditing the Fed, including Rep. Cory Gardner of Colorado and Rep. Steve Daines of Montana. Polls show Daines well ahead in his race while Gardner is neck and neck with his Democratic opponent.

Bills under proposal include measures that would force the Fed to be officially audited, conduct cost-benefit analysis before issuing regulations, restrict the power of the Fed chair, and strip the Fed of its low-unemployment mandate.

"While he believes the agency must remain independent, it should not be immune from congressional scrutiny," said Alee Lockman, Daines' communications director. Daines also believes Congress should change the Fed's mission, Lockman said.

The Fed has faced political pressure at various points in its 100-year history, starting with its inaction during the Great Depression, and for its high-inflation policies of the 1970s. Bank bailouts and the Fed's economic stimulus after 2008 also brought the ire of politicians, and featured in the 2012 U.S. Republican presidential nomination campaign.

Republican candidate Rick Perry famously said that then Fed Chairman Ben Bernanke would be treated "pretty ugly" in Texas if he printed money ahead of the election.

"Hopefully common sense will prevail. Applying cost-benefit analysis to regulation is no different than what most regulatory agencies do," said Austan Goolsbee, economics professor at the University of Chicago, Booth School of Business. "Moving deeper into the auditing of the Fed’s monetary policy decisions, however, puts the issue of Fed independence right in the cross-hairs," said Goolsbee, a former economic adviser to President Barack Obama and chairman of the Council of Economic Advisers from 2010-2011.

(Editing by James Dalgleish)

Fifty-three blindfolded bodies found in Iraq as political leaders bicker

Iraqi security forces found 53 corpses, blindfolded and handcuffed, south of Baghdad on Wednesday as Shi'ite and Kurdish leaders traded accusations over an Islamist insurgency raging in the country's Sunni provinces.

Officials said dozens of bodies were discovered near the mainly Shi'ite Muslim village of Khamissiya, with bullets to the chest and head, the latest mass killing since Sunni insurgents swept through northern Iraq.

"Fifty-three unidentified corpses were found, all of them blindfolded and handcuffed," Sadeq Madloul, governor of the mainly Shi'ite southern province of Babil, told reporters.

He said the victims appeared to have been killed overnight after being brought by car to an area near the main highway running from Baghdad to the southern provinces, about 25 km (15 miles) southeast of the city of Hilla.

The identity and sectarian affiliation of the dead people was not immediately clear, he said.

Sunni militants have been carrying out attacks around the southern rim of Baghdad since spring. In response, Shi'ite militias have been active in rural districts of Baghdad, abducting Sunnis they suspect of terrorism, many of whom later turn up dead.

The tit-for-tat attacks have escalated dramatically since Sunni Islamist fighters seized control of large parts of northern and western Iraq last month, sweeping towards Baghdad in the most serious challenge to the Shi'ite-led government of Prime Minister Nuri al-Maliki since the withdrawal of U.S. forces in 2011.

Mass killings of scores of victims have become a regular occurrence in Iraq for the first time since the worst days of sectarian and ethnic cleansing in 2006-2007.

The Sunni insurgents, led by the group known as the Islamic State which considers all Shi'ites heretics who must repent or die, boasted of killing hundreds of captive Shi'ite army troops after capturing the city of Tikrit on June 12. They put footage on the Internet of their fighters shooting prisoners.

In the following weeks more than 100 Sunni prisoners died in two mass killings while in government custody. The Shi'ite-led government officially says they were killed in crossfire when their guards came under attack, first in a jail in Baquba north of Baghdad and then in a convoy moving prisoners from Hilla. Sunni leaders say the prisoners were executed by their guards.

Amnesty International and the United Nations have reported several other suspected incidents of mass killings of prisoners in government custody.

The fighting between the Islamic State, formerly known as the Islamic State in Iraq and the Levant, backed by other armed Sunni groups, and the army backed by Shi'ite militias, threatens to split the country.

The renewed sectarian war has brought violence to levels unseen since the very worst few months of the fighting that followed the U.S. invasion to topple Saddam Hussein in 2003.

Abductions have also increased. On Friday, 17 Sunni Muslims were taken from the Musayyib area and briefly held by security forces and Shi'ite militia, a local tribal leader said, while a prominent sheikh was also kidnapped by unidentified men.

BARZANI FLAYS MALIKI

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Sunnis have backed the Islamic State's offensive because of the widespread view that they have been oppressed under Maliki's government.

