Cyprus details heavy losses for major bank customers

By Karolina Tagaris

NICOSIA (Reuters) - Major depositors in Cyprus's biggest bank will lose around 60 percent of savings over 100,000 euros, its central bank confirmed on Saturday, sharpening the terms of a bailout that has shaken European banks but saved the island from bankruptcy.

Initial signs that big depositors in Bank of Cyprus would take a hit of 30 to 40 percent - the first time the euro zone has made bank customers contribute to a bailout - had already unnerved investors in European lenders this week.

But the official decree published on Saturday confirmed a Reuters report a day earlier that the bank would give depositors shares worth just 37.5 percent of savings over 100,000 euros. The rest of such holdings might never be paid back.

The toughening of the terms sends a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.

Banks reopened to relative calm on Thursday after the imposition of the first capital controls the euro has seen since it was launched a decade ago.

The streets of Nicosia were filled with crowds relaxing in its cafes and bars on Saturday, but popular anger was not hard to find.

"Europe shouldn't have allowed this disaster to happen here. Cyprus was paradise and they've turned it into hell," said Tryfonas Neokleous, owner of a clothes shop on a cobbled street in the center of the city.

He said he didn't except business to pick up even now that the banks were open again after an almost two-week shutdown.

"I don't expect anything and I don't hope for anything anymore. People are going to spend their money on food and everything else they've been deprived of the last 15 days."

There are no signs for now that bank customers in other struggling euro zone countries like Greece, Italy or Spain taking fright at the precedent set by the bailout.

"Cyprus is and will remain a special one-off case," German Finance Minister Wolfgang Schaeuble told German mass-selling daily Bild. "Savings accounts in Europe are safe."

European officials have worked hard this week to stress that the island's bailout was a unique case - after a suggestion by Eurogroup chairman Jeroen Dijsselbloem that the rescue would serve as a model for future crises rattled European financial markets.

"Together in the Eurogroup we decided to have the owners and creditors take part in the costs of the rescue - in other words those who helped cause the crisis," said Schaeuble, one of the architects of the euro zone's response to a debt crisis now in its fourth year.

"Cyprus's economy will now go through a long and painful period of adjustment. But then it will pay back the loan."

ANGRY

Cypriot President Nicos Anastasiades said on Friday that the 10-billion euro ($13 billion) bailout had contained the risk of national bankruptcy and would prevent it from leaving the euro.

Cypriots, however, are angry at the price attached to the rescue - the winding down of the island's second-largest bank, Cyprus Popular Bank, also known as Laiki, and an unprecedented raid on deposits over 100,000 euros.

"We're numb. People are numb. But their hidden hope is that something good will happen eventually," said Pantelis Panayotou, 70, a jeweler whose stands in his shop are half empty.

The island has seen none of the angry street violence that frequently erupts in Greece but peaceful protests by students and bank workers have become an almost daily occurrence. At least 2,000 students protested outside parliament this week.

Etyk, a bank workers' union, called a rally outside parliament for Thursday to protest against potential job cuts and a hit on their pension funds.

Under the terms of Saturday's decree, the assets of Laiki will be transferred to Bank of Cyprus. At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.

Those with deposits under 100,000 euros will continue to be protected under the state's deposit guarantee.

The imposition of the capital controls has led economists to warn that a second-class "Cyprus euro" could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.

Among other things Cypriots and foreigners are allowed to take only up to 1,000 euros in cash when they leave the island.

Anastasiades said the restrictions - unprecedented in the currency bloc since euro coins and banknotes entered circulation in 2002 - would be gradually lifted. He gave no time frame but the central bank said the measures would be reviewed daily. ($1 = 0.7788 euros)

(Additional reporting by Erik Kirschbaum in Berlin; Writing by Patrick Graham; Editing by Jon Boyle)

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Italy president pledges to stay to deal with crisis

By Giselda Vagnoni

ROME (Reuters) - Italian President Giorgio Napolitano on Saturday ruled out standing down early to make way for new parliamentary elections, after the failure of attempts to form a government this week, saying he would keep trying to find a way out of the deadlock.

Napolitano, whose term ends on May 15, spoke after news reports suggested he might resign to get around constitutional provisions which prevent a president dissolving parliament and calling elections during his final months in office.

"I will continue until the last day of my mandate to do as my sense of national responsibility suggests, without hiding from the country the difficulties that I am still facing," he told reporters at his Quirinale palace.

But he acknowledged that he had limited scope to force the divided parties to find a way out of political situation that he said was "frozen between irreconcilable positions".

With investors still mindful of the turmoil that took the euro zone to the brink of disaster in 2011, the gridlock has revived worries about Italy just as the Cyprus banking crisis reopened concern about the stability of the single currency.

Napolitano said he would ask two small groups of experts to formulate proposals for institutional and social and economic reforms that could be supported by all political parties.

He named 10 senior figures including Enrico Giovannini, the head of statistics agency ISTAT, European Affairs Minister Enzo Moavero Milanesi and Bank of Italy board member Salvatore Rossi as well as one senior figure from each of the main parties apart from the anti-establishment 5-Star Movement.

Napolitano met leaders of the main parties on Friday to try to find a way out of the stalemate created by an election which has left Italy facing a return to the polls after no party won a viable majority in parliament.

However with all of the three main formations in parliament clinging to entrenched positions that have prevented a majority being formed, hopes of a solution that would head off potentially destabilizing early elections have faded.

Pier Luigi Bersani, whose center-left alliance has a majority in the lower house but not the Senate, was rebuffed by the populist 5-Star Movement, which rejects deals with the main parties it blames for Italy's social and economic crisis.

Bersani himself rejected demands by center-right leader Silvio Berlusconi for a cross-party coalition deal that would give the scandal-plagued former prime minister a share in power and the right to decide Napolitano's successor.

Both Berlusconi's group and the 5-Star Movement, led by ex-comic Beppe Grillo have also ruled out a new technocrat government like the one led by outgoing Prime Minister Mario Monti, blocking what appears to be the only other option.

IRRECONCILABLE

Napolitano's pledge to stay on delayed an immediate crisis but left hopes of progress dependent on parties which are divided less by substantive issues of policy than by deep personal mistrust that has worsened as the standoff has worn on.

Bersani said he would be guided by Napolitano but Berlusconi's party secretary Angelino Alfano had a more lukewarm response and stuck to demands for a coalition government in which it would play a part.

"Either we have a political government with a grand coalition or we return to vote immediately," he told Italian daily Corriere della Sera. "If the initiative begun today leads to this outcome, good. Otherwise, the only way is to go straight to the polls with no delay," he said.

Napolitano stressed that Monti retained full authority at the head of a caretaker administration until a new government can be formed but he will be unable to undertake any significant reforms to Italy's stagnant economy, now deep in its longest recession for 20 years.

Parliament must soon begin preparations to vote for a new president either to oversee the first steps of a new government or early elections and the battle to choose the next head of state is unlikely to ease the political tensions.

The head of state, elected by a joint sitting of parliament and representatives from the regions, has a broadly defined but at times vital role in overseeing affairs of state, as Napolitano himself has shown repeatedly ever since the last Berlusconi government fell in 2011.

With bond markets closed for the Easter break, investors have been left on the sidelines but a poorly received auction of mid- and long-term debt last week underlined the danger if the crisis drags on.

(Additional reporting by Naomi O'Leary in Rome and Ethan Bilby in Brussels; Writing by James Mackenzie; editing by Barry Moody and Rosalind Russell)

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Kenyatta won Kenya's presidency fairly: Supreme Court

By James Macharia and Edmund Blair

NAIROBI (Reuters) - Kenya's Supreme Court upheld Uhuru Kenyatta's presidential election victory on Saturday and his defeated rival accepted the ruling, helping douse tensions after tribal violence blighted the election five years ago.

The decision cleared the way for Kenya's richest man to take the top job in east Africa's biggest economy, but left Western powers with the headache of dealing with a leader charged with crimes against humanity at the International Criminal Court.

After the judgment, police fired shots in the air and tear gas at hundreds of stone-throwing youths in the western city of Kisumu, a stronghold of defeated candidate Raila Odinga, who had challenged Kenyatta's win. Protesters looted shops and burned tires in the city that was a flashpoint five years ago.

An official at Kenya's Red Cross said two people were killed from gunshots, and 11 others were wounded. But the violence was less severe than after the 2007 election.

And shortly after the court ruling, Odinga delivered a televised statement accepting the court's unanimous decision.

"The court has now spoken," Odinga said. "I wish the president-elect, honorable Uhuru Kenyatta, and his team well."

Western donors, worried about a nation seen as a vital ally in the regional battle against militant Islam, also congratulated Kenyatta. But they have said his indictment in the Hague will complicate their relations.

There was no immediate sign of major flare-ups in other areas of Kenya blighted by violence after the disputed ballot in 2007 that triggered bloodshed and killed more than 1,200 people.

During a 10-minute session to read the ruling, Chief Justice Willy Mutunga said the six-member court had reached the unanimous decision that Kenyatta and his running mate for deputy president, William Ruto, had been "validly elected".

"It is now for the Kenyan people, their leaders, civil society, the private sector and the media to discharge (their duty), to ensure that the unity, peace, sovereignty and prosperity of the nation is preserved," he said.

After a week of hearings, he said the court ruled that the March 4 vote was conducted in a free, fair and credible manner.

Many Kenyans said they were determined to avoid a re-run of the violence five years ago and that, this time round, they had more trust in the newly reformed judiciary and the chief justice, Mutunga, a well-respected lawyer appointed in 2011.

Kenyatta, in a televised address, thanked the court for its work and also Odinga for wishing him well. The president-elect promised his government would "work with and serve all Kenyans without any discrimination whatsoever."

"MADE KENYA PROUD"

Peaceful voting in this year's vote, and the fact the dispute was played out by lawyers not machete-wielding gangs, has helped repair Kenya's image.

Paramilitary police, some on horseback, formed a security cordon around the court before the ruling, keeping back a few dozen Odinga supporters who had defied a ban on rallies.

