U.S., Germany mull tax cuts, gloom eases

NEW YORK/LONDON (Reuters) - The prospect of new tax cuts in the United States and Germany injected a measure of New Year cheer on Monday, and a euro zone investor survey indicated new hope that the worst of the financial crisis had passed.

Asian stocks climbed to a two-month high on optimism that massive government spending programs will revive global growth, and European shares also advanced, though U.S. stocks gave back part of the strong gains racked up last week.

In a move that could help speed approval of a new stimulus in the United States, U.S. President-elect Barack Obama will seek as much as $310 billion in tax cuts as part of a plan to counter what senior policymakers warned could be a prolonged period of economic stagnation and deflation.

Still, one top Democratic senator said enactment would not likely come until February despite congressional Democrats' hopes to present the incoming president with a stimulus measure to sign in the early days of his term.

Senate Republican Leader Mitch McConnell also voiced concerns about the speed of any package moving through the Congress, and said his party's support could come if it is allowed to help shape the proposals.

In Germany, Chancellor Angela Merkel met her Social Democrat (SPD) coalition partners to discuss a second fiscal stimulus deal worth up to 50 billion euros. That would come on top of a 31 billion euro package last year that Merkel's critics -- including some European Union allies -- believe was too small to haul Europe's leading economy out of recession.

Merkel on Sunday came out in favor of tax relief moves she had previously ruled out until after September's federal election. But she faced tough talks to get the SPD to agree.

"It will be very difficult to get a common denominator on tax," Andrea Nahles, SPD deputy leader, told German radio. No firm decisions were expected on Monday, but a government spokesman said talks would prepare the ground for a January 12 deal.

The stimulus plans by the world's No. 1 and No. 3 economies mark the latest attempts to tackle a financial crisis that began with U.S. mortgage defaults in 2007 and now threatens much of the world with a deep and vicious recession.

Along the way, the crisis has reshaped the banking landscape and taken countries to the brink of bankruptcy.

INFLATION TUMBLES

Data published on Monday increased the pressure on the ECB to keep cutting interest rates. Spanish inflation in December was the lowest in a decade, at 1.5 percent, while Italian inflation fell to a 14-month low of 2.3 percent.

In Asia, December data showed greater-than-expected easing in inflation in Thailand, Indonesia and Taiwan, raising the prospect of temporary deflation and further rate cuts there.

Some investors, however, have begun to make tentative bets that the worst of the turmoil, which took a sharp turn for the worse in September with the collapse of investment bank Lehman Brothers, is over.

Kicking off the first full week of 2009, they pushed up Asian and European stocks, the dollar and commodities while selling safe-haven plays such as government bonds and the Japanese yen.

In the United States, government spending on projects helped limit a decline in construction spending to 0.6 percent in November, beating Wall Street forecasts, although private home building remained dismal and was likely to keep tumbling.

SURPRISE UPTURN

Sentiment among euro zone investors improved for the first time in seven months in January, showing its biggest rise since August 2005, though morale among the 16 nations remained negative, the Sentix research group said.

"In the eyes of investors, measures taken by many states and central banks worldwide seem to be having an impact. We assume many indicators will follow the early indication from Sentix in the coming weeks and months," Sentix said.

Asian stocks hit a two-month high and the FTSEurofirst 300 was up 1.9 percent, but U.S. stocks slipped, dipping less than 1 percent.

Oil prices were above $47 a barrel as crude's 25 percent rise since late December on Israel's incursion into Gaza and the Russian gas dispute continued.

In the latest fallout from the gas standoff, gas flows to Greece were down by a third, to Romania by 30 percent, to Bulgaria by 10 percent to 15 percent and to Croatia by 7 percent. Sustained falls could drive up demand for oil products.

China's finance minister said the year ahead would be difficult in fiscal terms, with the government's revenue falling just as it has pledged to ramp up spending to support domestic demand.

(Reporting by Reuters bureaus worldwide; Editing by Mike Peacock and Brian Moss)