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The United States and other countries have called for politicians to set up a more inclusive government in Baghdad following a parliamentary election in April. But the new legislature has so far failed to agree on leadership for the country, leaving Maliki in power as a caretaker.

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Sunnis and Kurds demand he leave office, but he shows no sign of agreeing to step aside. The Kurds are now closer than ever to abandoning Iraq altogether, with Massoud Barzani, leader of their autonomous region, calling last week for his parliament to ready a referendum on independence.

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In a statement late on Tuesday, Barzani launched a withering attack on Maliki, saying his eight years in office had brought disaster to Iraq and set the stage for its latest conflict.

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Kurdish forces have exploited the turmoil to seize control of the city of Kirkuk and its huge oil reserves a month ago, achieving a long-held dream. They regard the city, just outside their autonomous region, as their historical capital, while its oil could provide ample revenue for an independent state.

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"We have said we are not prepared under any circumstances to accept for our will to be bent, and go back to square one and face what reminds us of the policies that drowned Kurdistan in seas of the blood of its civilians and turned their homeland to ruins and mass graves," Barzani said, referring to years of oppression under Saddam.

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"That is what we have clearly faced throughout the period of abuse of power during the two disappointing terms of the prime minister."

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Maliki hit back in a weekly address on Wednesday, accusing Kurds of allowing their provincial capital Arbil to become a haven for the Islamic State and other militants, including former members of Saddam's now-banned Baath Party.

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"We will never be silent about Arbil becoming a base for the operations of the Islamic State and Baathists and al Qaeda and the terrorists," he said.

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Many Sunni Muslims who fled the mostly Sunni northern city of Mosul during the militants' offensive have ended up in Arbil.

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Medical sources and eyewitnesses said seven people were killed and 18 wounded in an air raid on Mosul on Wednesday.

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In Falluja, in the mainly Sunni western Anbar province that borders Syria, the general hospital said nine civilians died and 44 were wounded on Wednesday from aerial shelling and what residents call "barrel bombs". In fighting northeast of Baghdad, militants took control of the town of Sudor as well as a local dam in fighting which killed four soldiers and wounded six others, a source at the local al-Zahra hospital said.

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Sudor lies in Diyala province about 90 km (55 miles) from the capital, another area where the army and Shi'ite militias have clashed with the Sunni insurgents, with both sides gaining and losing territory.

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Also in Diyala, nine soldiers were killed and 38 were wounded as they repulsed an attack by the Islamic State fighters on the Mansuriya military base on Wednesday, police and hospital sources said.

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In the Zaiyouna district of eastern Baghdad, gunmen stormed the house of a government official, beheading his son and shooting dead his wife, a security source and a source in the Baghdad morgue said.

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(Additional reporting by Isabel Coles in Arbil, Ned Parker and Maggie Fick in Baghdad and a reporter in Hilla; Writing by Dominic Evans; Editing by Peter Graff and Giles Elgood)

Kerry faces uphill battle to defuse Afghan election standoff

U.S. Secretary of State John Kerry will arrive to a sceptical audience in Afghanistan this week to try to resolve a deepening crisis over a disputed presidential election which has stirred ethnic tensions in the fragile country.

Afghanistan has plunged into political chaos in recent months as a protracted election process to pick a successor to President Hamid Karzai has run into a deadlock between two leading candidates, Abdullah Abdullah and Ashraf Ghani.

Preliminary results from the June 14 second-round run-off put Ghani, a former World Bank official, in the lead with 56.4 percent of the vote, but Abdullah has rejected the count and his aides have threatened to set up an alternative administration.

Kerry is expected to arrive in the Afghan capital Kabul on Friday to try to mediate between the feuding camps, according to Abdullah, although U.S. officials have not confirmed the trip. Kerry is currently in neighbouring China.

Ghani's camp, confident in its victory, is wary of Kerry's mediation efforts, while Abdullah, who has alleged widespread fraud in the vote, welcomes the initiative.

"I don’t know what he can do," said Abbas Noyan, a spokesman for Ghani’s camp. "Secretary Kerry will come and talk with both candidates and see what he can do. I don’t think he has a road plan for this. Without a road map it is very difficult to solve this problem."

The United States, Afghanistan's biggest foreign donor, is in the process of withdrawing its forces from the country after 12 years of fighting Taliban insurgents, and it is unclear what leverage Kerry would have in resolving deep-seated rivalries.

Abdullah's camp, angry with Ghani's lead in the vote, has threatened to announce its own parallel government, a dangerous prospect for Afghanistan, already split along ethnic lines.