After the ruling, Kenyatta's backers ignored the rain and took to Nairobi's streets cheering. Cars hooted their horns.

Twitter lit up after the decision, with many saying it was time for Kenya to move on. Judith Sidi Odhiambo‏ praised the chief justice: "You have made Kenya proud and restored our dignity. Well done. We can now move ahead as a nation."

Kenyatta comfortably beat Odinga in total votes won, but only just avoided a run-off by edging above the 50 percent mark.

Kenyatta is facing charges of crimes against humanity in the Hague-based court, accused of helping incite violence after the 2007 vote. Kenyatta denies the charges and has promised to cooperate with the court to clear his name.

In Washington, the White House issued a statement congratulating Kenyatta on his victory.

It said: "We also congratulate the people of Kenya on the peaceful conduct of the election and commend Raila Odinga for accepting the Supreme Court's decision. We urge all Kenyans to peacefully accept the results of the election."

British Prime Minister David Cameron wrote to Kenyatta to congratulate him. European Commission President Jose Manuel Barroso sent a congratulatory message that also welcomed the new government's commitment to abiding by international obligations.

That referred to Kenyatta's acceptance speech on March 9 in which he promised to cooperate with international bodies but - in an apparent swipe at the West - said the world should also respect the democratic will of Kenyans.

Western nations have a policy of only "essential contacts" with court indictees. They say that will not affect dealings with the government as a whole, but will worry the issue could drive a long-time ally closer to emerging powers such as China.

Ahead of the ruling the Kenyan shilling had been trading in a tight range to the U.S. dollar and traders said it could strengthen if the ruling upheld Kenyatta's victory.

(Additional reporting by Joseph Akwiri in Mombasa, Hezron Ochiel in Kisumu and Humphrey Malalo in Nairobi; Writing by Edmund Blair; Editing by Stephen Powell)

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Pope leads Catholics into Easter at vigil service in St. Peter's

By Philip Pullella

VATICAN CITY (Reuters) - Pope Francis, leading the world's 1.2 billion Catholics into Easter for the first time, on Saturday urged those who have strayed from the faith to allow God back into their lives.

Francis, who was elected on March 13, presided at a solemn Easter vigil Mass in St. Peter' Basilica to usher the Catholic Church into the most important day of its liturgical calendar.

The immense basilica, the largest church in Christendom, was in the dark for the start of the service to signify the darkness in Jesus' tomb before what Christians believe was his resurrection from the dead three days after his crucifixion.

Some 10,000 faithful lit candles as Francis, the former Cardinal Jorge Bergoglio of Argentina, walked up the main aisle, and then the basilica's lights were turned on.

The 76-year-old Francis, wearing relatively plain white vestments - as opposed to the more elaborate robes preferred by his predecessor Benedict - delivered a simple homily recounting the Bible story of the women who went to Jesus' tomb but were surprised to find it empty.

He urged his listeners not to be "afraid of God's surprises," never to lose confidence during the trials and tribulations of daily life, and, if they have strayed, to let God back into their lives.

"Let the risen Jesus enter your life, welcome him as a friend, with trust: he is life! If up till now you have kept him at a distance, step forward. He will receive you with open arms," he said, speaking in Italian.

"If you have been indifferent, take a risk: you won't be disappointed. If following him seems difficult, don't be afraid, trust him, be confident that he is close to you, he is with you and he will give you the peace you are looking for and the strength to live as he would have you do," he said.

Another difference between Francis and his predecessor is that Francis reads his homilies standing behind a lectern like an ordinary priest instead of while seated on a throne.

He is still living in the same Vatican guesthouse where he stayed during the conclave that elected him the first non-European pope in 1,300 years instead of moving into the spacious and regal papal apartments in the Vatican's Apostolic Palace.

Francis has also been inviting ordinary people to his morning Mass at the guesthouse, including Vatican street sweepers and gardeners and staff of the guest house.

During Saturday night's service he presided at another Easter vigil tradition by baptizing four new adult members of the Church. They were from Italy, Albania, Russia and the United States.

Holy Saturday was the third of four hectic days leading up to Easter Sunday, the most important day in the Christian liturgical calendar.

On Easter Sunday he will celebrate another Mass and then deliver his first "Urbi et Orbi" (to the city and the world) message from the central balcony of St. Peter's Basilica to tens of thousands of people in the square below.

The balcony is the same spot where he first appeared to the world as pope on the night of March 13 after his election.

(Reporting By Philip Pullella; Editing by Jason Webb)

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China's urbanization drive leaves migrant workers out in the cold

By Lucy Hornby and Jane Lee

BEIJING/SHANGHAI (Reuters) - Twenty minutes' drive from Shanghai's glitzy financial district, dozens of migrant workers are preparing to abandon homes in old shipping containers, as one of the more unusual solutions to China's housing shortage faces the wrecking ball.

Cheap but crowded neighborhoods are being cleared across China as part of a stepped-up "urbanization" campaign by China's new leaders. The country aims to spend an estimated $6 trillion on infrastructure, including housing, as a projected 400 million people become urban residents over the next decade.

But in an ironic twist, the clearance of so-called "villages within cities" removes cheap housing stock for the very people targeted to fuel that migration, without providing sufficient replacement units. The land is sold by municipalities to developers who generally erect expensive apartment towers.

That throws into question how the government can achieve its ambitious goal.

"On the one hand, the law doesn't allow former farmers to expand housing for migrant workers, on the other hand local governments don't have the money to build affordable housing either," said Li Ping, senior attorney for Landesa Rural Development Institute in Beijing.

About 130 million Chinese migrants live in tiny, sub-divided rooms rented out by former farmers whose villages have been swallowed by sprawl, according to government surveys.

Policies to provide government-built housing while razing these shabby "villages within cities" result in a net loss of housing units, according to urban planners and academics, while choking off the private rental market that for decades has enabled China's massive urban migration.

The dilemma poses harsh choices for those who have made lives in the cities on the slimmest of margins, such as the migrants in the converted shipping containers in Shanghai.

"They can't just come and ask me to move. I have so many products here that I sell. So much stuff worth at least tens of thousands of yuan," said Li Yanxin, a migrant from nearby Anhui Province who runs a small convenience store out of his container. His profits - and therefore his ability to pay for his teenager's education - depend on the low rent he found in the container village.

Local officials put muscle behind a policy of clearing such sites, often declaring these dwellings illegal by noting non-agricultural land allocated to villagers cannot be used for commercial purposes. Land reclassified as "urban" can be sold at a huge profit.

"Not everyone can live in a high rise. Especially those of us who work in the recycling business," Zhang Baofa, who rented out the used shipping containers in one of the more creative solutions to Shanghai's shortage of cheap housing.

Local officials, embarrassed by photos of the container village circulating on the Internet, have vowed to remove the site within days. On Thursday, after four years of operation, they declared Li's store to be unregistered.

"This is zoned as village land. I borrowed the land. I bought the containers. I rented it out. I would know if it were illegal," Zhang said.

SEPARATE AND UNEQUAL

Chinese cities lack the visible slums of other developing countries, thanks in part to communities such as Xinzhuang in Beijing that collectively house about 3.4 million migrants just within the capital.

A high whitewashed wall and strip of green lawn hide Xinzhuang's 10,000 residents from surrounding luxury apartment blocks. Three black chickens scratch along a filthy gutter of blue-grey water next to the public latrine. Rooms of about 12 square meters each house families of three, for an affordable 500 yuan ($80) a month.

"A regular apartment would be more comfortable, but it's about 2,000 yuan a month. That's too much for the type of people who live here. They want to save what they can. We fill the lowest niche," said landlord Dong Gang, whose former farmhouse is now a two-story concrete structure divided into about 30 makeshift rooms.

One of the 1,000 original residents of Xinzhuang, he has been renting to migrants for 20 years. Complicated zoning laws mean that Dong can't expand beyond the footprint of his original home, hindering investments that might improve housing quality.

"In Beijing over the last two years they've been 'cleaning up' crowded tenements - that raises rents and forces many out," said Hu Xingdou, a specialist in migrant issues at the Beijing Institute of Technology.

Within the next two years, Beijing city is expected to allow migrants to rent but not buy city-built housing units. Even so, many migrants won't qualify to rent, and the number of government-built units often falls short of the number of migrants displaced.

"There is going to be less of this type of housing, because almost all cities have policies now to demolish 'villages within cities'," according to estimates by Tom Miller, author of "China's Urban Billion".

URBAN VILLAGES

For two decades, Chinese local governments have been able to ignore the problem of housing migrants, thanks to the makeshift villages and other arrangements that accommodate about 40 percent of migrants. The remainder live at factory dormitories or tents and pre-fab housing set up on construction sites.

As China's cities and export industries boomed, cheap private housing helped keep down the cost of labor, says Li Jinkui of the China Development Institute in Shenzhen. He estimates Shenzhen would have spent 25 years' worth of annual revenues to house the people who were renting in its "villages" in 2000 - a population now estimated at 5 million people.

Of 1.35 billion Chinese, 690 million are estimated to live in cities, but only about half of those can claim urban residency status due to an archaic national registration system that ties all citizens, and public benefits, to their hometowns.

City governments often lack figures for how many people live in neighborhoods targeted for demolition, but they can document their destruction with precision. Beijing's most recent city plan notes that 171 "villages within cities" had been "cleaned up" in the previous five years, but as of 2011, there were still 100 left.

The loss of affordable housing could accelerate, according to a Beijing plan released Thursday to catalogue "illegal" buildings on collectively owned land and then destroy them next spring. Coal briquettes burned in unheated slum villages contribute to Beijing's choking winter pollution.

European and American cities had huge programs to replace slums with public housing, Miller said. "The question is what happens when they are demolished in China?"

(Additional reporting by Langi Chiang in BEIJING; Editing by Ken Wills)

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No end to Italy deadlock despite president's efforts

By James Mackenzie and Barry Moody

ROME (Reuters) - Italy remained in political deadlock on Friday after a new round of talks led by President Giorgio Napolitano failed to break the stalemate created by elections last month that left no group able to form a government alone.

