U.S. drone strike kills another al Qaeda commander in Pakistan

DERA ISMAIL KHAN, Pakistan (Reuters) - A U.S. drone attack killed a senior al Qaeda commander in Pakistan's northwest on Sunday, military intelligence officials said, the second militant leader to be killed in strikes by the unmanned aircraft in three days.

The attack killed Mohammad Ahmed Almansoor and three others in a village close to Miranshah, the main town in North Waziristan, near the Afghan border.

The drone fired missiles at a house with Almansoor inside, destroying two rooms and a car. Four drones were seen flying over the area during the attack, residents and government officials said.

A similar attack on Thursday in North Waziristan killed another senior al Qaeda commander, Abu Zaid, who replaced Abu Yahya al-Libi as one of the militant Islamist group's most powerful figures, intelligence sources said. A U.S. drone attack also killed Libi in June.

Unmanned aerial attacks have crushed al Qaeda's network along Pakistan's border with Afghanistan but have drawn trenchant criticism in the two countries.

Al Qaeda has been weakened steadily in Afghanistan and Pakistan since the killing of Osama bin Laden in a raid by U.S. special forces on a Pakistani garrison town in May 2011.

(Reporting by Saud Mehsud in DERA ISMAIL KHAN and Jibran Ahmad in PESHAWAR; Writing by Randy Fabi; Editing by Paul Tait)

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German Finance minister doesn't rule out Eurogroup candidacy: paper

BERLIN (Reuters) - German Finance Minister Wolfgang Schaeuble declined to rule himself out as a candidate to replace Jean-Claude Juncker as chairman of euro zone finance ministers, in an interview published on Sunday.

Juncker, Luxembourg's prime minister, said he would step down as Eurogroup chief at the end of this year or early next, leaving policymakers just four weeks to find a successor to fill a potential power vacuum. He has headed the group since 2005.

Asked by Bild am Sonntag newspaper whether he or his French counterpart Pierre Moscovici would take over the job, Schaeuble replied, "in any case the new person has to drive European integration forward".

The Eurogroup has taken or prepared key decisions during the bloc's debt crisis over the past three years, such as Greece's debt restructuring, the creation of euro zone emergency funds and bailouts of Ireland and Portugal.

Juncker's mandate was initially set to expire in July, and at that time Schaeuble was widely seen as the front-runner to replace him, possibly as part of a deal with France on a rotating chairmanship which would later pass to Moscovici.

But Juncker was persuaded to stay on a few more months to help manage the region's sovereign debt crisis.

Moscovici said last week it was too early to speculate on his candidacy, but he also did not rule himself out.

"The German government wants the candidate to come from the circle of finance ministers, and we have seen that it has proved very worthwhile when the chairman can mediate between different positions," Schaeuble told Bild am Sonntag.

Diplomats have said the irascible Schaeuble, 70, has alienated colleagues in southern Europe and is not currently seen as a likely successor.

Some have called for a government head, instead of a finance minister, to run the group. For many years, Juncker had both roles in Luxembourg, giving him clout in discussions.

Juncker's double role created a convenient link between the euro zone's 17 finance ministers and its heads of state and government, who ultimately make the most important decisions.

(Reporting by Alexandra Hudson; editing by Jane Baird)

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Mandela comfortable in hospital: South Africa

PRETORIA (Reuters) - Former South African president Nelson Mandela spent a second day in a Pretoria military hospital on Sunday for medical tests and the government said the anti-apartheid leader's condition was comfortable.

President Jacob Zuma visited the 94-year-old, according to an official statement. It provided no other details of the health of South Africa's first black president, who came to power after historic all-race elections in 1994.

On Saturday, Zuma's office said there was no cause for alarm and that the medical treatment Mandela was receiving in the military hospital in the capital was "consistent with his age".

However, domestic media reports suggested that senior members of the government and people close to Mandela had been caught unawares by his admission to hospital.

The City Press newspaper said both the Nelson Mandela Foundation and his ex-wife, Winnie Madikizela-Mandela, had not known about his transfer to the capital from his home in the remote village of Qunu in the Eastern Cape province.

South Africa's Sunday Times said deputy President Kgalema Motlanthe had canceled a scheduled visit on Friday to Mandela in Qunu after being told of his condition.

The mood around Pretoria's Military One hospital was calm on Sunday. Army personnel were searching all cars driving onto the premises.