In a clear warning to Abdullah, Kerry said this week Washington would withdraw financial and security support if anyone tried to take power illegally. That would be a massive blow given about 90 percent of the Afghan budget comes from foreign aid.

Speaking to reporters at the end of annual high-level U.S.-China talks, Kerry made no mention of the Kabul trip but said he had discussed the situation with all sides.

"I have been in touch several times with both candidates, as well as President Karzai," he said in Beijing.

"We would encourage both for them to not raise expectations with their supporters, to publicly demonstrate respect for the accountability process and also to show critical statesmanship and leadership at a time when Afghanistan obviously needs it." 

Abdullah has put off announcing his government until after Kerry's visit, and his camp welcomes U.S. involvement because it hopes it could help pressure election officials into throwing out suspicious votes and thus change the outcome of the vote.

Abdullah has accused the outgoing president, who has an uneasy relationship with the United States, of backing Ghani and playing a role in rigging the vote in his favour.

"His Excellency John Kerry is coming ... so we welcome any effort to differentiate between clean votes and invalid votes," said Haji Mohammad Mohaqiq, Abdullah's second vice president and the leader of Afghanistan's ethnic Hazara minority.

"I don't say that they should interfere but they should cooperate in transparency. They should provide us political and technical support," he told Reuters at his vast house in Kabul.

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BITTER STANDOFF

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U.S. support is crucial for Afghanistan because it depends on foreign donors to fund everything from road-building to schoolteachers' salaries and security, with Washington paying the lion's share of the bill.

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U.S. President Barack Obama and Kerry have spoken to both candidates to encourage them to find a compromise and stop the country sliding into further political chaos.

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"The goal is to help the parties find a way forward that ensures that the next president of Afghanistan has a credible mandate to lead a unified Afghanistan," State Department spokeswoman Jen Psaki told Reuters.

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"The United States has made clear that our preference is to continue our strong support and assistance to Afghanistan and the Afghan people, but if the leaders of Afghanistan are unwilling to abide by their own constitution, that could impact the kind of financial and security assistance the United States provides."

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The White House has added, however, it expects "a thorough review of all reasonable allegations of fraud to ensure a credible electoral process".

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Former U.S. special envoy for Afghanistan James Dobbins, in an address to the Asia Society in Washington on Wednesday, said Obama had spoken to both candidates. "On the one hand assured them that Secretary Kerry would be arriving for discussions with them at the end of this week; and cautioned in particular Dr. Abdullah about moving pre-emptively in an unconstitutional fashion."

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Abdullah, a former anti-Taliban resistance fighter, draws his support mainly from the Tajik minority in northern Afghanistan while Ghani, a former World Bank economist, represents Pashtun tribes in the south and east of the country.

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Abdullah's refusal to accept the outcome of the vote has created a deadlock in Afghanistan, threatening to split the country along ethnic lines and setting the stage for a possibly bloody standoff or even secession in parts of the country.

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The lack of political unity in Afghanistan has prompted observers to draw parallels with Iraq, where a one-sided government has failed to represent all parts of the political spectrum, weakening the country and allowing an al Qaeda offshoot to capture large swathes of Iraq in recent weeks.

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Mohaqiq from Abdullah's camp blamed any possible repeat of Iraq's scenario in Afghanistan on the Karzai administration.

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"We don't want Afghanistan to repeat Iraq but all parties have to think about it. It is not only our responsibility. The government has been here for 13 years ... and still they do not want to leave the power democratically," he said.

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"If anything bad happens to Afghanistan the responsibility will be on President Karzai’s monopolistic team."

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(Additional reporting by Lesley Wroughton and Missy Ryan; Writing by Maria Golovnina; Editing by Nick Macfie)

Australian minister under fire for not meeting Tamil groups on Sri Lanka trip

A Tamil group criticised Australia's immigration minister on Thursday for visiting northern Sri Lanka without meeting Tamil leaders, days after Australia returned a boat of asylum seekers, including Tamils, under its hardline border security policy.

Some of the 41 Sri Lankans intercepted and sent home by Australia said on Tuesday they had been mistreated by Australian Customs, accusations Immigration Minister Scott Morrison denied.

A second boat carrying 153 Sri Lankan asylum seekers remained in legal limbo as the Australian High Court considered whether their interception was legal.

Australian Prime Minister Tony Abbott came to power last September partly because of his tough stance on asylum seekers. His government has touted its success in blocking such boats, saying there have been no illegal arrivals since last December.