Napolitano, 87, conducted a swift round of talks with the three main forces in parliament on Friday after the failure of a week of efforts by center-left leader Pier Luigi Bersani to win support for a new government.

But all the parties remained in the same entrenched positions they have occupied since the February 24-25 election, with no sign of movement from any of them.

Bersani won the largest share of the vote in the election but fell short of a majority in parliament.

The third biggest force, Beppe Grillo's populist 5-Star Movement, which holds the balance of power, on Friday again rejected backing a Bersani government or any administration not led by them.

The center-left in turn reiterated that it would not enter a coalition with Berlusconi, which the 76-year-old billionaire media magnate said after his talks with Napolitano was the only way out of the crisis short of a snap new election.

Bersani's deputy, Enrico Letta, said after meeting Napolitano that a coalition with Berlusconi's center-right, "would not be the choice of change the country has asked for."

Berlusconi and 5-Star both ruled out backing a technocrat government like the one led by outgoing Prime Minister Mario Monti, whom they both blame for pushing Italy into recession.

This had been seen as a possible alternative way to give Italy the government it needs to address a deep economic crisis.

"Our position has not changed. We expressed it with absolute clarity to the president," Berlusconi told reporters after the meeting with Napolitano.

Grillo on Friday scornfully rejected any idea of giving support for a government not led by his movement.

"Give them a vote of confidence? Those are swear words in the mouths of people like them," Grillo said in a live video broadcast on his popular blog. "They should all just go home."

Bersani says Berlusconi is untrustworthy and also rejects the latter's demand to nominate a successor to Napolitano, whose mandate expires in May.

PRESIDENT'S OPTIONS LIMITED

The refusal by Berlusconi and his allies in the Northern League, as well as Grillo, to back a technocrat government reduces Napolitano's options greatly and makes it much less likely that an independent figure will be able to lead a non-political administration.

"We were against the Monti government and if there is to be another government of that type it's a thousand times better to have new elections," League leader Roberto Maroni said.

The political gridlock has fed growing worries about Italy's ability to confront a prolonged economic crisis that has left it in deep recession for more than a year, with a 2-trillion-euro ($2.6-trillion) public debt and record unemployment, especially among the young.

Rumors have been circulating for days that ratings agency Moody's is preparing to cut its rating on Italy's sovereign debt, which is already only two notches above "junk" grade, partly due to the uncertain political outlook.

Napolitano has made clear that he does not want Italy to go back to new elections immediately, not least because the widely criticized election law is likely to just repeat the deadlock.

He made no announcement after the end of the talks on Friday and officials said he was considering his options. After the failure of the latest round of talks it is not clear what he can do to avoid a quick return to the polls.

Many are already preparing to vote again, with Berlusconi's center-right confident that the momentum created by his surge towards the end of the last campaign will continue.

A poll by the SWG company on Friday showed the center-right had pushed Bersani's bloc into second place since the vote.

(Additional reporting by Naomi O'Leary; Editing by Barry Moody and Michael Roddy)

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North Korea says to enter "state of war" against South Korea: KCNA

SEOUL (Reuters) - North Korea said on Saturday it was entering a "state of war" with South Korea in a continuing escalation of tough rhetoric against Seoul and Washington after coming under international sanctions for its nuclear test.

"From this time on, the North-South relations will be entering the state of war and all issues raised between the North and the South will be handled accordingly," a statement carried by the North's official KCNA news agency said.

KCNA said the statement was issued jointly by the North's government, ruling party and other organizations.

North Korea has been threatening to attack the South and U.S. military bases almost on a daily basis since the beginning of March, when U.S. and South Korean militaries started routine drills, and has ordered its armed forces on the highest alert.

But the impoverished state has kept a joint industrial zone that is the source of hard currency where hundreds of South Korean workers and vehicles cross enter daily after crossing the rival Koreas' heavily armed border.

Few believe North Korea will risk starting a full-out war.

The two Koreas have been in a technical state of war because their 1950-53 conflict ended under an armistice and not a peace treaty, although Pyongyang earlier in March declared the truce no longer valid.

(Reporting by Sung-won Shim; Editing by Jack Kim)

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Big depositors in Cyprus to lose far more than feared

By Michele Kambas

NICOSIA (Reuters) - Big depositors in Cyprus's largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday.

Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back.

The toughening of the terms will send a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.

Officials had previously spoken of a loss to big depositors of 30 to 40 percent.

Cypriot President Nicos Anastasiades on Friday defended the 10-billion euro ($13 billion) bailout deal agreed with the EU five days ago, saying it had contained the risk of national bankruptcy.

"We have no intention of leaving the euro," the conservative leader told a conference of civil servants in the capital, Nicosia.

"In no way will we experiment with the future of our country," he said.

Cypriots, however, are angry at the price attached to the rescue - the winding down of the island's second-largest bank, Cyprus Popular Bank, also known as Laiki, and an unprecedented raid on deposits over 100,000 euros.

Under the terms of the deal, the assets of Laiki bank will be transferred to Bank of Cyprus.

At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest, the source said. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.

Those with deposits under 100,000 euros will continue to be protected under the state's deposit guarantee.

Cyprus's difficulties have sent jitters around the fragile single European currency zone, and led to the imposition of capital controls in Cyprus to prevent a run on banks by worried Cypriots and wealthy foreign depositors.

"CYPRUS EURO"

Banks reopened on Thursday after an almost two-week shutdown as Cyprus negotiated the rescue package. In the end, the reopening was largely quiet, with Cypriots queuing calmly for the 300 euros they were permitted to withdraw daily.

The imposition of capital controls has led economists to warn that a second-class "Cyprus euro" could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.

Anastasiades said the restrictions on transactions - unprecedented in the currency bloc since euro coins and banknotes entered circulation in 2002 - would be gradually lifted. He gave no time frame but the central bank said the measures would be reviewed daily.

He hit out at banking authorities in Cyprus and Europe for pouring money into the crippled Laiki.

"How serious were those authorities that permitted the financing of a bankrupt bank to the highest possible amount?" Anastasiades said.

The president, barely a month in the job and wrestling with Cyprus's worst crisis since a 1974 war split the island in two, accused the 17-nation euro currency bloc of making "unprecedented demands that forced Cyprus to become an experiment".

European leaders have insisted the raid on big bank deposits in Cyprus is a one-off in their handling of a debt crisis that refuses to be contained.

MODEL

But policymakers are divided, and the waters were muddied a day after the deal was inked when the Dutch chair of the euro zone's finance ministers, Jeroen Dijsselbloem, said it could serve as a model for future crises.

Faced with a market backlash, Dijsselbloem rowed back. But on Friday, European Central Bank Governing Council member Klaas Knot, a fellow Dutchman, said there was "little wrong" with his assessment.

"The content of his remarks comes down to an approach which has been on the table for a longer time in Europe," Knot was quoted as saying by Dutch daily Het Financieele Dagblad. "This approach will be part of the European liquidation policy."

The Cyprus rescue differs from those in other euro zone countries because bank depositors have had to take losses, although an initial plan to hit small deposits as well as big ones was abandoned and accounts under 100,000 euros were spared.

Warnings of a stampede at Cypriot banks when they reopened on Thursday proved unfounded.

For almost two weeks, Cypriots were on a ration of limited withdrawals from bank cash machines. Even with banks now open, they face a regime of strict restrictions designed to halt a flight of capital from the island.

Some economists say those restrictions will be difficult to lift. Anastasiades said the capital controls would be "gradually eased until we can return to normal".

The government initially said the controls would stay in place for seven days, but Foreign Minister Ioannis Kasoulides said on Thursday they could last "about a month".

On Friday, easing a ban on cheque payments, Cypriot authorities said cheques could be used to make payments to government agencies up to a limit of 5,000 euros. Anything more than 5,000 euros would require Central Bank approval.

The bank also issued a directive limiting the cash that can be taken to areas of the island beyond the "control of the Cypriot authorities" - a reference to Turkish-controlled northern Cyprus which considers itself an independent state. Cyprus residents can take 300 euros; non-residents can take 500.

Under the terms of the capital controls, Cypriots and foreigners are allowed to take up to 1,000 euros in cash when they leave the island.

(Additional reporting by Ivana Sekularac and Gilbert Kreijger in Amsterdam; Writing by Matt Robinson; Editing by Giles Elgood)

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Pope leads traditional Good Friday rite at Rome Colosseum

By Philip Pullella

ROME (Reuters) - Thousands of people holding candles turned out at Rome's Colosseum to see Pope Francis mark the first Good Friday of his pontificate with a traditional "Way of the Cross" procession around the ancient amphitheatre.

Francis, who was elected on March 13, sat under a red canopy on Rome's Palatine Hill as representatives of the faithful from around the world alternated carrying a wooden cross on the day Christians commemorated Jesus's death by crucifixion.

"Sometimes it may seem as though God does not react to evil, as if he is silent," the Argentine pope said, speaking slowly in Italian and in a somber voice at the end of the evening service.

"And yet, God has spoken, he has replied, and his answer is the Cross of Christ: a word which is love, mercy, forgiveness. It is also reveals a judgment, namely that God, in judging us, loves us," he said.

"Christians must respond to evil with good," he said, urging them to beware "the evil that continues to work in us and around us".

The meditations for the 14 "stations of the cross" which commemorate events in the last hours of Jesus's life - from when Pontius Pilate condemned him to death to his burial in a rock tomb - were written by young people from Lebanon.

The wooden cross was passed from one group and person to another - including a person in a wheelchair. Those who carried it came from Italy, India, China, Nigeria, Syria, Lebanon and Brazil.

Several of the meditations, read by actors, referred to conflict in the Middle East and the suffering of its people.

One meditation called the Middle East "a land lacerated by injustice and violence".

Francis praised those Lebanese Christians and Muslims who tried to live together and who, he said, in doing so gave a sign of hope to the world.

