Jack Albin, chief investment officer with Harris Private Bank, said the market's advance reflects widespread investor enthusiasm and a realization that the Federal Reserve might have room to ease short-term interest rates. He pointed to low inflation and the recent nearly 20 percent pullback in oil prices.

"The Fed has a lot more elbow room to lower rates. The Fed could maybe even lower this year."

The Dow gained 93.58, or 0.81 percent, to 11,669.39. The Dow's advance put it within range of its high of 11,722.98 set in January 2000.

Broader stock indicators also jumped sharply. The Standard & Poor's 500 index rose to a five-and-a-half-year high, gaining 9.97, or 0.75 percent, to 1,336.34 and the Nasdaq composite index rose 12.27, or 0.55 percent, to 2,261.34.

Bonds fell after a sharp rally Monday in what was perhaps some profit-taking. The yield on the benchmark 10-year Treasury note rose to 4.58 percent from 4.54 percent late Monday. The dollar was mixed against other major currencies, while gold prices rose.

Light crude oil settled down 44 cents at $61.01 on the New York Mercantile Exchange. The slide in oil prices this month has given Wall Street investors optimism that consumer spending will hold up even as the economy slows and therefor help protect corporate profits.

Investor sentiment has strengthened since the Fed's August decision to leave interest rates unchanged after a two-year string of 17 straight increases. That enthusiasm became more widespread after the central bank held off again last week, signaling to investors that inflation remained within reasonable limits.

Recent reports on the health of the economy appeared to ease concerns held by some that the Fed had overreached in its bid to corral inflation. Aside from a disappointing report last week from the Philadelphia Fed about regional manufacturing activity, investors have grown increasingly confident as more economic findings have trickled out and oil prices have held lower long enough to make a difference at the pump.

Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc., doesn't expect the stock market's gains will last, however.

"I don't think we're going to go up, up and away from here. I think you've got momentum and the magnetism of a new record high for the Dow."

"I would preach a little caution here." Goldman contends the markets will discount for November's midterm elections by mid-to-late October and that some of the run-up this week could reflect a desire among institutional investors to burnish their third-quarter figures.

"This time of the year you also get some window dressing by institutions and also some short covering," he said. "The bears have not had a lot of a fun."

Bears wouldn't have been surprised by news from Lowe's, which rose 1 cent to $28.85, despite reducing its full-year profit forecast; it warned that a slowdown in the sector was hurting sales of its home-improvement products. Lennar rose 7 cents to $46.95 even after saying its third-quarter profit fell 39 percent amid sluggishness in the sector and the company, one of the country's biggest homebuilders, trimmed its fourth-quarter forecast.

In technology, PMC-Sierra Inc., a maker of communications and storage chips, fell 55 cents or 8.4 percent, to $6 after cutting its third-quarter sales forecast to $114 million to $116 million from $122 million to $124 million.

Innovex Inc., a chip maker, fell 38 cents, or 13.7 percent, to $2.40, after warning its fourth-quarter sales could fall short of expectations.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 1.72 billion shares, compared with 1.75 billion traded Monday.

The Russell 2000 index of smaller companies was up 2.52, or 0.35 percent, at 729.61.

Overseas, Japan's Nikkei stock average fell 0.49 percent. Britain's FTSE 100 closed up 1.30 percent, Germany's DAX index was up 1.00 percent, and France's CAC-40 was up 1.42 percent.

While stressing that U.S. dominance in education and innovation should keep the country among the world's most competitive "for the foreseeable future," the report said economic concerns had made other countries more attractive for business leaders.

U.S. Sen. Lindsey Graham, a South Carolina Republican, said in Washington that the decline in America's competitiveness would accelerate unless the country made reforms.

"We need to clean up our own backyard to make sure our economic and legal policies welcome capital instead of drive it away," he said.