During a visit on Wednesday to the northern city of Jaffna, Morrison met the governor of the Northern Province, G.A. Chandrasiri, a presidential appointee.

Tamil groups were upset Morrison did not meet the province's chief minister, C.V. Vigneswaran, the leader of the Tamil National Alliance, the party that finished first in last year's regional election.

"He did not meet any single Tamil representative or civil society group," Tamil National Alliance spokesman Suresh Premachandran told Reuters. "I still don't know the intention of his brief visit. He may want to show that he visited Jaffna. But he did not speak to any Tamils."

Most of the group returned to Sri Lanka are members of the majority Sinhalese community and not minority Tamils, who have alleged persecution by Sri Lankan authorities since the defeat of Tamil Tiger separatists in the north in 2009.

Morrison's schedule was organised by the Sri Lankan government, a spokesman for the minister said, adding that he has previously visited the north with members of the Tamil community.

He was visiting Sri Lanka to hand over two patrol boats to strengthen the island nation's surveillance against people smuggling.

"The purpose was to hand over the boats on the invitation of defence ministry. The date was fixed long before the people tried to enter Australia," Sri Lankan Deputy Foreign Minister Neomal Perera said. "It was unfortunate the visit came during these days."

SEEKING A BETTER LIFE

The United Nations has launched an inquiry into war crimes allegedly committed by both Sri Lankan state forces and Tamil rebels in the final months of the civil war, saying the government has failed to investigate properly. Sri Lanka rejects such allegations as interference in its internal affairs.

While Sri Lanka says many asylum seekers are economic migrants, rights groups say Tamils seek asylum to prevent torture, rape and other violence at the hands of the military. They say some Sinhalese who criticise the government are also at risk.

The 37 Sinhalese and four Tamils on the first boat were returned to Sri Lanka over the weekend and appeared in court in the port city of Galle. Five people suspected of being the ringleaders of a people-smuggling operation were detained and 27 released on bail. Children were released without charge.

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Daluwattage Don Ranjith, one of the five people detained, told Reuters through his lawyer that he was on board the vessel as an asylum seeker, not an organiser.

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"What we are saying is we were under persecution in this country ... We fled as refugees," Ranjith, who is Sinhalese, said in a statement issued via his lawyer Lakshan Dias.

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Dias said he could not share information on how or why Ranjith was being persecuted without his client's permission.

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Other passengers told Reuters they had been trying to reach New Zealand, not Australia, to seek jobs for a "better life".

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Asked by reporters in Colombo if he was concerned the 41 would be mistreated by Sri Lankan authorities, Morrison said: "No, I'm not."

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(Additional reporting by Jane Wardell in SYDNEY; Writing by Shyamantha Asokan in NEW DELHI; Editing by Douglas Busvine)

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Boeing sees $5.2 trillion jet market, win versus Airbus on twin-aisles

Boeing Co made its most bullish 20-year forecast for jetliner demand since 2011, saying on Thursday the world will need 36,770 new planes worth $5.2 trillion by 2033.

The company's annual projection is up 4.2 percent from its 2013 forecast, and it predicted beating rival Airbus Group NV in the lucrative market for twin-aisle planes as the planes are built and delivered over the next two decades.

"If Airbus doesn't do something with their product strategy, they're headed to 30-35 percent market share" in deliveries of next-generation twin-aisle aircraft, Randy Tinseth, Boeing's vice president of marketing, told reporters in a briefing.

Boeing's 787 and 777X jets already make up 65 percent of all current orders, with the Airbus A350 accounting for the rest, and that gap will widen unless Airbus develops another jet as a competitor, he said.

Planes are delivered years after orders are placed, so the final numbers may change as airlines change their plans.

Airbus has disputed Boeing's numbers, saying it is already winning most orders in twin-aisle aircraft when looking at recent years.

Airbus is considering embarking on development of such a jet, and may launch the project at the Farnborough Airshow next week. The jet, dubbed the A330neo, would be a revamped version of Airbus' twin-aisle A330 jetliner with new efficient engines made by Rolls-Royce Holdings PLC.

SMALL WONDERS

Boeing's annual forecast, released in conjunction with the airshow, said single-aisle airplanes such as the 737 and A320 will garner the most orders, reflecting booming demand for air travel in Asia and the growth of low-cost carriers there.

Last year Boeing predicted a 20-year need for 35,280 planes valued at $4.8 trillion.

About 40 percent of single-aisle planes built in the next two decades will go to low-cost carriers, and a large share of will be in China, Tinseth said. He predicted China would overtake the United States as the world's largest domestic air travel market in the next 20 years.