Prayers were read out for exploited and abused children, refugees, the homeless and victims of religious intolerance, war, violence, terrorism, poverty, injustice and drug addiction.

There were also prayers against abortion and euthanasia.

Good Friday is the second of four hectic days leading up to Easter Sunday, the most important day in the Christian liturgical calendar.

On Holy Thursday, two young women were among 12 people whose feet the pope washed and kissed at a traditional ceremony in a Rome youth prison, the first time a pontiff has included females in the rite.

After celebrating an Easter eve service, on Easter Sunday he will deliver his first "Urbi et Orbi" (to the city and the world) message in St. Peter's Square.

(Reporting By Philip Pullella; Editing by Michael Roddy)

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Muslims vanish as Buddhist attacks approach Myanmar's biggest city

By Jason Szep

SIT KWIN, Myanmar (Reuters) - The Muslims of Sit Kwin were always a small group who numbered no more than 100 of the village's 2,000 people. But as sectarian violence led by Buddhist mobs spreads across central Myanmar, they and many other Muslims are disappearing.

Their homes, shops and mosques destroyed, some end up in refugee camps or hide in the homes of friends or relatives. Dozens have been killed.

"We don't know where they are," says Aung Ko Myint, 24, a taxi driver in Sit Kwin, a farming village where on Friday Buddhists ransacked a store owned by the town's last remaining Muslim. "He escaped this morning just before the mob got here."

Since 42 people were killed in violence that erupted in Meikhtila town on March 20, unrest led by hardline Buddhists has spread to at least 10 other towns and villages in central Myanmar, with the latest incidents only about a two-hour drive from the commercial capital, Yangon.

The crowds are fired up by anti-Muslim rhetoric spread over the Internet and by word of mouth from monks preaching a movement known as "969". The three numbers refer to various attributes of the Buddha, his teachings and the monkhood. But it has come to represent a radical form of anti-Islamic nationalism which urges Buddhists to boycott Muslim-run shops and services.

Myanmar is predominantly Buddhist but about 5 percent of its 60 million people are Muslims. There are large Muslim communities in Yangon, Mandalay and towns across Myanmar's heartland where the religions have co-existed for generations.

But as violence spreads from village to village, the unleashing of ethnic hatred, suppressed during 49 years of military rule that ended in March 2011, is challenging the reformist government of one of Asia's most ethnically diverse countries.

Dusk-to-dawn curfews are in effect in many areas of Bago, the region where Sit Kwin lies, while four townships in central Myanmar are under a state of emergency imposed last week.

"I will not hesitate to use force as a last resort to protect the lives and safeguard the property of the general public," President Thein Sein said in a nationally televised speech on Thursday, warning "political opportunists and religious extremists" against instigating further violence.

The unrest has made almost 13,000 people homeless, according to the United Nations. State-run media reports 68 people have been arrested.

RUMOURS

The trouble in Sit Kwin began four days ago when people riding 30 motorbikes drove through town urging villagers to expel Muslim residents, said witnesses. They then trashed a mosque and a row of Muslim shops and houses.

"They came with anger that was born from rumors," said one man who declined to be identified.

Further south, police in Letpadan have stepped up patrols in the farming village of 22,000 people about 160 km (100 miles) from Yangon.

Three monks led a 30-strong group towards a mosque on Friday. Police dispersed the crowd, many of whom carried knives and staves, and briefly detained two people. They were later released at the request of township officials, police said.

"I won't let it happen again," said police commander Phone Myint. "The president yesterday gave the police authority to control the situation."

The abbot who led the protest, Khamainda, said he took to the streets after hearing rumors passed by other monks by telephone, about violence between Buddhists and Muslims in other towns. He said he wanted revenge against Muslims for the destruction by the Taliban of Buddhist statues in Bamiyan province in Afghanistan in 2001.

"There is no problem with the way they live. But they are the minority and we are the majority. And when the minority insults our religion we get concerned," he told Reuters. "We will come out again if we get a chance."

Letpadan villagers fear the tension will explode. "I'm sure they will come back and destroy the mosque," says Aung San Kyaw, 35, a Muslim. "We've never experienced anything like this."

Across the street, Hla Tan, a 67-year-old Buddhist, shares the fear. "We have lived peacefully for years. Nothing can happen between us unless outsiders come. But if they come, I know we can't stop them," he said.

North of Sit Kwin, the farming town of Minhla endured about three hours of violence on both Wednesday and Thursday.

About 300 people, many from the nearby village of Ye Kyaw, gathered on Wednesday afternoon. The crowd swelled to about 800 as townsfolk joined, a Minhla policeman told Reuters. They then destroyed three mosques and 17 shops and houses, he said. No Buddhist monks were involved, said witnesses.

"VERY NERVOUS"

The mob carried sticks, metal pipes and hammers, said Hla Soe, 60, a Buddhist who runs an electrical repair shop in Minhla. "No one could stop them," he said.

About 200 soldiers and police eventually intervened to restore a fragile peace. "I'm very nervous that it will happen again," he said.

About 500 of Minhla's township's 100,000 people are Muslims, said the police officer, who estimated two-thirds of those Muslims had fled.

However, Tun Tun is staying. "I have no choice," says the 26-year-old, whose tea shop was destroyed and looted by Buddhists, one armed with a chainsaw.

He plans to rebuild his shop, whose daily income of 10,000 kyat ($11) supports an extended family of 12. On the wall of his ransacked kitchen is a portrait of democracy leader Aung San Suu Kyi. He did not believe she could do anything to help.

Tun Tun traced the rising communal tension in Minhla to speeches given on February 26 and 27 by a celebrated monk visiting from Mon State, to the east of Yangon. He spoke to a crowd of 2,000 about the "969 movement", said Win Myint, 59, who runs a Buddhist community centre which hosted the monk.

After the 969 talks, Muslims were jeered and fewer Buddhists frequented his tea shop, said Tun Tun. Stickers bearing pastel hues overlaid with the numerals 969 appeared on non-Muslim street stalls across Minhla.

President Thein Sein's ambitious reform program has won praise, but his government has also been criticized for failing to stem violence last year in Rakhine State in western Myanmar, where officials say 110 people were killed and 120,000 were left homeless, most of them Rohingya Muslims.

The U.N. special rapporteur on human rights in Myanmar said on Thursday he had received reports of "state involvement" in the recent violence at Meikhtila.

Soldiers and police sometimes stood by "while atrocities have been committed before their very eyes, including by well-organized ultra-nationalist Buddhist mobs", said the rapporteur, Tomas Ojea Quintana. "This may indicate direct involvement by some sections of the state or implicit collusion and support for such actions."

Ye Htut, a presidential spokesman and deputy minister of information, called those accusations "groundless". "In fact, the military and the government could not be concerned more about this situation," he said in a Facebook post.

Late on Friday, three monks were preparing to give another "969" speech in Ok Kan, a town 113 km (70 miles) from Yangon.

(Additional reporting by Min Zayar Oo; Editing by Andrew R.C. Marshall and Robert Birsel)

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Mortar kills 15 at Damascus University, Syria says

By Oliver Holmes and Hamdi Istanbullu

BEIRUT/ISTANBUL (Reuters) - Fifteen Syrian students were killed when rebel mortar shells hit a Damascus University canteen on Thursday, state-run news agency SANA said, as attacks intensified in the center of the capital.

The Syrian Observatory for Human Rights, an opposition monitoring group, said a mortar killed 13 people at the university, without saying who fired the bombs.

Other activists confirmed the attack but no opposition group has denied or claimed responsibility.

Insurgents trying to end four decades of rule by the family of President Bashar al-Assad have formed a semi-circle around the capital and intensified attacks from positions on the outskirts this week.

A bastion for Assad's forces, the capital city is a crucial prize in a two-year-old uprising that has developed into a war in which more than 70,000 people have been killed.

Another 1.2 million Syrians have also fled to neighboring countries and North Africa, where they have registered as refugees or are awaiting processing, according to the U.N. High Commissioner for Refugees (UNHCR).

Highlighting the strain the conflict is placing on neighboring states, Turkey, host to about 260,000 of the refugees, denied on Thursday it had rounded up and deported hundreds of Syrians following unrest at a refugee camp.

SANA said mortar rounds landed in a canteen at the College of Architecture in Baramkeh, a central district near several government buildings, including the Defense Ministry, the headquarters for state media and Assad's official residence.

Pro-government Al-Ikhbariya TV showed images of doctors trying to resuscitate at least two young men and blood on the floor of what appeared to be an outdoor canteen. A young woman was shown walking in a hospital, her face bleeding heavily.

SANA quoted the president of Damascus University as saying the death toll, initially put at 12, had risen to 15 in what state and pro-government media called a terrorist attack.

Last weekend rebel groups sent out warnings on the Internet that they planned to intensify strikes on government and military sites in the city and warned residents they should leave to avoid what they called "Operation Shaking the Fort".

The United Nations said on Monday it would withdraw about half of its international staff from Damascus after a mortar bomb landed near their hotel.

The Syrian military has responded to rebel attacks with artillery shelling and air strikes on suburbs where rebels are entrenched among thousands of civilians trapped in crossfire.

On Thursday, opposition activists said rebels had taken the main bus station in northeastern Damascus. They provided footage of fighters walking around a deserted area and stamping on a framed picture of Assad. (http://link.reuters.com/peg96t)

Government reporting restrictions make it difficult to verify such accounts independently.

TURKISH DENIAL

The foreign ministry in Turkey denied on Thursday any Syrians had been expelled following unrest at the Suleymansah refugees camp, near the Turkish town of Akcakale

A group of 130 people, identified with the help of camera footage as being "involved in the provocations", decided to cross back into Syria voluntarily, either because they did not want to face judicial proceedings or because of repercussions from other refugees, the ministry said in a statement.

Witnesses said hundreds of Syrians were bused to the border after Wednesday's clashes in which refugees threw rocks at military police, who fired tear gas and water cannon.