The conservative lawmaker, a leading critic of China's currency policy, added, "Secondly, we need to level the playing field in the world marketplace ... we're losing market share and competitive advantage because people are cheating, like China."

CHALLENGE TO U.S.

Augusto Lopez-Claros, chief economist of the World Economic Forum, said that unless the United States acted it "could allow other countries in a highly competitive global economy to challenge the U.S.'s privileged position."

Switzerland was deemed the most competitive economy in 2006, followed by Finland, Sweden, Denmark and Singapore. After the United States, which had topped the 2005 index, Japan, Germany, the Netherlands and Britain rounded out the top 10.

The Geneva-based group Forum said that Switzerland's well developed infrastructure, plentiful scientific research and intellectual property safeguards helped vault the small Alpine country into the index's leading position.

As in Switzerland, it said high-ranking Nordic countries benefited from strong institutions and excellent education and training, but said they lagged in labor market flexibility.

Most European Union countries saw stable competitiveness readings over the past year, but Italy's competitiveness ranking fell to 42nd -- compared to 38th last year -- because of ongoing macroeconomic and institutional weakness.

RUSSIA, CHINA SLIP

Russia slipped nine places for a 62nd-place ranking this year, largely due to private sector misgivings about the independence of the country's judiciary, according to the report based on surveys of more than 11,000 business leaders worldwide.

"Legal redress is Russia is neither expeditious, transparent nor inexpensive, unlike in the world's most competitive economies," it said. "Partly because of this, the property rights regime is extremely poor and worsening."

China's ranking also fell -- to 54 from last year's 48.

The report said China had a mixed performance this year as fast growth, low inflation and high savings rates were muted by banking weakness concerns, poor penetration rates for mobile phones, computers and other technology, and low secondary and tertiary school enrollment rates.

Fellow Asian powerhouse India gained two places to rank 43rd in the World Economic Forum ranking, with persistent poverty, weak health infrastructure and a large public sector deficit offsetting advances in technological services.

Chile, ranked 27, led Latin America's showing in the 2006 index while Brazil slipped nine places to 66th as a result of a worryingly large budget deficit, the report said.

With Iraq alone costing about $8 billion a month, another infusion of money will be needed next spring.

The House passed the Pentagon appropriations bill by a 394-22 vote Tuesday night, and the Senate is due to vote before adjourning this weekend for the fall campaign.

The House-Senate compromise bill provides $378 billion for core Pentagon programs, about a five per cent increase, though not quite as much as President George W. Bush asked for. The $70 billion for Iraq and Afghanistan is a down payment on war costs the White House has estimated will hit $110 billion for the budget year beginning Oct. 1.

With final passage of the bill, Congress will have approved $507 billion for Iraq, Afghanistan and heightened security at overseas military bases since the Sept. 11, 2001, attacks, according to the Congressional Research Service.

"If the president had told us the truth, that Iraq and Saddam Hussein ... presented no real threat to us, that there was no likelihood of weapons of mass destruction, that there was no connection to al-Qaeda ... would this Congress have voted for war?" said Jerrold Nadler, a Democrat from New York. "I don't think so."

"Is the world better or worse off without (Saddam)?" said Tom Cole, a Republican from Oklahoma. "I think it's better, and it took American action."

Opinion polls indicate the war continues to be unpopular with voters, but even Democratic opponents of the war generally embraced the Pentagon measure, which provides funding for body armour and other support for U.S. troops overseas.

The growing price tag of the Iraq conflict is partly driven by the need to repair and replace military equipment worn out in harsh, dusty conditions in Iraq and Afghanistan or destroyed in battle. Almost $23 billion was approved for army, marine corps and National Guard equipment such as helicopters, armoured Humvees, Bradley armoured fighting vehicles, radios and night-vision equipment.

Lawmakers allotted $1.9 billion for new jammers to counter improvised explosive devices in Iraq and Afghanistan and $1 billion is provided for body armour and other personal protective gear.