Twin-aisle planes also will attract strong demand. But Boeing notched back its forecast for jumbo jets such as the Boeing 747 and Airbus A380. It expects airlines to need about 620 of those over the next 20 years, down from the 760 it forecast last year.

"That's the market that has really struggled to take hold," Tinseth said.

Boeing expects airlines to buy 25,680 new single-aisle planes over 20 years, and that the global fleet will double to 42,180. About 58 percent of those planes will represent growth at airlines. The rest will replace retired aircraft.

Boeing cut its forecast for air-cargo growth this year to 4.7 percent from 5 percent in 2013, but said the trend is stable and will continue to support production of the 747-8 freighter and freight versions of its popular 777 jet.

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(Reporting by Alwyn Scott; Additional reporting by Tim Hepher in London; Editing by Richard Chang)

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Exclusive: Commerzbank may pay $600 million-$800 million to settle U.S. probe - sources

Germany's second-biggest bank Commerzbank AG is expected to pay $600 million to $800 million to resolve investigations into its dealings with Iran and other countries under U.S. sanctions, sources familiar with the matter said.

The penalty, previously reported to be more than $500 million, includes a demand from New York's top banking regulator, Benjamin Lawsky, for more than $300 million from the bank, the sources said.

Other U.S. authorities, including the Department of Justice, the Treasury Department, the Federal Reserve and the Manhattan District Attorney, are also involved in the talks.

The German bank is the latest bank to enter into settlement negotiations with U.S. authorities. French lender BNP Paribas SA struck a record-breaking $8.9 billion deal last week to resolve investigations into violations of sanctions and related misconduct involving Sudan, Iran and Cuba. U.S. authorities are also investigating Italy's UniCredit SpA, France's Credit Agricole SA and Societe Generale, and Germany's Deutsche Bank AG for sanctions violations, sources said. Analysts expect that Commerzbank will have to book charges of up to 300 million euros ($409 mln) as a fine of $800 million would be about twice as much as the lender is estimated to have set aside for Iran.

Commerzbank had 934 million euros billion) at the end of 2013 as provision for litigation risks, including the U.S. investigation.

"An additional cost of 300 million euros would be a lot compared to Commerzbank's expected 2014 earnings," Metzler analyst Guido Hoymann said. "But breaking it down per share, the market may have over reacted."

Commerzbank is expected to post a pre-tax profit of 1 billion euros this year, according to estimates compiled by Thomson Reuters Starmine.

Additional litigation costs of 300 million euros translate to charges of 0.26 euros per share, while Commerzbank's shares have lost 0.77 euros since the start of the week.

Commerzbank shares closed down 2.04 percent on Thursday, underperforming the European banking sector, which was down 1.65 percent.

    Among the violations being investigated are Commerzbank's transactions for the Islamic Republic of Iran Shipping Lines, one of the sources said.

The state-sponsored shipping company was designated for economic sanctions by the United States in 2008 for allegedly supporting Iran's proliferation of weapons of mass destruction. The source said Commerzbank was alleged to have done business with the company despite knowing that it was sanctioned.

A Commerzbank representative declined to comment on the allegations and the size of any settlement.

A settlement could be reached in the next few weeks, one source said.

The Justice Department, Manhattan DA's office and the New York Department of Financial Services declined to comment. The other authorities could not immediately be reached for comment.

German paper Frankfurter Allgemeine Zeitung later reported, citing people familiar with the matter, that Commerzbank had fired staff in Hamburg "some time ago" for having concealed dealings with customers in countries such as Iran and Sudan.

Commerzbank could not immediately be reached for comment on the newspaper report on Thursday evening in Germany.

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SIMILARITIES TO STANDARD CHARTERED

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    Over the past five years, more than half a dozen foreign banks have settled with authorities over sanctions violations. They forfeited more than $12 billion, according to Manhattan District Attorney Cyrus Vance. 

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For example, Standard Chartered Plc, which was accused of hiding 59,000 Iranian transactions worth $250 billion from regulators, paid $667 million to U.S. authorities in 2012.

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One source said the number, volume and type of suspicious transactions at Commerzbank are in the same ballpark as those in the Standard Chartered case.

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    Like Standard Chartered, many of Commerzbank’s transactions involved Iran, according to one source. Violations involving Iranian entities can lead to lower penalties than sanctions against other countries such as Sudan. That is because until 2008, U.S. law allowed Iranian transactions that originated and ended outside the United States, even if they were cleared through a U.S. bank.