"There has been a big deportation operation here, they got rid of lots of people. They kicked out two of my boys and three of my brother's sons. They came for my boys last night and told them to get their bags," one refugee at the camp told Reuters by telephone, giving her name as Saher.

Camp residents said young men started the protest against living conditions after faulty electrics set a tent on fire, injuring three brothers aged seven, 18 and 19, one of whom later died in hospital, according to Turkish media reports.

UNHCR said it was concerned about the reports and had taken them up with Turkey. Such action would violate U.N. conventions.

In a sign of divisions hampering international efforts to stem the conflict, Russia on Thursday accused the Arab League of abandoning support for a peaceful solution by giving a summit seat to the Syrian opposition.

Opposition leader Moaz Alkhatib took Syria's vacant seat on Tuesday at the Arab summit, which also lent its support to giving military aid to rebels fighting Assad.

Russian Foreign Minister Sergei Lavrov also cast doubt over the mandate of U.N.-Arab League mediator Lakhdar Brahimi.

"I just don't see how Mr. Brahimi can continue to be considered the representative not just of the United Nations but of the Arab League," Lavrov said in Moscow.

Russia has in the past vocally supported Brahimi, who has met in recent months with Russian and U.S. officials in talks which failed to bridge disagreements over Syria.

Russia, which has long supplied arms to Assad's government but says it is not delivering weapons that can be used in the civil war, vehemently opposes arming the rebels.

Moscow says it has pressed Assad's government to end violence and accuses Western and Arab states of failing to put enough pressure on his opponents to do so, and in many cases encouraging them to keep fighting.

Russia and China have blocked three resolutions in the U.N. Security Council, and Moscow says Assad's exit from power must not be a precondition for peace talks

(Additional reporting by Reuters TV, Erika Solomon in Beirut and Steve Gutterman in Moscow; Writing by Jason Webb; Editing by Michael Roddy)

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Attempt to end Italy crisis stalls, president mulls next move

By James Mackenzie and Barry Moody

ROME (Reuters) - Center-left leader Pier Luigi Bersani has failed in his attempt to find a way out of Italy's political deadlock and President Giorgio Napolitano will now seek another solution, the president's palace said on Thursday.

Bersani reported back to Napolitano on Thursday night after being given a mandate almost a week ago to see if he could muster enough support to form a government after the inconclusive election in February.

Napolitano's office said Bersani, who took the largest share of the vote but failed to win a viable majority, had told him his talks with other parties had ended without resolution and the president would now assess other options "without delay".

Bersani said he had told Napolitano of "significant, positive elements of understanding" in the talks with groups including Silvio Berlusconi's center-right bloc and the populist 5-Star Movement led by ex-comic Beppe Grillo.

"I also explained the difficulties deriving from objections or conditions which I did not consider acceptable."

The failure to reach a conclusion leaves Italy still stuck in political limbo more than a month after the election with the bank crisis in Cyprus fuelling fears of financial market turmoil that could threaten the stability of the euro zone.

Officials said Napolitano would start a new round of consultations with parties on Friday, beginning with Berlusconi's People of Freedom (PDL) party in the morning and ending with Bersani's Democratic Party (PD) in the evening.

A PD spokesman said Bersani had not given up on forming a government but the PDL poured scorn on the center-left leader and said he had wasted a month in a fruitless bid that proved he did not have the numbers to govern.

Napolitano has said he opposes a snap new election to end the impasse but his options are severely limited if he is to avoid a return to the polls within months.

They include naming an outsider to head a technocrat government like that of outgoing Prime Minister Mario Monti or a cross-party political coalition but any government must be able to rely on a majority in parliament.

On Thursday, the main indicator of market confidence - the spread between Italian 10-year bonds and their safer German counterparts - widened to 350 basis points, some 30 points higher than the level seen before the February 24-25 election.

WALL

Bersani had expressed hopes up to the last minute that he could overcome the difficulties but appeared to have run into a wall, particularly in his overtures to Grillo, whose movement says it will not support a vote of confidence in a government led by either the center right or center left.

Bersani has in turn rebuffed demands by Berlusconi that he form a broad left-right coalition, saying the scandal-plagued media magnate was too discredited to deal with.

Mindful of the risk of instability, Napolitano had insisted Bersani obtain firm guarantees of support from the other parties for a vote of confidence in parliament before he would agree to give him a firm mandate to form a government.

Bersani had tried to win support for a list of reforms that included measures on issues like political conflict of interests and corruption that were opposed by Berlusconi and he was never able to win enough guaranteed backing.

The scale of the task now facing Napolitano was underlined by Bersani earlier this week when he said that only someone who was "insane" would want to lead a government given the problems facing Italy.

The center-left leader's struggle to reach an agreement showed how hard it will be even for any new technocrat cabinet to win support in the divided parliament, increasing the chances of a snap election.

An election can only be called after parliament elects a successor to Napolitano, whose term ends in mid-May. Constitutional rules prevent a president from dissolving parliament during the final months of his mandate.

Even this task is politically fraught because Berlusconi wants to pick the new head of state, something Bersani rejects.

Underlining the challenges for the next government, a senior Bank of Italy official and the head of Italy's statistics agency ISTAT both said the government's latest economic forecasts may still be too optimistic, even after being sharply cut last week.

Last week the government said the economy, in its longest recession for 20 years, would contract 1.3 percent this year, compared with a previous forecast of a 0.2 percent shrinkage.

However, ISTAT head Enrico Giovannini told a parliamentary committee hearing on Thursday the result may be worse than that with no recovery until the end of the year or early 2014.

(Additional reporting by Naomi O'Leary and Gavin Jones; editing by Barry Moody and Rosalind Russell)

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South Sudan says 150 killed in battle with rebels

JUBA (Reuters) - More than 150 people have been killed in a battle between South Sudan's army and insurgents in the eastern Jonglei state, officials said on Thursday.

The African country's army earlier this month launched an offensive against rebels led by David Yau Yau in Jonglei where the government hopes to search for oil with the help of France's Total.

Since winning independence from Sudan in July 2011, South Sudan has been struggling to impose its authority across vast swathes of territory bristling with weapons after decades of civil war with Khartoum.

Yau Yau mounted a rebellion last year, with support from his Murle ethnic group, after losing local elections in 2010.

Army spokesman Philip Aguer told Reuters his forces had killed 143 fighters from Yau Yau's militia in a battle east of Pibor town on Tuesday. Twenty soldiers were killed and 70 people were wounded, he said.

Information Minister Barnaba Marial Benjamin said the army, or SPLA, had seized an air strip which had been used to drop ammunition and arms to Yau Yau's troops.

"The SPLA is moving in the area so as to put an end to the rebellion," he said.

South Sudan has accused arch rival Sudan of supporting Yau Yau and other rebel groups, a claim denied by Khartoum.

A shortwave radio station with links to the Yau Yau rebellion says the group is fighting the government in reaction to abuses committed during a state disarmament program in Jonglei.

Rights groups accuse South Sudan's army of human rights violations during a disarmament push aimed at ending a cycle of clashes between the Murle and Lou Nuer tribes.

Nearly 900 people died when about 7,000 armed youths of the Lou Nuer tribe attacked Murle villages in the Pibor area at the end of last year, according to the United Nations.

(Reporting by Andrew Green in Juba; Writing by Ulf Laessing in Cairo; Editing by Michael Roddy)

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North Korea readies rockets after U.S. show of force

By David Chance and Phil Stewart

SEOUL/WASHINGTON (Reuters) - North Korea put its missile units on standby on Friday to attack U.S. military bases in South Korea and the Pacific, after the United States flew two nuclear-capable stealth bombers over the Korean peninsula in a rare show of force.

North Korean leader Kim Jong-un signed off on the order at a midnight meeting of top generals and "judged the time has come to settle accounts with the U.S. imperialists in view of the prevailing situation", the official KCNA news agency said.

The North has an arsenal of Soviet-era short-range Scud missiles that can hit South Korea and have been proven, but its longer-range Nodong and Musudan missiles that could in theory hit U.S. Pacific bases are untested.

On Thursday, the United States flew two radar-evading B-2 Spirit bombers on practice runs over South Korea, responding to a series of North Korean threats. They flew from the United States and back in what appeared to be the first exercise of its kind, designed to show America's ability to conduct long-range, precision strikes "quickly and at will", the U.S. military said.

The news of Kim's response was unusually swift.

"He finally signed the plan on technical preparations of strategic rockets of the KPA (Korean People's Army), ordering them to be on standby for fire so that they may strike any time the U.S. mainland, its military bases in the operational theaters in the Pacific, including Hawaii and Guam, and those in South Korea," KCNA said.

South Korea's Yonhap news agency reported there had been additional troop and vehicle movements at the North's mid- and long-range missile sites, indicating they may be ready to fire.

"Sharply increased movements of vehicles and soldiers have been detected recently at North Korea's mid and long-range missile sites," Yonhap quoted a South Korean military source as saying.

It was impossible to verify the report which did not specify a time frame, although South Korea's Defense Ministry said on Friday that it was watching shorter-range Scud missile sites closes as well as Nodong and Musudan missile batteries.

The North has launched a daily barrage of threats since early this month when the United States and the South, allies in the 1950-53 Korean War, began routine military drills.

The South and the United States have said the drills are purely defensive in nature and that no incident has taken place in the decades they have been conducted in various forms.

The United States also flew B-52 bombers over South Korea earlier this week.

The North has put its military on highest readiness to fight what it says are hostile forces conducting war drills. Its young leader has previously given "final orders" for its military to wage revolutionary war with the South.

ECONOMIC ZONE

Despite the tide of hostile rhetoric from Pyongyang, it has kept open a joint economic zone with the South which generates $2 billion a year in trade, money the impoverished state can ill-afford to lose.

Pyongyang has also canceled an armistice agreement with the United States that ended the Korean War and cut all communications hotlines with U.S. forces, the United Nations and South Korea.

"The North Koreans have to understand that what they're doing is very dangerous," U.S. Defense Secretary Chuck Hagel told reporters at the Pentagon on Thursday.