Mandela is a hero to many South Africans and two brief stretches in hospital in the last two years have made front page news.

"I wish Mr. Mandela a quick recovery from his sickness so we can be with him all the time. He was a good president, a good leader, so he must be with us," said John Sekiti, a petrol station attendant in Pretoria.

Mandela was admitted to a Johannesburg hospital in 2011 with a respiratory condition, and again in February this year because of abdominal pains. He was released the following day after a keyhole examination showed there was nothing serious.

He has since spent most of his time in Qunu.

His frail health prevents him from making any public appearances in South Africa, although he has continued to receive high-profile domestic and international visitors including former U.S. President Bill Clinton.

(Reporting by Olivia Kumwenda, Shafiek Tassiem and Lynette Ndabambi; Writing by Olivia Kumwenda; Editing by Ed Cropley and Tom Pfeiffer)

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Netanyahu: Hamas's Gaza jubilation proves Israel is at risk

JERUSALEM (Reuters) - Hamas's vow to vanquish Israel after claiming "victory" in last month's Gaza conflict vindicates Israel's reluctance to relinquish more land to the Palestinians, Prime Minister Benjamin Netanyahu said on Sunday.

Khaled Meshaal, the leader of the Islamist Hamas movement, made a defiant speech before thousands of supporters in the Gaza Strip on Saturday, promising to take "inch-by-inch" all of modern-day Israel, which he said he would never recognize.

"Over the last day, we have again been exposed to the true face of our enemies. They have no intention of compromising with us. They want to destroy our country," Netanyahu told his weekly cabinet meeting.

The Israeli leader has faced fierce foreign criticism this week for announcing a wave of Jewish settlement building in the occupied West Bank and East Jerusalem following a de-facto recognition by the U.N. General Assembly of a Palestinian state.

But Netanyahu said Israel would never withdraw unilaterally from the West Bank as it had done from Gaza in 2005, arguing that this would risk creating another territory from which Palestinians could launch rockets at Israeli cities.

"I am always aghast at the delusions of others who are prepared to pursue this process and call it peace," he said.

"We want a true peace with our neighbors, but we will not close our eyes nor bury our heads in the sand," he said, adding that this required Israel to "stand up to international pressure".

Although Hamas refuses to recognize Israel or renounce violence, the Western-backed Palestinian President Mahmoud Abbas has said he is ready to make peace on the basis of the lines that existed before the 1967 war, when Israel seized the West Bank, East Jerusalem and the Gaza Strip.

ABBAS UNITY

Direct talks broke down in 2010 over the issue of settlement building and Abbas, who holds sway in the West Bank, has since called for reconciliation with Hamas, which ousted his own forces from Gaza in a 2007 civil war.

Hamas's 1988 founding charter calls for the destruction of Israel and for recovering all mandate Palestine, although Hamas leaders have said in recent years the movement could live peacefully alongside Israel if it wins a state on all land occupied in 1967. Various Hamas officials have at times indicated a willingness to negotiate a ceasefire, possibly decades long, with Israel.

"What is interesting is that Abu Mazen (Abbas), of all people, did not condemn the (Hamas) words calling for Israel's destruction, just as previously he did not condemn the rockets fired at Israel (from Gaza)," Netanyahu said.

"And to my regret he is working for unity with this same Hamas, which is supported by Iran."

Hamas is celebrating the 25th anniversary of its foundation this week, turning the event into a "victory" party following its eight-day conflict with Israel last month in which some 170 Palestinians and six Israelis, mostly civilians, were killed.

Israel not only killed the group's military mastermind during the fighting, but also says it destroyed long-range Gazan rocket arsenals and secured a ceasefire that put an end to indiscriminate attacks from the coastal enclave.

As a first-time premier in 1997, Netanyahu sent Mossad assassins to kill Meshaal, then a mid-level Hamas figure, in Jordan in reprisal for a wave of Palestinian suicide bombings. They botched the mission, and the ensuing recrimination from Amman forced Israel to free the jailed spiritual leader of Hamas. The episode helped propel Meshaal to the top ranks.

A cabinet minister from Netanyahu's rightist Likud party, Yisrael Katz, said Israel could again target Meshaal should Hamas not keep the Egyptian-brokered Gaza truce of November 21.

"He said he wishes to die a martyr, and there is a high probability that this last wish would be realized, and he would become a legitimate target, should the quiet be violated," Katz told Israel Radio.