The measure includes a Democratic-sponsored provision against establishing permanent military bases in Iraq. GOP leaders dropped identical language from an Iraq funding bill this June.

The bill would be the first of 11 spending bills to clear Congress for the new budget year.

So little progress has been made on other bills that the Pentagon measure also carries a stopgap funding bill to keep open through Nov. 17 agencies whose funding bills won't have passed. Only the homeland security measure is expected to also pass before Congress leaves Washington to campaign.

The core bill contains $86 billion for personnel costs, enough to support 482,000 army soldiers and 175,000 marines. That would provide for a 2.2 per cent pay increase for the military, as Bush requested in his February budget.

The bill provides $120 billion for operations and maintenance costs, just less than the Pentagon request. And $81 billion goes for procurement of new weapons, with $76 billion dedicated to research and development costs.

That's still not enough for the White House, which requested $4 billion more. But House appropriators diverted that money to ease cuts in domestic programs. Earlier this year, the Senate passed a version shifting $9 billion to domestic programs but backed off in the face of a White House veto threat.

The sprawling measure contains good news for lawmakers from Maine, California and Missouri, among others. The bill includes $2.6 billion for two super-modern Navy DD(X) destroyers. That is significant because it would allow Bath Iron Works in Maine and Northrop Grumman's Ingalls Shipbuilding in Mississippi to build one ship each.

A House-passed defence policy bill had called for only one DD(X) ship, to be built in Mississippi.

The measure also almost triples Bush's request for eight C-17 cargo planes, providing for 22 of the aircraft, which are built in Long Beach, Calif. Several components are manufactured at Boeing's St. Louis-based defence company.

But Lockheed Martin's F-35 Joint Strike Fighter, which is assembled in Fort Worth, Texas, would face cuts. Bush requested five planes, but lawmakers cut that back to two, though funds are provided for advanced purchases of parts for 12 more.

A public relations company that participated in a controversial U.S. military program that paid Iraqi newspapers for stories favorable to coalition forces has been awarded another multimillion-dollar media contract with American forces in Iraq.

Washington-based Lincoln Group won a two-year contract to monitor a number of English and Arabic media outlets and produce public relations-type products like talking points or speeches for U.S. forces in Iraq, officials said Tuesday.

"Lincoln Group is proud to be trusted to assist the multinational forces in Iraq with communicating news about their vital work," Lincoln Group spokesman Bill Dixon said in a statement. Details about the contract were confirmed by the U.S. military spokesman in Iraq, Lt. Col. Barry Johnson, and were described in documents posted on a federal government Web site outlining contracts awarded.

The contract is worth roughly $6.2 million per year over a two-year period, Johnson said.

The idea is to use the information to "build support" in Iraqi, Arabic, international and U.S. audiences for what the military describes as its goals in Iraq, such as destroying the insurgency and helping Iraqis build a democracy, according to contract documents.

The list of media outlets to be watched includes the New York Times, Fox Television and the satellite channel, Al-Arabiya.

The Lincoln Group was mired in controversy last year when it became known that the company had been part of a U.S. military operation to pay Iraqi newspapers to run positive stories about coalition activities. According to the company's Web site, it was created in 2003 to do public relations and communications work in challenging environments such as Iraq.

The type of contract, its cost, and the fact that it was awarded to the PR and communications company have raised questions.

Rep. Robert Andrews (news, bio, voting record), D-N.J., who serves on the House Armed Services Committee, said he would be asking the
Department of Defense for information about how this "controversial" vendor was chosen, saying the choice of the Lincoln Group "concerns me greatly."

But, Andrews said he's more concerned about the fact that the contract was awarded at all, not just to the Lincoln Group.

"I wish that our problem in Iraq was that the military wasn't getting good PR," Andrews said. "The problem seems to be that the country is sliding into civil war."