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The U.S. inquiry into Commerzbank's activities began in 2010. U.S. authorities have found that the bank stripped identifying information from incoming wires to avoid red flags that would have helped regulators police the transactions.

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Commerzbank, which is 17 percent owned by the German government, is expected to enter into a deferred prosecution agreement that would suspend criminal charges in exchange for the financial penalty and other concessions, the sources said.

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    Though other penalties against Commerzbank have not yet been determined, one source said they were not expected to be severe and might include installing an independent monitor at the bank. 

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($1 = 0.7331 Euros)

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(Additional reporting by Aruna Viswanatha and Arno SchuetzeEditing by Ross Colvin Jane Merriman and Jane Baird)

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Seized nuclear material in Iraq 'low grade': IAEA

The U.N. atomic agency said on Thursday it believed nuclear material which Iraq said had fallen into the hands of insurgents was "low grade" and did not pose a significant security risk.

Iraq told the United Nations that the material was used for scientific research at a university in the northern town of Mosul and appealed for help to "stave off the threat of their use by terrorists in Iraq or abroad".

Iraq's U.N. envoy this week also said that the government had lost control of a former chemical weapons facility to "armed terrorist groups" and was unable to fulfil its international obligations to destroy toxins kept there.

An al Qaeda offshoot, Islamic State in Iraq and the Levant, took over swathes of Syria and Iraq before renaming itself Islamic State in June and declaring its leader caliph - a title held by successors of the Prophet Mohammad.

The U.N. International Atomic Energy Agency (IAEA) "is aware of the notification from Iraq and is in contact to seek further details", IAEA spokeswoman Gill Tudor said.

"On the basis of the initial information we believe the material involved is low grade and would not present a significant safety, security or nuclear proliferation risk," she said. "Nevertheless, any loss of regulatory control over nuclear and other radioactive materials is a cause for concern."

Iraqi U.N. Ambassador Mohamed Ali Alhakim told U.N. Secretary-General Ban Ki-moon in a July 8 letter that nearly 40 kg (88 pounds) of uranium compounds were kept at the university.

"Terrorist groups have seized control of nuclear material at the sites that came out of the control of the state," he said.

However, a U.S. government source said it was not believed to be enriched uranium and therefore would be difficult to use to manufacture into a nuclear weapon.

Russian Foreign Ministry spokesman Alexander Lukashevich said the reported seizure likely posed no direct threat. But, he said: "The sheer fact that the terrorists ... show unmistakeable interest in nuclear and chemical materials is, of course, very alarming".

NO "DIRTY BOMB" MATERIAL

Any loss or theft of highly enriched uranium, plutonium or other types of radioactive material is potentially serious as militants could try to use them to make a crude nuclear device or a "dirty bomb", experts say.

Olli Heinonen, a former IAEA chief inspector, said that if the material came from a university it could be laboratory chemicals or radiation shielding, consisting of natural or depleted uranium.

"You cannot make a nuclear explosive from this amount, but all uranium compounds are poisonous," Heinonen told Reuters. "This material is also not 'good' enough for a dirty bomb."

In a so-called "dirty bomb", radioactive material such as might be found in a hospital or factory is combined with conventional explosives that disperse the hazardous radiation.

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Citing U.N. investigations dating back ten years or more, Heinonen said there should be no enriched uranium in Mosul. The Vienna-based IAEA helped dismantle Iraq's clandestine nuclear programme in the 1990s - during Heinonen's three decades there.

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"Iraq should not have any nuclear installation left which uses nuclear material in these quantities," he said.

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Another proliferation expert, Mark Hibbs of the Carnegie Endowment think-tank, said: "The Mosul region and several university departments were scoured again and again by U.N. inspectors for a decade after the first Gulf War (1990-1991) and they know what materials were stored there."

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"These included tons of uranium liquid wastes, sources, uranium oxides, and uranium tetrafluoride. Some of these items are still there, but there’s no enriched uranium," he said.

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Iraq's Foreign Ministry said atomic material samples were used at Mosul university laboratories in "very limited quantities" for scientific study and research only. Iraqi authorities had started to prepare a plan to get rid of them but the security situation had prevented the work, it added.

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(Additional reporting by Gabriela Baczynska in Moscow, Raheem Salman in Baghdad and Michelle Nichols at the United Nations)

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Israel presses Gaza offensive, kills eight in air strike: officials

At least 78 Palestinians, most of them civilians, have been killed in Israel's Gaza offensive, Palestinian officials said on Thursday as militants in the enclave kept up rocket attacks on Tel Aviv, Jerusalem and other cities.