"We must make clear that these provocations by the North are taken by us very seriously and we'll respond to that."

The U.S. military said that its B-2 bombers had flown more than 6,500 miles to stage a trial bombing raid from their bases in Missouri as part of the Foal Eagle war drills being held with South Korea.

The bombers dropped inert munitions on the Jik Do Range, in South Korea, and then returned to the continental United States in a single, continuous mission, the military said.

Thursday's drill was the first time B-2s flew round-trip from the mainland United States over South Korea and dropped inert munitions, a Pentagon spokeswoman said.

Victor Cha, a North Korea expert at the Center for Strategic and International Studies, said the drill fitted within the context of ramped-up efforts by the Pentagon to deter the North from acting upon any of its threats.

Asked whether he thought the latest moves could further aggravate tensions on the peninsula, Cha, a former White House official, said: "I don't think the situation can get any more aggravated than it already is."

South Korea denied suggestions on Friday that the bomber drills contained an implicit threat of attack on the North.

"There is no entity on the earth who will strike an attack on North Korea or expressed their wishes to do so," a spokesman for the South's Unification Ministry said.

Despite the shrill rhetoric from Pyongyang, few believe North Korea, formally known as the Democratic People's Republic of Korea, will risk starting a full-out war.

Still, Hagel, who on March 15 announced he was bolstering missile defenses over the growing North Korea threat, said all of the provocations by the North had to be taken seriously.

"Their very provocative actions and belligerent tone, it has ratcheted up the danger and we have to understand that reality," Hagel said, renewing a warning that the U.S. military was ready for "any eventuality" on the peninsula.

North Korea conducted a third nuclear weapons test in February in breach of U.N. sanctions and despite warnings from China, its one major diplomatic ally.

(Additional reporting by David Alexander in Washington; Editing by Warren Strobel, Paul Simao and Raju Gopalakrishnan)

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Iran, North Korea, Syria block U.N. arms trade treaty

By Louis Charbonneau

UNITED NATIONS (Reuters) - Iran, Syria and North Korea on Friday prevented the adoption of the first international treaty to regulate the $70 billion global conventional arms trade, complaining that it was flawed and failed to ban weapons sales to rebel groups.

To get around the blockade, British U.N. Ambassador Mark Lyall Grant sent the draft treaty to Secretary-General Ban Ki-moon and asked him on behalf of Mexico, Australia and a number of others to put it to a swift vote in the General Assembly.

U.N. diplomats said the 193-nation General Assembly could put the draft treaty to a vote as early as Tuesday.

"A good, strong treaty has been blocked," said Britain's chief delegate, Joanne Adamson. "Most people in the world want regulation and those are the voices that need to be heard."

"This is success deferred," she added.

The head of the U.S. delegation, Assistant Secretary of State Thomas Countryman, told a group of reporters, "We look forward to this treaty being adopted very soon by the United Nations General Assembly." He declined to predict the result of a vote but said it would be a "substantial majority" in favor.

U.N. member states began meeting last week in a final push to end years of discussions and hammer out a binding international treaty to end the lack of regulation over cross-border conventional arms sales.

Arms control activists and human rights groups say a treaty is needed to halt the uncontrolled flow of arms and ammunition that they say fuels wars, atrocities and rights abuses.

Delegates to the treaty-drafting conference said on Wednesday they were close to a deal to approve the treaty, but cautioned that Iran and other countries might attempt to block it. Iran, Syria and North Korea did just that, blocking the required consensus for it to pass.

Iranian President Mahmoud Ahmadinejad had told Iran's Press TV that Tehran supported the arms trade treaty. But Iranian U.N. Ambassador Mohammad Khazaee told the conference that he could not accept the treaty in its current form.

"The achievement of such a treaty has been rendered out of reach due to many legal flaws and loopholes," he said. "It is a matter of deep regret that genuine efforts of many countries for a robust, balanced and non-discriminatory treaty were ignored."

One of those flaws was its failure to ban sales of weapons to groups that commit "acts of aggression," ostensibly referring to rebel groups, he said. The current draft does not ban transfers to armed groups but says all arms transfers should be subjected to rigorous risk and human rights assessments first.

'HELD HOSTAGE'

Syrian Ambassador Bashar Ja'afari echoed the Iranian concerns, saying he also objected to the fact that it does not prohibit weapons transfers to rebel groups.

"Unfortunately our national concerns were not taken into consideration," he said. "It can't be accepted by my country."

North Korea's delegate voiced similar complaints, suggesting it was a discriminatory treaty: "This (treaty) is not balanced."

Iran, which is under a U.N. arms embargo over its nuclear program, is eager to ensure its arms imports and exports are not curtailed, diplomats said. Syria is in a two-year-old civil war and hopes Russian and Iranian arms keep flowing in, they added.

North Korea is also under a U.N. arms embargo due to its nuclear weapons and missile programs.

Russia and China made clear they would not have blocked it but voiced serious reservations about the text and its failure to get consensus. A Russian delegate told the conference that Moscow would have to think hard about signing it if it were approved. India, Pakistan and others complained that the treaty favors exporters and creates disadvantages for arms importers.

If adopted by the General Assembly, the pact will need to be signed and ratified by at least 50 states to enter into force.

Several diplomats and human rights groups that have lobbied hard in favor of the treaty complained that the requirement of consensus for the pact to pass was something that the United States insisted on years ago. That rule gave every U.N. member state the ability to veto the draft treaty.

"The world has been held hostage by three states," said Anna Macdonald, an arms control expert at humanitarian agency Oxfam. "We have known all along that the consensus process was deeply flawed and today we see it is actually dysfunctional."

"Countries such as Iran, Syria and DPRK (North Korea) should not be allowed to dictate to the rest of the world how the sale of weapons should be regulated," she added.

The point of an arms trade treaty is to set standards for all cross-border transfers of conventional weapons. It would also create binding requirements for states to review all cross-border arms contracts to ensure arms will not be used in human rights abuses, terrorism or violations of humanitarian law.

The main reason the arms trade talks took place at all is that the United States - the world's biggest arms exporter - reversed U.S. policy on the issue after President Barack Obama was first elected and decided in 2009 to support an arms treaty.

Washington demanded that the conference be run on the basis of consensus because it wanted to be able to block any treaty that undermined the U.S. constitutional right to bear arms, a sensitive political issue in the United States. Countryman said the draft treaty did not undermine U.S. rights.

The National Rifle Association, a powerful U.S. pro-gun lobbying group, opposes the treaty and has vowed to fight to prevent its ratification if it reaches Washington. The NRA says the treaty would undermine domestic gun-ownership rights.

The American Bar Association, an attorneys' lobby group, has said that the treaty would not impact the right to bear arms.

(Reporting by Louis Charbonneau; Editing by Will Dunham, Lisa Shumaker and Paul Simao)

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Syrian opposition opens first embassy, says world lets it down

By Yara Bayoumy and Regan Doherty

DOHA (Reuters) - A Syrian opposition bloc recognized by the Arab League as the sole representative for Syria opened its first embassy in Qatar on Wednesday in a diplomatic blow to President Bashar al-Assad.

But opposition leader Moaz Alkhatib, who took Syria's seat at an Arab summit in Doha on Tuesday, used the ribbon-cutting ceremony to voice his frustration with world powers for failing to do more to help in the two-year-old struggle to topple Assad.

"There is an international willingness for the revolution not to triumph," he told reporters at the embassy, which was festooned with balloons in the red, green, white and black of Syria's national flag.

Alkhatib, a Sunni Muslim cleric who resigned this week as leader of the Syrian National Coalition, but who is staying on as a caretaker, also alluded to internal differences plaguing the opposition umbrella group formed in Qatar in November.

"The only way to victory is unity," he declared.

Damascus raged against summit host Qatar for helping the opposition into Syria's seat at the League, while Russia and Iran also criticized the move to delegitimize Assad's rule.

"This is a flagrant violation of the pact and internal organizations and rules of shared Arab work and is a dangerous precedent," a statement attributed to the government and run on Syrian state television said.

"The Doha summit's decision has created a model that will encourage the practice of violence, extremism and terrorism and will be a danger not just to Syria, but Arab states and the whole world."

Yet although the 22-member Arab bloc lent its support to giving weapons to Syrian rebels, it is unclear how much impact the opposition's diplomatic advances will have inside Syria.

The Cairo-based coalition's control over insurgent groups is tenuous at best. Some of the most militarily effective, such as the al Qaeda-linked Nusra Front, openly reject its authority.

Alkhatib told Reuters in an interview he was surprised by a rebuff from the United States and NATO to his request for Patriot missiles based in Turkey to help protect rebel-held parts of northern Syria from Assad's helicopters and warplanes.

"I'm scared that this will be a message to the Syrian regime telling it 'Do what you want'," he said.

OPPOSITION DISUNITY

NATO Secretary-General Anders Fogh Rasmussen, speaking to students in Moscow via video link from Brussels, again said the Western alliance had no intention of intervening in Syria.

"We believe that we need a political solution in Syria," he said, noting there was no U.N. mandate for NATO action there.

Disunity among Syria's opposition in exile and the armed factions on the ground have long hindered the struggle against Assad and have contributed to Western reluctance to intervene.

Alkhatib has cited the West's failure to do more to help the opposition, as well as the coalition's internal divisions, as reasons for announcing on Sunday that he would quit as leader.

He offered no clarity on his own political future in his interview with Reuters. "I have given my resignation and I have not withdrawn it. But I have to continue my duties until the general committee meets," the former mosque imam said.

The Arab summit's support for Assad's foes may prove more symbolic than practical, but Syria vented its wrath at Qatar for its pro-opposition actions at the annual gathering.

"The emir of Qatar, the biggest bank for supporting terrorism in the region, began his presidency of the Arab League by hijacking it with tainted oil and money," said state news agency SANA, a mouthpiece for Assad's government.

Qatar's Sheikh Hamad bin Khalifa al-Thani "committed a flagrant violation of the League's pact by inviting the deformed body, the 'Doha Coalition', to usurp Syria's seat in the League", SANA said, in a scathing reference to the opposition.