Meshaal is making his first visit to Gaza and is expected to return to Egypt on Monday. He lives between Doha and Cairo, and is the Hamas point person for all its foreign ties.

(Writing by Dan Williams; editing by Crispian Balmer and Jason Webb)

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Egypt's Mursi scraps decree, fails to appease opponents

CAIRO (Reuters) - Egypt's president scrapped a decree that gave him extra powers and ignited violent protests, but irate opponents said on Sunday he had deepened the conflict by pressing on with a vote on a constitution shaped by Islamists.

President Mohamed Mursi and his Islamist partisans have insisted the referendum go ahead on December 15 to seal a democratic transition that began when a popular uprising felled Hosni Mubarak 22 months ago after three decades of one-man rule.

The retraction of Mursi's November 22 decree, announced around midnight after a "national dialogue" boycotted by almost all the president's opponents, has failed to calm a war of words.

Prime Minister Hisham Kandil, a technocrat with Islamist leanings, said the referendum was the best test of opinion.

"The people are the makers of the future as long as they have the freedom to resort to the ballot box in a democratic, free and fair vote," he said in a cabinet statement.

But opposition factions, uncertain of their ability to vote down the constitution against the Islamists' organizational muscle, want the document redrafted before any vote.

Ahmed Said, a liberal leader of the main opposition National Salvation Front, said Mursi's withdrawal of his November 22 decree had not annulled its consequences, describing the race to a referendum as "shocking" and an "act of war" against Egyptians.

The Front has promised a formal response later on Sunday.

Egypt tipped into turmoil after Mursi grabbed powers to stop any court action to hinder the transition. An assembly led by Mursi's Muslim Brotherhood and other Islamists then swiftly approved the constitution it had spent six months drafting.

Liberals, leftists, Christians and others had already quit the assembly in dismay, saying their voices were being ignored.

The April 6 movement, prominent in the anti-Mubarak revolt, derided the result of Saturday's talks as "manipulation and a continuation of deception in the name of law and legitimacy".

A leftist group led by defeated presidential candidate Hamdeen Sabahy demanded the referendum be deferred until a consensus could be reached on a new draft, saying there could be "no dialogue while blood is being spilled in the streets".

But Muslim Brotherhood spokesman Mahmoud Ghozlan said scrapping Mursi's decree had removed any cause for controversy.

"We ask others to announce their acceptance of the referendum result," he said on the group's Facebook page, asking whether the opposition would accept "the basics of democracy".

"NOT LOGICAL"

More protests were planned near Mursi's palace, despite tanks, barbed wire and other barriers installed last week after clashes between Islamists and their rivals killed seven people.

"A constitution without consensus can't go to a referendum," said Hermes Fawzi, 28, a protester outside the palace. "It's not logical that just one part of society makes the constitution."

After the dialogue hosted by Mursi, a spokesman announced that the president had issued a new decree whose first article "cancels the constitutional declaration" of November 22. He said the referendum could not be delayed for legal reasons.

Egypt is torn between Islamists, who were suppressed for decades, and their rivals, who fear religious conservatives want to squeeze out other voices and restrict social freedoms. Many Egyptians just crave stability and economic recovery.

Each side has mobilized tens of thousands of supporters in rival rallies in Cairo and other cities. Mursi's foes have chanted for his downfall. Islamists fear a plot to oust the most populous Arab nation's first freely elected president.

Islamists reckon they can win the referendum and, once the new constitution is in place, an election for a new parliament about two months later. The Islamist-led lower house elected this year was dissolved after a few months by a court order.

Investors appeared relieved at Mursi's retraction of his decree, sending Egyptian stocks 4.4 percent higher on Sunday. Markets are awaiting approval of a $4.8 billion IMF loan later this month designed to support the budget and economic reforms.

The new decree removed some parts of the old one that had angered the opposition, including an article that had given Mursi broad powers to confront threats to the revolution or the nation - wording that critics said gave him arbitrary authority.

It also dropped an article that had shielded Mursi's actions from the courts until a new parliament was elected, reflecting his distrust of a judiciary largely unreformed from Mubarak's era. But the new decree said "constitutional declarations including this declaration" remained beyond judicial review.

The new decree also set procedures to form an assembly to write a new constitution if Egyptians vote this draft down.

The military, which led Egypt's transition for 16 turbulent months after Mubarak fell, told feuding factions on Saturday that only dialogue could avert "catastrophe". But a military source said these remarks did not herald an army takeover.