As Israeli officials seemed to hint at a possible invasion by ground forces, eight members of one family, including five children, were killed in an early morning air strike that levelled two homes at Khan Younis in the south of the Gaza Strip near the Egyptian border, the Palestinian Health ministry said.

Israel's military made no comment on what would be the deadliest strike since its began its assault on Tuesday. The defence minister spoke of "long days of fighting ahead".

U.S. President Barack Obama told Israeli Prime Minister Benjamin Netanyahu in a phone call that the United States was willing to help negotiate a ceasefire, the White House said.

French President Francois Hollande voiced his concern at the civilian deaths in the Palestinian enclave and called for a truce. A spokeswoman for U.S. Secretary of State John Kerry, who like Hollande spoke to Palestinian President Mahmoud Abbas, said of possible escalation: "Nobody wants to see a ground invasion."

The offensive followed a build-up in violence after three Jewish students were killed in the occupied West Bank last month and a Palestinian youth died in a suspected revenge attack.

Medical officials in Hamas-dominated Gaza said at least 60 civilians, including a four-year-old girl and a boy aged five who were killed on Thursday, were among the 78 Palestinians who have died in Israeli attacks since Tuesday.

Netanyahu said in a televised statement: "So far the battle is progressing as planned but we can expect further stages in future. Up to now, we have hit Hamas and the terror organisations hard and as the battle continues we will increase strikes at them."

Netanyahu discussed options with his security cabinet as air strikes continued and officials hinted at a possible ground offensive. There was no word on when or if this would happen.

"We have long days of fighting ahead of us," Defence Minister Moshe Yaalon said.

"KNIFE EDGE"

Sirens sounded in and around Jerusalem in the evening and residents ran for cover as a number of rockets were launched towards the holy city. Two were intercepted and others fell in open ground. The remnants of one rocket fell on a building in an Israeli community in the hills near Jerusalem, police said.

Militants from Hamas's Qassam Brigades and the smaller Islamic Jihad group said they had launched separate strikes.

The only Israeli casualties on Thursday were two people who had minor wounds when a mortar exploded near the Gaza border.

U.N. Secretary-General Ban Ki-moon briefed the Security Council on Thursday, condemned the rocket attacks and urged Israel to show restraint. "Gaza is on a knife edge," he told reporters.

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Israel says it has struck more than 860 targets in an offensive intended to halt persistent rocket fire at its own civilian population. The rocket fire escalated after Israeli forces arrested hundreds of Hamas activists in the West Bank while hunting for the abducted teenagers.

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Israel says Hamas Islamists put innocent Palestinians in harm's way by placing weaponry and gunmen in residential areas. The movement has wide support among Palestinians.

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SMOKE AND RUBBLE

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Across the Gaza Strip, smoke and rubble marked the aftermath of Israeli attacks in the most serious hostilities in two years between the militants and Israel's powerful armed forces.

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"The Jews say they are fighting Hamas and fighting gunmen while all the bodies we have seen on television are those of women and children," said Khaled Ali, 45, a Gaza taxi driver.

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The military said more than 470 projectiles have been fired at Israel since Tuesday, including some 170 on Thursday alone. The rocket salvoes have caused no fatalities or serious injuries, due in part to interception by Israel's partly U.S.-funded Iron Dome aerial defence system.

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The wail of air raid sirens has paralysed business in southern communities and sent hundreds of thousands of people scrambling for shelter in Tel Aviv, the commercial capital where two rockets were shot down on Thursday. But offices and shops remained open and roads were clogged with traffic.

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One rocket fell in the West Bank between Jerusalem and Abbas's administrative centre Ramallah. It landed in open ground close to a Palestinian home. Some rockets have landed more than 100 km (60 miles) from Gaza.

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Hamas spokesman Sami Abu Zuhri sounded a defiant note, when asked about defence minister Yaalon's remarks of further action to come. "Our backs are to the wall and we have nothing to lose," he said. "We are ready to battle until the end."

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"KNOCK ON THE DOOR"

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Israel's targets in the Gaza Strip have included militant commanders' homes, which it described as command and control centres. Palestinian officials put the number of dwellings either destroyed or damaged at more than 120. Local residents said some of the houses did not belong to fighters.

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Netanyahu has accused Hamas of committing "a double war crime" by targeting Israeli civilians "while hiding behind Palestinian civilians".