Johnson could not comment on how the Lincoln Group was chosen, saying it was a "standard contracting process." He said the contract did not include any provisions to purchase favorable coverage or pay for favorable stories. The Lincoln Group would not comment on the contract beyond the statement issued.

Lucy Dalglish, the executive director of The Reporters Committee for Freedom of the Press, based in Arlington, Va., said she was worried about whether the military would be creating its own news through its own newspapers or Web sites.

"If they're trying to influence Iraqi opinion of Americans, I almost find that to be unconscionable because that would say that they do not value a free and independent press in Iraq," Dalglish said.

Johnson said the contract is really nothing new from programs that are already in existence.

Multi-National Forces-Iraq already has in place a one year contract with The Rendon Group, a Washington D.C.-based company, to perform many of the same functions this current contract would fulfill, Johnson said.

"We always monitor the press. Any organization, anywhere monitors the press to see what's being said to determine what messages are out there and how it's impacting the environment," Johnson said.

The Rendon Groups contract, worth $6.4 million over one year, was scheduled to expire this September but Johnson said it has been extended until Oct. 27 while the winner of the new contract is determined.

A key question is whether any public relations campaign in Iraq will work.

Nabil Khalid, the executive news director of Al-Arabiya, one of the most popular Arabic-language television stations in the Middle East, said right now, the multinational forces in Iraq are losing the public relations battle.

"If you asked me who better influences the media, the insurgents or the multinational forces, I would say that the insurgents," Khalid said, speaking by telephone from the station's Dubai headquarters.

This August, the median price for all housing types was $225,000, down 1.7 percent from August 2005, when the median was $229,000, the realtors' group reported Monday.

Historically, it's rare for prices to sink very far nationally even when recessions occur. The National Association of Realtors (NAR) predicts a return to stability next year. But some economists are forecasting a tougher climate, thanks to an extraordinarily large run-up in prices in the past couple of years and homebuyers' increasing reliance on exotic new types of mortgage loans. Merrill Lynch predicts a 5 percent home-price drop in 2007, while Goldman Sachs, another New York investment firm, forecasts a 3 percent decline nationwide.

"The housing market is weak and getting weaker," says Mark Zandi, chief economist for Moody's Economy.com. "It appears the downturn has a ways to go."

After a five-year boom in the housing market, where home prices head from here could have a significant impact on the direction of the economy and on the pocketbook finances of millions of families. But economists differ in their forecasts of how the current real estate cycle will unfold.

NAR has taken a largely upbeat view. "This is the price correction we've been expecting - with sales stabilizing, we should go back to positive price growth early next year," NAR economist David Lereah said in a statement accompanying Monday's numbers.

The volume of sales barely budged in August, closing the month at an annualized pace of 6.3 million existing-home sales, the report said. That suggests some possible stabilizing after months of declines in the number of units sold. Home sellers may finally be settling for lower prices rather than letting their homes sit on the market.

Pessimists say a speculative "bubble" had built up and now needs to unwind - possibly over several years.

"As draconian as that sounds, a 5 percent price decline would only reverse one-tenth of the price run-up over the previous five years," Merrill Lynch economist David Rosenberg wrote in a recent report.

"Additional price declines should not be surprising," says Asha Bangalore, an economist at Northern Trust Co. in Chicago. "We have a recession in the housing market.... Usually it takes two to three years to stabilize."

She points to a rising supply of homes on the market. There are now enough homes on the market to meet demand for 7.5 months, up from 7.3 months supply in July, Dr. Bangalore says. The last time inventories surpassed current levels was in October 1992, during the last housing downturn.

Economist Richard DeKaser of First National City Corp. in Cleveland says the decline in sales volume is only about half-way done. So far, he reasons, existing-home sales have fallen about 12.6 percent on a year-over-year basis. "On average, they have fallen on the order of 25 percent," he says. "This suggests we're about halfway there, and by late next year, this should be over."