(Additional reporting by Tamim Elyan and Yasmine Saleh; Writing by Alistair Lyon; Editing by Mark Heinrich)

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Russian assembly set for tough response to U.S. rights bill

MOSCOW (Reuters) - Russia's foreign minister urged parliament on Sunday to agree a tough response to a U.S. law punishing Russian human rights violators, increasing the risk of a chill in relations with Washington.

Moscow announced restrictions on meat imports from the United States on Friday although it denied suggestions it had done so in response to the U.S. Senate's passage a day earlier of the so-called Magnitsky Act.

Foreign Minister Sergei Lavrov said the parliament should now respond and Alexei Pushkov, a senior parliamentary deputy from President Vladimir Putin's party, said the State Duma lower house would discuss retaliatory measures this week.

"As this is an attempt to interfere in our internal affairs, I would be very interested in a reaction by the state Duma that would be collective, on a multi-party basis and representing all party groups," Lavrov said in televised remarks.

Puskhov, who heads the chamber's foreign affairs committee, said a majority of lawmakers wanted a tough response, calling for visa restrictions on U.S. citizens who have violated human rights. He did not say who this might include or what rights violations they were accused of making.

"The Americans have reminded us about the way Russia is viewed on Capitol Hill," Yuri Ushakov, a foreign policy adviser to Putin, was quoted as saying by Interfax news agency.

"Stereotypes about our country persist and no one can get rid of them. So the Americans have made an extremely unfriendly move against us."

President Barack Obama, who launched a "reset" in relations with Russia less than four years ago, is likely to sign the Magnitsky legislation, which will test his and Putin's resolve to improve relations since both won elections this year.

The new U.S. legislation would bar visas for Russian officials linked to the 2009 death in custody of Sergei Magnitsky, a Russian lawyer who accused federal investigators of stealing $230 million from the state.

Lavrov told U.S. Secretary of State Hillary Clinton on Thursday that Russia would bar entry for Americans "guilty of crude human rights abuses."

Moscow has also warned it would respond with "asymmetrical" measures. Areas in which the United States wants Russian cooperation most include nuclear arms control and Iran.

DAMAGE MAY BE LIMITED

But there are also signs that Putin, back in the presidency since May, wants to limit the damage to relations with Russia's former Cold War enemy.

Political analysts say the Magnitsky Act will probably not derail Russian assistance on Afghanistan, affect diplomacy aimed at curbing Iran's nuclear program, or deepen disputes over U.S. missile defense and the conflict in Syria.

Moscow is trying to ensure its interests are protected in Syria. Despite frequent denials that it is shifting position, Moscow appears to be preparing for when President Bashar al-Assad leaves power.

The Senate approved the "Magnitsky Act" as part of a broader bill to lift a Cold War-era restriction and grant Russia "permanent normal trade relations, " or PNTR.

Despite Russian denials, analysts saw a link between the Magnitsky Act and Moscow's announcement of restrictions on meat imports from several countries, including the United States.

In a joint statement on Saturday, U.S. Trade Representative Ron Kirk and Agriculture Secretary Tom Vilsack said Russia's new requirement for imported beef and pork to be certified free of ractopamine, a feed additive used in the U.S. meat industry but banned in some other countries, appeared to be a violation of Moscow's obligations to the World Trade Organisation.

The move could potentially make producers from the United States, which exports more than $500 million a year worth of beef and pork to Russia, less competitive, giving an advantage to China and the European Union, where ractopamine is banned.

Russia's plant and health regulator, Rosselkhoznadzor, said it had warned over a year ago about the "inadmissibility" of meat with ractopamine to Russia.

(Editing by Timothy Heritage and Jason Webb)

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Venezuela's Chavez suffers cancer again, names potential heir

CARACAS (Reuters) - Venezuela's President Hugo Chavez returns to Cuba on Sunday for more surgery after a recurrence of cancer led him to name a successor for the first time in case the disease ends his 14-year dominance of the OPEC nation.

Supporters gathered in squares across the South American country, shocked and saddened by the news from the 58-year-old socialist leader, who made the announcement in a late-night broadcast on Saturday from the presidential palace.

In his first public acknowledgement that cancer may cut his tumultuous years in power, Chavez said Vice President Nicolas Maduro would take over if he is incapacitated, and urged supporters to vote for him if an election is held.