Qatar has funded political opposition groups and is believed to be funneling money and weapons to rebels in Syria.

Russia, which gives Damascus military and diplomatic support, scolded the Arab League for taking "another anti-Syria step" by giving Syria's seat to the opposition.

Arab nations are far from united on Syria, with Algeria, Iraq and Lebanon often opposing any action against Assad's rule.

Saudi Arabia, Qatar and some others have thrown their support behind the mostly Sunni Muslim rebels in Syria, partly to weaken Shi'ite Iran, the main regional ally of Assad, whose minority Alawite sect is distantly derived from Shi'ite Islam.

Iran, which has sent advisers, money and weapons to help Assad stay in power, also lambasted the Arab League for allowing a foe of Assad to take Syria's seat at the summit, calling this "a pattern of dangerous behavior".

Iran views Assad as a pillar of an "axis of resistance" against Israel and a bulwark against Sunni militants in Syria, a country which for three decades has been the main conduit for Iranian arms supplies to Lebanon's Shi'ite Hezbollah movement.

(Additional reporting by William Maclean in Doha, Oliver Holmes and Erika Solomon in Beirut, Marcus George in Dubai and Gabriela Baczynska in Moscow; Writing by Alistair Lyon; Editing by Jon Boyle and Michael Roddy)

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Britain opens inquest into Berezovsky's unexplained death

By Maria Golovnina

LONDON (Reuters) - Britain opens a judicial inquiry into the death of Russian oligarch Boris Berezovsky on Thursday to establish how he died in the locked bathroom of his vast mansion near London.

Berezovsky, who survived years of intrigue, power struggles and assassination attempts in Russia, was found dead on Saturday in his home in Ascot, a town close to Queen Elizabeth's Windsor Castle.

Police said there was no sign of a struggle and the 67-year-old's death was "consistent with hanging", suggesting he might have killed himself.

Berezovsky was the king-maker behind Vladimir Putin's ascent to power in Russia but later became his number-one enemy and fled to Britain in 2000.

Berezovsky's associates have hinted he was depressed after losing a $6 billion court case against another tycoon, Roman Abramovich, last year, when a judge humiliated him publicly by saying he was an unimpressive and unreliable witness.

Other people close to him have said they were not convinced by the official account.

"If he really hanged himself why was that not known from the very beginning?" said Andrei Sidelnikov, an opposition figure who knew Berezovsky. "I don't believe it was a suicide."

In Russia, state media quoted Deputy Prosecutor General Alexander Zvyagintsev as saying the government would continue efforts to "bring back assets that Berezovsky and his accomplices acquired criminally and legalized abroad".

Mass-circulation tabloid Komsomolskaya Pravda, which supports the Kremlin, ran a front page headline on Wednesday that read: "Did Berezovsky hang himself or did he have help?"

The inquest will open in the town of Windsor on Thursday.

MANIPULATOR

A master of political manipulation, Berezovsky had been known as the "godfather of the Kremlin" and wielded immense influence during a decade that followed the Soviet collapse.

Once a mathematician with Nobel Prize aspirations, he built a massive business empire under former President Boris Yeltsin and was the first of Russia's so-called oligarchs.

He then became one of the first victims of a ruthless political crackdown of the early Putin era after falling out with his protégé.

Once in exile, Berezovsky often said he feared for his life, particularly after the fatal poisoning of his friend and former Russian spy Alexander Litvinenko with a dose of the radioactive isotope polonium-210 in London in 2006.

Another friend and business partner, Badri Patarkatsishvili, also died in unclear circumstances two years later.

For many, Berezovsky personified the decade of wild capitalism, chaos and violence that followed the Soviet fall. He left a trail of enemies in Russia and beyond, and no doubt once featured on many a hit list.

Berezovsky survived an assassination attempt in 1994 when a bomb exploded in his car, decapitating his driver.

In his final months he led a much less extravagant life, apparently bitter and broken and rarely seen in public.

He suffered another blow in 2011 when he was forced to pay one of Britain's biggest divorce settlements to his former wife Galina. Media reported the settlement topped $100 million.

"My father was not the typical parent, nothing about him was ordinary," said his daughter Anastasia in a tribute. "He has colored my life in infinite ways, and I know that what he concerned himself most with was making all his children proud."

(Additional reporting by Steve Gutterman in Moscow; Writing by Maria Golovnina; Editing by Andrew Heavens)

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Nations close to deal on U.N. arms trade treaty: envoys

By Louis Charbonneau

UNITED NATIONS (Reuters) - United Nations members on Wednesday were close to a deal on the first international treaty to regulate the $70 billion global conventional arms trade, though delegates and rights groups said India, Iran or others could still block agreement.

Arms control campaigners and human rights groups say one person dies every minute worldwide as a result of armed violence and a treaty is needed to halt the uncontrolled flow of arms and ammunition they say fuels wars, atrocities and rights abuses.

United Nations member states began meeting last week in a final push to end years of discussions and hammer out a binding international treaty to end the lack of regulation over cross-border conventional arms sales.

The world body's 193 member states received the last revision of the draft treaty ahead of the final day of the drafting conference on Thursday. Reuters questioned delegates from over a dozen countries who said they were cautiously optimistic that the treaty would be adopted unanimously.

"India, Syria and Iran are countries that could still cause trouble," a European diplomat told Reuters on condition of anonymity. "But I'll wager the treaty will pass by consensus."

Iran, which is under a U.N. arms embargo over its nuclear program, is eager to ensure its arms imports and exports are not curtailed, diplomats say. Syria is in a two-year-old civil war and hopes Russian and Iranian arms keep flowing in, they added.

But they are under pressure to back the draft, envoys said.

Speaking on condition of anonymity, a U.S. official declined to say whether Washington would support the draft treaty.

"We are continuing to review the text with an eye toward ensuring that it accomplishes all of our goals, including that it protect the sovereign right of states to conduct legitimate arms trade and, of course, that it not infringe upon the constitutional right of our citizens to bear arms," he said.

Several U.N. diplomats predicted Washington would vote yes.

The National Rifle Association, a powerful U.S. pro-gun lobbying group, opposes the treaty and has vowed to fight to prevent its ratification if it reaches Washington. The NRA says the treaty would undermine domestic gun-ownership rights.

The American Bar Association, an attorneys' lobby group, has said that the treaty would not impact the right to bear arms.

'DEFICIENCIES'

Other major arms producers like Russia and China, which had initially resisted the treaty, along with Germany, France and Britain were also expected to support the draft, diplomats said.

The chief British delegate, Ambassador Joanne Adamson, said the new draft treaty has many improvements over earlier drafts.

"These (improvements) include inclusion of ammunition in the scope of the treaty, a new article on preventing diversion of arms, and strengthened section on exports which are prohibited," she said. "Human rights are at the heart of this text."

The main reason the arms trade talks are taking place at all is that the United States - the world's biggest arms exporter - reversed U.S. policy on the issue after President Barack Obama was first elected and decided in 2009 to support an arms treaty.

The point of an arms trade treaty is to set standards for all cross-border transfers of conventional weapons. It would also create binding requirements for states to review all cross-border arms contracts to ensure arms will not be used in human rights abuses, terrorism or violations of humanitarian law.

Several human rights groups and arms control advocates, including Amnesty International, Oxfam and Control Arms, praised the new draft. They said it had shortcomings, but was a major improvement over an earlier draft that had too many loopholes.

"While there are still deficiencies in this final draft, this treaty has the potential to provide significant human rights protection and curb armed conflict and violence if all governments demonstrate the political will to implement it," Brian Wood of Amnesty International said.

But he made clear that there were problems with the text, including an overly narrow scope of types of arms covered. It covers tanks, armored combat vehicles, large-caliber artillery systems, combat aircraft, attack helicopters, warships, missiles and missile launchers and small arms and light arms.

Predator drones and grenades are among the weapon categories that are not covered explicitly in the draft treaty.

Anna Macdonald of Oxfam said there were "some improvements" in the draft, though some problems remained that she wanted fixed in the final hours before a decision is made by U.N. member states.

"We need a treaty that will make a difference to the lives of the people living in Congo, Mali, Syria and elsewhere who suffer each day from the impacts of armed violence," she said.

Daryl Kimball, head of the Arms Control Association, predicted that "over time, the treaty will help tip the scales in favor of human rights and human security when states consider arms sales in the future."

Rights groups complained about one possible loophole in the current draft involving defense cooperation agreements. Several diplomats who also oppose this loophole said it could exempt certain weapons transfers from the treaty.

Three delegates dubbed that provision the "India clause," because it was something India pushed hard for, they said.

(Reporting By Louis Charbonneau; Editing by Cynthia Osterman and Stacey Joyce)

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Despite threats, North Korea keeps border factories open

By Ju-min Park

PAJU, South Korea (Reuters) - A heavily armed border crossing between North and South Korea that allows the North access to $2 billion in trade a year, one of its few avenues to foreign currency, remained open on Thursday despite Pyongyang's move to cut communications.

North Korea on Wednesday severed the last of three telephone hotlines with South Korea as it readied its troops to face what it believes to be "hostile" action from Seoul and Washington. The phone line is used to regulate access to the Kaesong industrial park on the North Korean side of the border as well as for military communications with the South.

Nearly 200 South Koreans and 166 vehicles carrying oil and materials drove into the park just inside the North early on Thursday after North Korean authorities used a separate phone line from the park's management office to allow access, South Korean officials said.

The North has already cut a direct hotline to U.S. military forces stationed in South Korea and a Red Cross line that had been used by the governments on both sides.

Severing hotlines is one of the least threatening but symbolic things Pyongyang can do to raise tensions and at the same time pressure Seoul and Washington to restart dialogue, said Yang Moo-jin of the University of North Korean Studies in Seoul.

North Korea periodically cuts the lines. Its latest moves follow U.N. sanctions imposed for its February 12 nuclear test and routine drills by South Korean and U.S. forces. Pyongyang has also scrapped an armistice that ended the 1950-53 Korean War.

