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The Wall Street investment bank and brokerage announced its plans less than two weeks after posting a $4.9 billion second- quarter loss, hit by $9 billion of write-downs in that period.

In a sign of how toxic Merrill’s debt holdings have become, it has agreed to sell $30.6 billion of collateralized debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds, for just $6.7 billion, or about 22 cents on the dollar.

Indian army spokesman Brig. Gopala Krishnan Murali called the attack a “brazen violation of cease-fire.”

One Indian soldier died and “three or four” Pakistani soldiers were killed in “retaliatory fire” in the Kupwara area of the region, Murali said.

Murali said that the body of one Pakistani soldier was still lying on the Indian side of the frontier and intermittent firing between troops continued.

There was no immediate comment from Pakistani officials.

The region has been the focus of two of the countries’ three wars, since they were created in the bloody partition of the Indian subcontinent at independence from Britain in 1947, although the frontier had been largely quiet since a truce was declared in late 2003.

But cross-border shootings in the last few months have led to a familiar round of accusations, with each side blaming the other for violating the cease-fire and New Delhi accusing Islamabad of helping Islamic rebels sneak into its part of Kashmir.

Gold has soared furiously — a few years ago the metal was trading at $250 an ounce — as investors poured into the market due to inflation fears, a weakened dollar and market turmoil.

“There are a lot of people who think that by the end of the year we’ll be trading $1,200 to $1,500. They are not very expensive options, so people are buying them,” said John Bilello, COMEX gold options floor trader.

Bilello said that many option investors were currently adjusting positions after gold’s sharp fall but he saw recent strong volume of December $1,000 calls, bull call spreads between $1,200 and $1,300, and the selling of put options — all of which are betting that gold will rise further.

A bull call spread involves buying a lower strike price call and selling a higher strike price call, and profits are maximized when prices rise above the higher strike price.

Option traders saw strong interest in the $1,200 December calls and other higher strike prices because they offered an affordable way for individuals to invest in gold’s upside potential.

In addition, these out-of-the-money call options are priced sharply below those of the near-the-money ones — a sign that the price volatility of gold will likely stay high in the near term.

An option is “out of the money” when the exercise price of a call — which gives the buyer the right but not the obligation to buy gold futures — exceeds the current price of the underlying gold contract.

“Option strategies and option positions do reflect the bullish outlook for the gold market. The general view is that gold does have an upside bias despite the setback in the last couple of days,” said Bill O’Neill, managing partner of New Jersey-based commodity firm LOGIC Advisors.

Gold has lost $40 so far this week due to tumbling oil and a stronger dollar, after moving within striking distance of the $1,000 mark last week.

On Friday, both the U.S. gold futures for August delivery GCQ8 and spot gold traded at $925 an ounce. Gold scaled a record-high $1,030.80 on March 17.

COMEX December $1,200 calls currently have 30,000 lots of open interest, by far the most popular among all the different strike prices. The second-highest was the $1,000 calls with 15,144 lots, followed by the $1,050 calls with 12,637 lots.

George Gero, vice president of RBC Capital Markets Global Futures in New York, said that the gold options market was a bullish signal because investors wanted to be long further out in strike prices.

RISING VOLATILITY

Investing in call spreads substantially reduces costs but also lowers the upside, and the strategy was very popular for gold options investors, said Rob Kurzatkowski, futures analyst with optionsXpress in Chicago.

Kurzatkowski said many small speculative traders who cannot afford the more expensive near-the-money calls or the 100-ounce gold futures could turn to the deep out-of-the-money calls for gold investment.

“They are hoping to catch a bit of a move on their investment. So the higher open interest in strike prices out there … is an affordable way for them to participate in the market,” Kurzatkowski said.

On Friday, a single lot of December $1,200 call option costs $7.30, compared with $56.10 of the on-the-money December $925 call. The difference is due to gold’s high implied volatility, which measures the expected magnitude of gold futures price movement given an option price.

Kurzatkowski said that gold’s current implied volatility was about 36, sharply above the long-term average in the low 20s because of the recent large price swings in the gold market.

However, COMEX option floor trader Jonathan Jossen cautioned that the heavy bets in out-of-the-money calls could just be part of a complex strategy by investors to hedge their downside risk by using covered call writing, which combines a short call and a long future.

The official said the deficit was being driven to record levels by the sagging economy and the stimulus payments being made to 130 million households in an effort to keep the country from falling into a deep recession. A deficit approaching $490 billion would easily surpass the record deficit of $413 billion set in 2004.

The administration official spoke on condition of anonymity because the new estimate had not been formally released. Administration officials were scheduled to do that at a news conference later Monday.

White House press secretary Dana Perino had no comment on the $490 billion figure. But she told reporters that the White House and lawmakers acknowledged months ago that they were going to increase the deficit by approving a short-term boost for the slumping economy.

“Both parties recognized that the deficit would increase, and that that was going to be the price that we pay,” Perino said.

The White House had predicted next year’s deficit at $407 billion. Figures for the 2008 budget year ending Sept. 30 may also set a record.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

“The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.”

In e-mails and phone conversations released by CFTC, Optiver’s heads of U.S. and global trading talk about how they are able to “bully the market” and use similar references like “whack” or “push” or “move” the futures market.

“Today’s action lets the marketplace know that the (CFTC’s) Division of Enforcement has a zero-tolerance policy when it comes to gamesmanship,” Stephen Obie, the agency’s new acting head of enforcement, said at a news conference announcing the market manipulation charges.