"It is absolutely necessary, absolutely essential, that I undergo a new surgical intervention," the president said in his speech, flanked by ashen-faced ministers. "With God's will, like on the previous occasions, we will come out victorious."

His departure from office, either before or after the scheduled January 10 start of his new term, would trigger an election within 30 days. It would mark the end of an era for the Latin American left, depriving them of one of their most acerbic voices and Washington's main irritant in the region.

A clutch of Latin American and Caribbean neighbors, from Cuba and Nicaragua to Bolivia and Ecuador, depend on Chavez's oil-fuelled generosity to bolster their fragile economies.

An unruly transition from Chavez's highly centralized rule could also raise the specter of political instability in Venezuela, which holds the world's largest crude oil reserves.

Allies lack his famous charisma and may struggle to control his unwieldy coalition of military and leftist leaders.

FORMER BUS DRIVER NAMED SUCCESSOR

Among them, though, Maduro - a 50-year-old, mustachioed former bus driver and union leader - is widely viewed as the most popular among Venezuelans thanks to his affable manner, humble background and close relationship with Chavez.

Speculation about Chavez's health had grown during a three-week absence from public view that culminated in his latest trip for medical tests in Cuba - where he has undergone three cancer operations and had two tumors removed since June 2011.

He returned to Venezuela on Friday after those tests, and is due to have the operation in Cuba in the next few days. Venezuela's National Assembly was to hold a special session on Sunday to formally approve his trip.

Chavez said he had rejected the advice of his medical team to have the surgery sooner, on Friday or this weekend, telling them he needed to fly back to Venezuela to seek that permission.

"I decided to come, making an additional effort, in truth, because the pain is not insignificant," Chavez said in a televised address also shown live in Cuba.

The president's return to Cuba may mark the start of another lengthy period of silence from government officials, combined with furious rumors over what political changes might be in store and what Chavez's actual condition is.

He has never said what type of cancer he has, though when initially diagnosed in mid-2011 the government said Chavez's problem was in the pelvic area.

Opposition leaders wished Chavez well, but criticized him for excessive secrecy and not using local healthcare.

"A president should be treated in his country. We have the best equipment and doctors here. But we respect the fact he will be in Cuba," one leader, Julio Borges, told local media.

He criticized Chavez for declaring himself cured prior to the election campaign then admitting he had been unwell after winning: "We have the right to demand to be told the truth."

NEW PRESIDENTIAL VOTE?

The shock on the faces of Cabinet ministers during Saturday's late-night broadcast signaled uncertainty over who will hold the reins absent Chavez, even in the top echelons of power.

Chavez has been receiving treatment at Havana's Cimeq hospital as a guest of his close friend and political mentor, former Cuban leader Fidel Castro. He is guaranteed tight security and privacy on the communist-led Caribbean island.

The usually loquacious Venezuelan leader had sharply cut back appearances since winning the October 7 election, saying the campaign and radiation therapy had left him exhausted.

Venezuela's constitution stipulates a new election if Chavez leaves office, unless it is in the last two years of his six-year term when his vice-president would take over.

Publicly naming long-time ally Maduro was a surprise.

"He is a complete revolutionary, a man of great experience despite his youth, with great dedication and capacity for work," Chavez said. "In a scenario where they were obliged to hold a new presidential election, you should choose Nicolas Maduro."

Maduro's trade union background appeals to Chavez's working-class supporters, while his years as foreign minister provided opportunities for networking abroad.

He may win less support from the military wing of the Socialist Party, which controls many top government posts.

The naming of Maduro sidelines Diosdado Cabello, a Congress head and former military comrade of Chavez. Perhaps fearing in-fighting, Chavez urged "unity" again-and-again in his comments.

"I never argue with Chavez's instructions, I obey them," Cabello said shortly afterwards. "I am at the service of the vice-president, at the service of the fatherland."

The opposition could find itself in its best position to oust his administration since Chavez took power in 1999. Many voters have ignored the failings of Chavez's government because of their intense emotional connection to him.

Any new poll would potentially give just-defeated presidential candidate Henrique Capriles another chance. He won 44 percent and a record 6.5 million votes for the opposition.

Though past polls have shown Capriles is more popular than any of Chavez's allies, including Maduro, the vice president will benefit from his boss's personal blessing.

Venezuela's widely traded bonds are likely to soar when markets open on Monday on expectations that Chavez's renewed illness will pave the way for a more market-friendly government.