"What else can they do? Actually start a war?" said Yang.

"Not answering the phone and saying the armistice is not valid any more, that's what they can do and they've done this before."

NORTH STILL ACCEPTING US DOLLARS

Workers and traders crossing the world's most heavily militarized border made sure they had U.S. dollar bills for the trip, some borrowing from a co-worker so they had enough of the zone's officially accepted currency.

Pyongyang's rhetoric against Washington including a vow to attack its military bases in the Pacific and to stage a nuclear strike has not yet extended to its willingness to accept dollars, which South Koreans said they had to use to buy cigarettes and other goods in the zone.

"I am a bit nervous but it looked the same as before when I went in there yesterday," truck driver Park Chul-hee, 44, told Reuters outside the Paju customs office. North Korean soldiers in and around Kaesong had been wearing combat fatigues recently, he added.

The North-South military hotline was used on a daily basis to process South Koreans and vehicles across the border and in and out of the Kaesong project, where 123 South Korean firms employ more than 50,000 North Koreans to make household goods.

About 120 South Koreans remain in the park on an average day. The presence of South Koreans at Kaesong poses a potentially serious political risk for Seoul given they could be trapped if Pyongyang sealed the border.

The first of the 511 people and 398 vehicles who were scheduled to return from the zone on Thursday began crossing the border into the South, indicating the crossing was operating normally in both directions.

"I think the third nuclear test is the last tipping point. I was worried so I came out," said one South Korean who has been running a factory in Kaesong for six years and who requested anonymity due to the sensitivity of the issue.

Few people believe the North will shut down the project.

The $2 billion a year it generates reduces Pyongyang's dependency on China, which accounted for almost $6 billion in trade in 2012, according to South Korean government estimates.

Kaesong also generates more than $80 million a year in cash in wages. This is paid to the state rather than to workers.

(Writing by Jack Kim, Editing by Dean Yates)

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North Korea to cut all channels with South

SEOUL (Reuters) - Reclusive North Korea is to cut the last channel of communications with the South because war could break out at "any moment", it said on Wednesday, days of after warning the United States and South Korea of nuclear attack.

The move is the latest in a series of bellicose threats from North Korea in response to new U.N. sanctions imposed after its third nuclear test in February and to "hostile" military drills under way joining the United States and South Korea.

The North has already stopped responding to calls on the hotline to the U.S. military that supervises the heavily armed Demilitarized Zone (DMZ) and the Red Cross line that has been used by the governments of both sides.

"Under the situation where a war may break out at any moment, there is no need to keep north-south military communications which were laid between the militaries of both sides," the North's KCNA news agency quoted a military spokesman as saying.

"There do not exist any dialogue channel and communications means between the DPRK and the U.S. and between the north and the south."

The Pentagon condemned the latest escalation in North Korean rhetoric, with spokesman George Little calling Pyongyang's declaration "yet another provocative and unconstructive step."

The U.S. military announced on March 15 it was bolstering missile defenses in response to threats from the North, including a threat to conduct a preemptive nuclear strike against the United States.

Despite the shrill rhetoric, few believe North Korea, formally known as the Democratic People's Republic of Korea (DPRK), will risk starting a full-out war.

North and South Korea are still technically at war anyway after their 1950-53 civil conflict ended with an armistice, not a treaty, which the North says it has since torn to pieces.

The "dialogue channel" is used on a daily basis to process South Koreans who work in the Kaesong industrial project where 123 South Korean firms employ more than 50,000 North Koreans to make household goods.

About 120 South Koreans are stationed at Kaesong at any one time on average.

It is the last remaining joint project in operation between the two Koreas after South Korea cut off most aid and trade in response to Pyongyang's shooting of a South Korean tourist and the sinking of a South Korean naval vessel blamed on the North.

Kaesong is one of North Korea's few hard currency earners, producing $2 billion a year in trade with the South, and Pyongyang is unlikely to close it except as a last resort.

The North's military spokesman representing its "supreme command" did not mention Kaesong, which has suffered temporary shutdowns before.

The South's government said it would take steps to ensure the safety of the workers at Kaesong. It did not elaborate.

(Reporting by Jack Kim; additional reporting by Phil Stewart in Washington; editing by Nick Macfie and Jackie Frank)

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Car bomb hits Syrian capital as rebels press closer

BEIRUT (Reuters) - A car bomb killed at least three people, wounded dozens and blew the windows out of buildings in northeastern Damascus on Tuesday as rebel fighters stepped up attacks in the Syrian capital, pro-government television stations said.

The al-Ikhbariya news channel said the explosion went off near a military supply office. Addounia TV gave a preliminary toll of three people killed.

Both attributed the blast to a suicide bomber in a car.

But opposition activists in the area said it was not clear if it was by a bomb or a mortar round.

Video of the aftermath of the explosion broadcast on al-Ikhbariya showed a crater next to a road, about 2 by 2 meters (yards). Windows were blown out of nearby buildings but there was no footage of the remains of a car bomb or of any of the victims.

The British-based Syrian Observatory for Human Rights, which has a network of contacts in Syria, said civilians and soldiers were among the dead in the attack in the Rukn al-Din district.

Fighting between President Bashar al-Assad's forces and rebels has come closer to central Damascus in recent months. Once a bastion for Assad's forces, the capital has become a focal point of the two-year-old uprising that has devolved into civil war in which more than 70,000 people have been killed.

Rebels said on Monday they planned missile strikes on government and security sites in Damascus and told residents to leave the city to avoid being hit in a campaign they named "Operation Shaking the Fort".

Mortar bombs struck two schools and the compound of the state news agency SANA in the heart of the city on Tuesday. Another hit a hospital close to the Old City, a world heritage site dating back to the 3rd millennium B.C.

On Monday, rebels fired dozens of mortar rounds around the central Ummayad Square. The United Nations said it was pulling about half of its international staff after a mortar bomb landed near their hotel.

The Syrian military has responded with artillery attacks and air strikes on suburbs where rebels have based themselves amongst thousands of civilians trapped in the crossfire.

Rebels have made several other attempts to bring the fight to the heart of the capital but were pushed back to a ring of suburbs around the east and south of central Damascus.

But in recent months, street clashes, car bombs and mortar attacks have hit Damascus with rising intensity, showing that the rebels have become increasingly capable of striking at the city center.

(Reporting by Erika Solomon and Oliver Holmes; Editing by Angus MacSwan)

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North Korea says ready for combat as sanctions tighten

By Jack Kim and Ju-min Park

SEOUL (Reuters) - North Korea repeated threats on Tuesday to target U.S. military bases as Washington and its allies tightened economic sanctions against the isolated country by targeting Pyongyang's main foreign exchange bank with new measures.

The rhetoric from North Korea - which has threatened the United States with nuclear war and rehearsed drone attacks on South Korea - and Washington's hardening reaction, drew more concern from China, Pyongyang's only major ally, which said the situation was "sensitive".

Pyongyang says United Nations sanctions, agreed after North Korea carried out a third nuclear test in February, are part of a Washington-led plot to topple its leadership.

"From this moment, the Supreme Command of the Korean People's Army will be putting into combat duty posture No. 1 all field artillery units, including long-range artillery units and strategic rocket units, that will target all enemy objects in U.S. invasionary bases on its mainland, Hawaii and Guam," the North's KCNA news agency said.

The order was issued in a statement from the North Korea's military "supreme command."

The Pentagon condemned North Korea's rhetoric, saying it was designed to "raise tensions and intimidate others."

"They need to stop threatening peace on the peninsula. That doesn't help anyone ... and we stand ready to respond to any contingency," Pentagon spokesman George Little told reporters.

The Pentagon has declined to define the range of North Korea's rockets, saying it is classified. But Admiral James Winnefeld, vice chairman of the Joint Chiefs of Staff, acknowledged on March 15 that one type of North Korean missile likely had the range to reach the United States.

South Korea's defense ministry said it saw no sign of imminent military action by North Korea and most military analysts say Pyongyang will not risk a conflict with the United States that it would lose.

South Korea and the U.S. military are conducting military drills until the end of April, which they have stressed are strictly defensive in nature. The North accuses Washington of war preparations by using B-52 bombers which have flown over the Korean peninsula as part of the drills, and it has abrogated an armistice that ended the 1950-53 Korean War.

The Pentagon said there have been three such flights by U.S. B-52 bombers since March 8, with the most recent one on Monday.

BANK SANCTIONS?

Officials said Japan and Australia plan to impose sanctions on North Korea's Foreign Trade Bank as part of U.S.-led efforts targeting Pyongyang's funding for its nuclear program.

China again called on all parties to show restraint. "At present, the situation on the Korean peninsula remains complex and sensitive," said Foreign Ministry spokesman Hong Lei.

Pyongyang's aggressive rhetoric appears to mark a further attempt to boost the military credentials of Kim Jong-un, who took power in December 2011 after the death of his father. He has cemented the role of the military and the North's nuclear weapons and missile ambitions with the nuclear test and two long-range rocket launches.

KCNA said on Tuesday that Kim had guided a landing operation by combined units including the North Korean navy.

"This is a mythmaking for the (military) commander," said Jeung Young-tae, a senior analyst at the Korea Institute of National Unification in Seoul.

Many Americans appeared unfazed by what the Pentagon described as a "well-worn pattern" of rhetoric and threats from Pyongyang.

"I think they're threatening more than anything else. I don't' feel very threatened," said Sophie Hara, a Hawaii resident.

"It's just a bluff."

South Korea marked the third anniversary on Tuesday of the sinking of a navy ship that killed 46 sailors that it and the United States have blamed on North Korea. Pyongyang denied the charge.

On March 22, South Korea and the United States signed a "counter-provocation plan" meant to fine tune joint reaction to any future North Korean military strikes. The Pentagon said details of the plan were classified.

(Additional reporting by Phil Stewart in Washington and Suzanne Roig in Honolulu; Editing by Ian Geoghegan and David Brunnstrom)

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