Though the housing numbers are bad, the rate of decline may be slowing. "The fact is that the decline is showing signs of losing momentum, not gaining momentum," says Bob Brusca of FAO Economics in New York. For example, the decline in the August sales volume was less than economists had been expecting, he says. "We can't say it's a turning point, but we can say it's an inflection point."

He expects the downturn to continue for another year, but at a slower pace. And he's not concerned about the drop in home prices, because during the past three years, the median price of houses is up 27 percent, and the average price of a home is up 20.9 percent.

"Even though prices have fallen, people still have a lot of wealth and equity built up," Mr. Brusca says. "We would need to see a lot more decline before it materially impacts consumer finances."

One new uncertainty in this cycle is today's greater reliance on adjustable-rate mortgages. With the interest rates on those loans shifting upward, a key question is how many owners will have to unload homes they bought during good times when values were rising and interest rates were low.

"The probability of a more disorderly correction is raised by this element," says Bangalore of Northern Trust.

The decline in last month's prices of new homes on a seasonally adjusted, year-over-year basis is the first such drop since February 1993, except for a very slight blip on a seasonally unadjusted basis in April 1995.

Prices may continue to fall, since many of the leading economic indicators have continued to weaken.

The home builders' sentiment index is continuing to decline, as are the number of pending sales of existing homes. Applications for mortgages also remain soft. And the inventory of unsold homes continues to rise, now up to 3.9 million homes, about double what it was in 2003 during the height of the housing boom.

"The rising number of unsold homes reflects the home sellers who were hoping to cash out at a high price and have kept their homes on the market for an extended time," says Mr. Zandi.

Some of these trends are likely to continue, until next summer, says Zandi, when he expects to see housing start to stabilize. With such a long period of weakness, he says, it's beginning to look as if home prices might fall in 2007 by about 5 percent on a year-over-year basis. "This would be the first calendar-year decline since the Great Depression," he adds.

To all appearance, the agreements achieved in France will influence the world energy policies. President Putin said that German Chancellor Angela Merkel raised a question about giving the European orientation to Russia's giant Shtokman gas field. "I can say that Gazprom is considering the opportunity now. The decision will be made shortly," President Putin said.

The Shtokman gas field is one of the largest gas deposits in the world. Its reserves make up 3.2 trillion cubic meters and 31 million tons of gas condensate. It is possible to extract about 70 billion cubic meters a year, which means that the field reserves may last for 50 or even 70 years. It was previously believed that liquefied gas would be delivered to the USA, where Gazprom initially planned to develop one-tenth of the US market and subsequently enlarge its share to 20 percent.

Putin's statement is not just an official phrase to summarize the results of the talks. It marks the change of the development strategy. The success of the talks can be explained with mutual economic interests and close political views. It is an open secret that Russia, France and Germany stand against the establishment of the unipolar world structure. The three countries share similar positions regarding the events in the Middle East and Iran too. To crown it all, special relations with Russia can bring the leading place for France and Germany in Europe.

Russia is developing relations with Old Europe against the background of USA's concerns with Moscow's home and foreign policies. There are monstrous regimes in the world that can continue with their evil deeds for a long time, making many democratic countries crawl in front of them just because they need to have oil and gas for their living.

Russia is not interested in selling its energy sources only. The country is interested in entering European markets, gaining access to up-to-date technologies and participating in European enterprises. It is worthy of note that Russia has recently acquired five percent of stocks of the European Aeronautic Defense and Space Company (EADS). This corporation depends on the deliveries of Russian-made titanium.

Russia's integration in the European economy on the base of competitive advantages raises concerns with US-oriented European government. The US administration will most likely stir up another international scandal in Europe, dwell upon the subject of energy blackmail, or deprive the EADS concern of its orders in the United States.

The European axis (Paris-Berlin-Moscow) is a normal reaction of experienced politicians to USA's hegemony. The USA has become a defense machine making its way to global reign. The agreements in France show that "Old Europe" approaches Russia as an independent and attractive center of power.