Chavez's cancer saga has once again distracted attention from major national issues like state elections in a week, a possible devaluation of the local bolivar currency, and a proposed amnesty for jailed and exiled political foes.

Messages of support for Chavez poured in from friends and sympathizers round the region, including Colombia's FARC rebels.

(Additional reporting by Brian Ellsworth, Diego Ore, Deisy Buitrago in Caracas; Marc Frank in Havana)

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Germany's SPD names former finance minister as Merkel challenger

HANOVER, Germany (Reuters) - Germany's opposition Social Democrats (SPD) formally nominated former Finance Minister Peer Steinbrueck on Sunday as their candidate to run for chancellor against Angela Merkel in next September's election.

Steinbrueck promised a more just society and called for a united fight against Merkel's centre-right coalition in a speech aimed at winning over the hearts of the oft-divided centre-left SPD at a special party congress.

"The financial crisis showed that things have got out of balance in Germany, in Europe and in our society," said Steinbrueck, who wants higher taxes on the wealthy and a minimum wage that Merkel's Christian Democrats (CDU) firmly oppose.

Political analysts say Steinbrueck faces an uphill battle to defeat the popular Merkel and win the chancellorship the SDP last held under Gerhard Schroeder from 1998 to 2005. The SPD does have a strong chance of forming part of a new "grand coalition" including the CDU, analysts say.

"Germany needs more 'We' and less 'I'," said Steinbrueck, a towering man with a booming voice who served as Merkel's finance minister from 2005 to 2009 in a former "grand coalition."

"The gap is growing between rich and poor because of a growing number of under-paying jobs and because of our poorly financed towns and cities."

His 100-minute long speech was interrupted at the start by Greenpeace hecklers who managed to outwit the SPD's careful choreography and security guards to unfurl a banner behind the podium that read: "Did you rake in enough dough?"

The 600 delegates booed before the banner was hauled off the wall. Steinbrueck, who momentarily stood in stunned silence, has come under attack for earning 1.25 million euros ($1.6 million) as an after-dinner speaker during the last three years.

FIGHTING SPIRIT

Merkel is seeking a third term and opinion polls show the CDU, with its Bavarian sister party, the Christian Social Union (CSU), holding a steady 10-point lead over the SPD -- about 40 percent to 30 percent.

But the CDU/CSU's coalition partners, the Free Democrats (FDP), have fallen below the 5 percent threshold needed to win seats in parliament. By contrast, the SPD's preferred partners, the Greens, are polling around 13 percent.

Political scientists say a "grand coalition" with the CDU/CSU and the SPD is the most likely outcome. But a new CDU/CSU-Greens coalition or an SPD-Greens coalition like the one that led Germany from 1998 to 2005 are two other possible outcomes.

Steinbrueck, 65, has ruled out serving in another grand coalition, a fighting spirit that has endeared him to the party's grass roots who fear other SPD leaders appear overly eager to rejoin Merkel as junior partners.

"I don't just want a partial change of government," Steinbrueck said to loud applause. "I want an entirely new government. I want an SPD-Greens government for our country. I'm not available for any grand coalition."

Steinbrueck, who ran unopposed, was elected candidate with the backing of 94 percent of SDP delegates. He has never won election in Germany and lost his one campaign as state premier of North Rhine-Westphalia in 2005.

His campaign got off to a dreadful start in October and he initially lost poll support with his abrasive style and the row over his speaking engagements. Especially disliked by women voters, he spent months defending himself for high earnings.

A November ARD TV poll showed only 30 percent of Germans find Steinbrueck likeable, down 7 points since September, while Merkel's rating rose 9 points to 51. He fell three pegs to be ranked the country's sixth most popular politician.

BOUNCE BACK

But Steinbrueck, a centrist whose candidacy is supposed to help the SPD siphon away middle-of-the-road voters, has bounced back with energetic speeches and hard-hitting interviews.

Gerhard Schroeder, 68, and the other living SPD chancellor Helmut Schmidt, 93, were sitting in the front row on Sunday -- the first time both have appeared together at an SPD party congress since 1998. Both have endorsed Steinbrueck.

Schmidt and Schroeder ultimately ran into trouble with the powerful left wing - which is why they the two men kept their distance from the SPD after leaving office ahead of schedule.

Steinbrueck, who has lost weight in the two months since he was first picked to run against Merkel, tried to imbue a sense of optimism in his party.