The kind of manipulation being alleged doesn’t appear to be large enough to explain this year’s 80 percent surge in oil prices. In a preliminary report issued earlier this week, a Bush administration interagency task force led by the CFTC said it believes that supply and demand fundamentals remain the best explanation for soaring prices.

But today’s action does provide ammunition to critics who insist that the lack of transparency in oil markets makes possible a wide range of practices that drive up oil prices, which in turn drive up the price motorists pay for gasoline.

The CFTC brought charges against Bastiaan van Kemp, a Dutch national who was chief executive office of Chicago-based Optiver US. It also charged Christopher Dowson, a Briton who was head of trading in Chicago at Optiver and Randal Meijer, who oversaw trading for the main Optiver holding company and all its subsidiaries.

In a series of phone recordings and e-mails obtained by CFTC enforcement officials, the executives weigh how far they can push their attempts to “bang the close” of market trading and still avoid detection by regulators. They then allegedly sought to cover up their scheme once confronted by officials at the New York Mercantile Exchange and later the CFTC, according to the charging document.

In one conversation, Dowson said the cover-up plan amounted to “a fairy (tale) story.”

In another conversation, Dowson and Meijer describe their activities to “bully” the market in the last minutes of trading as “a fun game,” and discuss expanding the scheme to other commodities like sugar, wheat or corn.

In yet another conversation, Dowson confides to Meijer that he is trying to build up positions but stay under the radar screen, noting “I’m also not doing it so dramatically that … we’re talking about it on CNBC (television) or things like this.”

The CFTC alleges that in 19 instances over 11 days during March 2007, Optiver’s global and U.S. operations attempted to manipulate the settlement price during the trading of next-month contracts for future delivery of crude oil, heating oil and New York Harbor gasoline. The three executives charged allegedly made more than $1 million from the illegal trading.

Congress has been critical of the CFTC for not being more active in investigating potential manipulation of oil prices and for not seeking greater staffing. Legislation is now moving in Congress aimed at stopping “speculation” in oil markets, so the timing of the CFTC action raised questions of whether the action was political.

Obie rejected the suggestion. “I categorically deny it,” Obie said. He said that cases are brought when they are ready, not based on politics. “This is not politically motivated.”

Obie called the case — the first brought since the CFTC announced a national oil markets investigation in May — significant, but said the agency could not quantify how much Optiver’s alleged manipulation had driven oil prices.

“This case is important for the public to know that this manipulation has an impact on the market. But at this point we are not at a point to quantify that,” Obie said.

The CFTC complaint involves civil, not criminal, charges. It is up to the Department of Justice to pursue criminal charges, and CFTC officials would not comment on that possibility.

In the charging document, regulators allege that Optiver’s top U.S. and global traders engaged in a practice called “banging the close.” During the trading day, Optiver allegedly built up substantial trading positions and then tried to offset those positions in the final minutes of trading before the daily settlement, or close of trading, at 2:30 p.m. Eastern time.

A Statistics New Zealand report prepared for Fonterra showed the dairying contribution to export revenues for the year to May had risen by more than 3 per cent to 27 per cent, with Fonterra accounting for 25 per cent.

Fonterra is the world’s largest dairy exporter, fifth largest dairy company globally and trades in 140 countries.

Chairman Henry van der Heyden said much of the increase had been driven by record commodity prices.

“If we hadn’t had the drought, which saw our milk production drop by around 4 per cent, the figure could have been even higher,” he said.

World economic growth and demand from emerging markets – along with reduced supply, drought in Australia and biofuel production driving up the costs of feedstock – helped drive up dairy commodity prices.

The ANZ Commodity Price Index for dairy products hit 291.9 in November, having risen for 15 consecutive months from 127.6 in August 2006. The dairy index has since fallen in all but one month to reach 256.7 in June.

In May Fonterra raised an already record forecast payout to dairy farmers to $7.90 per kilogram of milksolids, compared with $4.46 the previous season. Fonterra said this season’s payout would inject about $9 billion into the economy.

The final payout for the the 2007/08 season would be announced in September, while the opening forecast for next season was the highest initial forecast in the co-operative’s history, at $7 per kilogram of milksolids.

“We’re seeing continued investment from farmers and in our processing capacity. That’s a huge boost, particularly for regions like Southland with a lot of new jobs and benefits flowing through,” van der Heyden said.

The Senate, in a rare weekend session, overwhelmingly approved the measure, 72-13, a reflection of the election-year jitters on Capitol Hill over the troubled economy. Bush has said he will sign the bill, which the House approved 272-152.

“Today, Congress did more than send a bill to the president – we sent a message to American families that help is on the way,” said Senate Banking Committee Chairman Chris Dodd, D-Conn., who helped write the legislation.

The measure’s critics attacked it as a bailout of speculators and irresponsible borrowers at potentially huge cost to taxpayers.

In a video released by IntelCenter, a terrorism monitoring group, a bearded man identified as “Commander Seyfullah” is seen reading a declaration of jihad against the Olympics and warns athletes and spectators, “especially Muslims”, to stay away.

It was issued by a group calling itself the Turkestan Islamic party. The group may be allied with the East Turkestan Islamic Movement – designated a terrorist organisation by the US, China and several other countries – which seeks independence for the Muslim Uighur people of China’s far west province of Xinjiang, which Uighur separatists call East Turkestan.

“Commander Seyfullah” said the group was responsible for three bombs last week on buses in the city of Kunming, which killed two people, and for two bus bombings on May 21 in Shanghai, which killed three.

The group said it also bombed a plastics factory in southern China and claimed involvement in an attack on police in the city of Wenzhou using explosives on a tractor, both on July 17.

Some of these incidents had been attributed to criminals, local grievances or accidents.