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Owners of some of the targeted homes received telephoned warnings from Israel to get out. In other cases, so-called "knock-on-the-door" missiles, which do not carry explosive warheads, were first fired as a signal to evacuate. Scenes of families fleeing their homes have played out daily.

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Israeli leaders, who have popular support for the Gaza offensive, have mobilised some 20,000 army reservists, giving them the means, if they choose, to mount a land offensive in one of the world's most densely populated territories.

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The last time they did that was in early 2009. Ground troops did not cross into the Strip during the last major exchange of rockets and missiles in October 2012.

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U.S.-backed Palestinian President Abbas, who is based in the West Bank and entered a power-sharing deal with Hamas in April after years of feuding, has denounced the Israeli offensive. In telephone calls with U.S. Secretary of State John Kerry and Turkish Prime Minister Tayyip Erdogan, Abbas "stressed the need to achieve a ceasefire immediately", the official Palestinian news agency WAFA said.

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(Additional reporting by Ori Lewis, Dan Williams and Allyn Fisher-Ilan in Jerusalem and Ali Sawafta in Ramallah; Writing by Jeffrey Heller; Editing by Alastair Macdonald and David Gregorio)

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China, U.S. to boost security ties, but no breakthroughs

China and the United States agreed on Thursday to boost military ties and counter-terrorism cooperation during high-level annual talks in Beijing, but there was little immediate sign of progress on thorny cyber-security or maritime issues.

The two-day talks, led by Secretary of State John Kerry and Treasury Secretary Jack Lew for the United States and Vice Premier Wang Yang and top diplomat Yang Jiechi for China, were never expected to achieve great breakthroughs.

The Strategic and Economic Dialogue, now in its fifth year, is more about managing an increasingly complex and at times testy relationship.

After discussions on topics ranging from the value of China's currency to North Korea, Yang said the two sides agreed to strengthen cooperation in counter-terrorism, law enforcement and military-to-military relations.

He gave few details.

On two of the most sensitive issues - maritime disputes and cyber-spying - Yang largely restated Beijing's position on both.

"The Chinese side will continue to steadfastly protect its territorial and maritime rights" in the South and East China Seas, Yang told reporters as the talks wrapped up.

"China urged the U.S. side to adopt an objective and impartial stance and abide by its promise to not take sides and play a constructive role in safeguarding regional peace and stability."

Washington insists it has not taken sides but has criticized China's behavior in the potentially energy-rich South China Sea, where the Philippines, Vietnam, Malaysia, Brunei and Taiwan have overlapping territorial claims with China.

Beijing, however, views the United States as encouraging Vietnam and the Philippines to be more assertive in the dispute, and of backing its security ally Japan in the separate spat over uninhabited islands in the East China Sea.

China's Foreign Ministry criticized the Philippines on Thursday for extending by one year a drilling permit for London-listed Forum Energy Plc for a natural gas project in the disputed Reed Bank area of the South China Sea.

"Any foreign companies carrying out development of oil or gas in China's territorial waters without obtaining permission from China are breaking the law," ministry spokesman Hong Lei told a daily briefing.

CYBER TALKS FRANK

On Internet security, Kerry told reporters that discussions were frank, and both sides agreed it was important to keep talking.

It was unclear if any progress was made in resuming the activities of a cyber working group that Beijing suspended in May after the United States charged five Chinese military officers with hacking.

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"The loss of intellectual property through cyber has a chilling effect on innovation and investment. Incidents of cyber theft have harmed our businesses and threatened our nation's competitiveness," Kerry said.

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Chinese hackers broke into the computer networks of the United States government agency that keeps the personal information of all federal employees in March, the New York Times reported this week, citing senior U.S. officials.

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Yang said China wanted cooperation on cyber issues on the basis of mutual respect and trust.

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"China believes cyber-space should not become a tool to harm other countries' interests. China hopes the U.S. side can create the conditions to carry out U.S.-China dialogue and cooperation on the Internet," he said.

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China sees the United States as being hypocritical on the subject following revelations about Washington's own spying by former U.S. intelligence contractor Edward Snowden.

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Kerry also repeated his earlier message that Washington wanted a strong, prosperous and stable China.

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"And we mean what we say when we emphasize that there's no U.S. strategy to try to push back against or be in conflict with China," he told Chinese President Xi Jinping in Beijing's Great Hall of the People.

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(This story has been refiled to fix typo in paragraph 15)

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(Writing by Ben Blanchard; Editing by Dean Yates)

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