"It's time for change," he said. "I want to be the next German chancellor and I want Germany to find a new social balance. I want change instead of standstill. We can do it."

(Reporting By Erik Kirschbaum; editing by Jason Webb)

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Italian parties begin campaigning, cajole Monti

ROME (Reuters) - Italy's political parties began maneuvering on Sunday ahead of elections expected in February as supporters of technocrat Prime Minister Mario Monti sought to cajole him to stay in politics.

Monti has repeatedly said he would not campaign for power, but that he would be willing to serve again as an apolitical premier should the vote result be unclear.

But the premier's unexpected resignation in the face of People of Freedom (PDL) leader Silvio Berlusconi's attacks against his stewardship of the economy are fuelling speculation that Monti is ready to join the race.

Italian "progressives" from the centre-left's Democratic Party (PD) to the Union of the Centre (UDC) "identify with the reasonable and responsible policies Monti has made," UDC leader Pier Ferdinando Casini said on Sunday.

"A large part of civil society does not want to return to the populism and demagoguery of the past. We must give them the political offering they seek."

PD front-runner candidate Pier Luigi Bersani lauded Monti's plan to resign immediately after the passage of the budget, saying it showed great dignity. Bersani won a U.S.-style primary vote last week in which he promised to continue down the path taken by the premier.

The PD leads the PDL by at least 16 percentage points, according to polls from last week.

Berlusconi's campaign against European Union-inspired austerity that was put in place to stem the spread of a debt crisis "risks undermining the painful sacrifices that each Italian has made this year to save the national economy," PD lower house president Dario Franceschini said.

Italians are indeed burdened by the recession, which began mid-way through last year and shows no signs of abating. Many blame Monti's tax increases for making it worse. Unemployment is at a record high and consumer spending has collapsed.

"Eggs and potatoes, eggs and potatoes, that's all we can afford to eat right now," said Roberta Uzzo, who lives near the ancient walls of Rome. "It's a very ugly period. My husband is unable to find any work and with one sole income it's very difficult to go forward."

PDL secretary Angelino Alfano, whose attacks in parliament on Friday Monti said prompted him to step down, defended his party's decision to withdraw its support for the government.

"We think we did the right thing" in declaring Monti's government over on Thursday, Alfano said, "to underscore the struggles that Italians are facing because of the dire economic situation."

The consummate showman Berlusconi bashed Monti's leadership as he declared his sixth bid for power on the soccer pitch of his AC Milan team on Saturday, but Monti stole the scene by resigning later in the day and counter-attacking that "populism" was only a shortcut to winning votes.

MARKETS

Early elections in Italy must not hinder Monti's economic reforms, European Commission President Jose Manuel Barroso warned in an interview with financial daily Il Sole 24 Ore.

"The next elections must not serve as a pretext for putting in doubt how indispensable these measures are," he said in Sunday's edition. "The relative calm on the markets does not mean we are out of the crisis."

Berlusconi's withdrawal of support for the government last week triggered a new rise in 10-year bond yields, the main barometer of market opinion, reversing weeks of steady falls.

The yield on the 10-year BTP stood at 4.5 percent at the end of last week, 323 basis points higher than the yield on lower risk German 10-year Bunds, but much lower than the level of 7.3 percent seen last year.

Much will depend on how investors view the prospect of a potentially messy election campaign and a likely government of the centre-left, led by a former communist.

"From the perspective of international investors, it is worth noting that so far, I have heard nothing from the Bersani camp that would make me worry about Italian reforms or Italy's newly reclaimed place at the table among other leading European or G-7 members," Unicredit global chief economist Erik Nielsen wrote in a note.

Former European Commissioner Monti came to power at the height of the financial crisis a year ago and was widely credited with restoring Italy's credibility with investors and European partners after the scandal-plagued Berlusconi era.

"Whoever governs Italy, a founding member of the EU, is going to have to pursue this course with the same seriousness," European Central Bank executive board member Joerg Asmussen said on Sunday in Germany's Bild newspaper.

Berlusconi's centre-right PDL lags the PD by as much as 20 percentage points in opinion polls, and also trails the anti-establishment 5-Star Movement, which has surged to prominence on a tide of public anger against the mainstream political class.

Italy's four small centrist blocs would draw less than 10 percent of the vote if elections were held today, polls show.

(Additional reporting by James Mackenzie and Hanna; Rantala in Rome and Lisa Jucca in Milan; Editing by Barry Moody and Stephen Powell)

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Jihadist-backed rebels take Syrian army command post

BEIRUT (Reuters) - Syrian rebels backed by radical Islamists captured a northern regimental command center of President Bashar al-Assad's army, activists said on Sunday, as Russia dismissed speculation that it is preparing for its ally's possible exit from power.

Assad's forces hammered rebel units on the outskirts of Damascus as they tried to drive back opposition fighters rebels seeking to advance toward the embattled leader's seat of power.

Rebels have made a series of advances in recent weeks, partly due to help from radicals such as Jabhat al-Nusra, a group linked to Al Qaeda in Iraq which has been excluded from a newly-formed rebel military command.

The Syrian Observatory for Human Rights said Jabhat al-Nusra, which has called for the creation of an Islamic state in Syria, had participated in capturing the command center of the army's 111th regiment in the north of the country. It said around five soldiers were captured, while the commanding officer and some 140 of his men fled to another army site nearby.

Russia, Syria's main arms supplier, dismissed suggestions from observers that its support for Assad might be softening.

"We are not holding any talks on the fate of Assad," Russian Foreign Minister Sergei Lavrov said after meeting U.S. Secretary of State Hillary Clinton and special U.N. envoy to Syria Lakhdar Brahimi. "All attempts to present the situation differently are rather shady," Itar-Tass news agency quoted him as saying.

Washington and its NATO allies, who have thrown their weight behind the opposition, are pressing for Assad's departure to end the conflict in Syria, which has taken more than 40,000 lives.

Russia and China have blocked U.N. resolutions against Assad, saying they oppose foreign intervention in the conflict.

However, Western officials have recently cited intelligence reports that Assad may turn to chemical weapons. "We have seen enough evidence to know that they need a warning and they have received a warning and I hope they heed that," British Foreign Secretary William Hague said on Saturday.

Syria has repeatedly denied the charges and accused the West of creating pretexts for foreign intervention.

RADICALS ON THE RISE

Rebels have seized several military bases in recent weeks, although some activists on the ground say there is no sign they are on the verge of toppling Assad.

The rebels' capture of the regimental command center in the Sheikh Suleiman region of Aleppo province, however, shows growing cooperation and even allegiance to radical Islamists who have proven to be some of the most effective fighters.

It is unclear how much Jabhat al-Nusra's exclusion from the newly-formed rebel military command in Syria, an effort backed by Western, Turkish and Arab security officials, will affect efforts to unify rebel ranks and increase financial support.

Led by Brigadier Selim Idris, the new command structure itself is also Islamist-dominated, though it has the backing of many Western states which have expressed reluctance to support the rebels due to the presence of radicals.

Radical groups such as Jabhat al-Nusra are small compared with other factions but their influence has grown in recent months, partly due to their successful operations. Some residents and rebels also believe the hardliners are more disciplined than some rebels who have been accused of looting and kidnapping.

ROAD TO DAMASCUS?

Damascus has become a focal point of battles over the past week, as rebels effectively shut the international airport by clashing with Assad's forces there. Foreign flights have been suspended and residents say the airport road is closed.

Rebels who have dubbed their campaign "Operation Opening the Road to Damascus", uploaded video on Sunday that showed heavy gunbattles and explosions rocking several rural towns around the capital. The video also showed rebels firing a fully functioning tank which they had captured from the army.

But there is no clear winner yet in a battle where neither side seems to have advanced. The Syrian army has claimed many successes around the capital, airing footage on state television of soldiers raiding parts of the rebel stronghold of Deraya.

"Our noble forces in Deraya have destroyed some of the terrorist dens used by al Qaeda terrorists to store weapons and other criminal tools," said a report on Syria TV, which usually refers to rebels as terrorists. "Many terrorists were killed."

Syrian soldiers also freed an Iranian diplomat captured on the outskirts of Damascus on Saturday, according to Iran's state-run Arabic news channel Al-Alam. Majeed Adeli, the cultural attaché at the Iranian embassy in Damascus, had been kidnapped by rebels in the Sayyida Zeinab suburb.

Rebels have been targeting Iranians in Syria, many of whom it accuses of belonging to Iranian security forces. Iran has been Assad's main bankroller and backer in the region. Rebels are also holding 48 Iranians which Tehran says were pilgrims.

(editing by David Stamp)

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