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OPEC oil ministers have agreed to curb overproduction by more than 500,000 barrels, in a compromise meant to avoid new turmoil in crude markets while seeking to prevent prices from falling too far.

The move reflects OPEC efforts to cover all bases in an oil market that saw prices spike to a new record just short of US$150 a barrel in July, only to shed nearly 30 percent off those peaks in subsequent months.

An OPEC statement issued after oil ministers ended their meeting early Wednesday said the organization agreed to produce 28.8 million barrels a day.

OPEC President Chakib Khelil said that quota in effect meant that member countries had agreed to cut back 520,000 barrels a day in overproduction.

This story was written by CNNMoney.com writers Tami Luhby and David Ellis and Fortune.com writers Roddy Boyd and Colin Barr.

Beleaguered Wall Street firm Lehman Brothers will unveil “key strategic initiatives” for the firm, along with its expected third-quarter earnings, Wednesday morning before the market opens.

However, it may prove difficult for Lehman to convince investors that it will be able to raise the capital it needs to keep doing business after the 45% plunge in its stock price Tuesday.

The investment bank’s shares hit their lowest level in more than 10 years Tuesday as investors grew ever more concerned about the company’s future. Earlier in the day, Standard & Poor’s placed Lehman (LEH, Fortune 500) on CreditWatch with negative implications.

“The CreditWatch listing stems from heightened uncertainty about Lehman’s ability to raise additional capital, based on the precipitous decline in its share price in recent days,” said Standard & Poor’s credit analyst Scott Sprinzen. “Although the ratings ultimately could be affirmed, we do not currently rule out the possibility of lowering the ratings by more than one notch.”

Shares fell early Tuesday morning following a report by Dow Jones that indicated talks between Lehman and Korea Development Bank had ended. It had been widely speculated in recent weeks that the state-run KDB was interested in buying a stake in Lehman.

Lehman closed Tuesday at $7.79, down from $14.15. The company’s stock has plunged nearly 88% so far this year due to concerns about its ability to raise much needed capital.

Lehman is expected to post a second straight multibillion-dollar quarterly loss, and is reportedly considering several options to raise capital and reduce its exposure to further mortgage-related losses.

Stuck between a rock and a hard place

While much has been made of Lehman’s culture and the resourcefulness of its chief executive, Dick Fuld, there is no denying that the firm is in a spot unlike any other in its history.

In addition to a reported collapse in talks with KDB, a multi-week, highly public quest to get buyers for its Neuberger Berman money management unit has yielded no buyers so far.

Of course, a sale of the Neuberger unit would bring another set of equally vexing problems, given that ratings agencies appear to be placing great importance on its recurring profits and steady cash flows.

Tuesday’s utter devastation in Lehman’s stock price ended any possibility of a desperation stock sale, no matter how dilutive. With investors certain to demand a sharp discount from the market price, and 694 million shares outstanding, a meaningful capital increase would require a dilution of current suffering shareholders that would leave them with very little.

The Treasury Department’s busy weekend, in which it placed mortgage guarantors Freddie Mac and Fannie Mae in a conservatorship, also served to shut down one of the favorite capital sources for troubled financial companies: the preferred security market.

When Treasury suspended dividend payments on $30 billion of Fannie and Freddie preferred stock, investors began to sell preferred stock investments across the finance sector.

Attempts to garner a buyer for the firm’s nearly $33 billion in distressed commercial real estate loans and bonds have been ongoing and resulted in nothing.

Nor is selling the pieces individually into the market much of an option, with the commercial mortgage bond markets selling off sharply on a weekly basis, assuring that any sales made lock in large realized losses.

In peddling the commercial real estate block, Lehman’s smaller size relative to peers Merrill Lynch (MER, Fortune 500), UBS (UBS) and Citigroup (C, Fortune 500) becomes most apparent. Each of those three firms was able to liquidate disastrous multi-billion dollar portfolios in CDOs and mortgage-backed bonds because they have the balance sheet size to finance the sales to counterparties. Lehman simply does not.

Package delivery company FedEx Corp. said Tuesday it expects its fiscal first-quarter results will exceed expectations, but it affirmed its fiscal 2009 outlook and cut its capital spending plan.

Investors sent shares up $4.55, or 5.4%, to $89.30 during aftermarket electronic trading, after closing at $84.75.

The company now expects net income for the quarter ended Aug. 31 will total $1.23, ahead of previous guidance of 80 cents to $1 per share.

Analysts polled by Thomson Reuters, on average, expect a profit of 95 cents per share.

The increase is due to lower-than-expected fuel costs late in the quarter as well as “stringent” cost-cutting, the company said.

However, FedEx (FDX, Fortune 500) did not raise fiscal 2009 guidance and instead affirmed its outlook of $4.75 to $5.25 per share, while analysts expect earnings of $4.98 per share.

Weaker macroeconomic conditions offset better-than-expected first-quarter results, the Memphis, Tenn.-based company said.

“While sustained declines in fuel prices could improve our full-year outlook, the slowing economic growth trends in the United States. are now extending to other areas of the global economy,” said Alan B. Graf Jr., executive vice president and chief financial officer, in a statement. “As a result, we have reduced our planned capital investments by $400 million, to $2.6 billion for fiscal 2009.”

Oil prices closed below $104 a barrel Tuesday for the first time since early April, and prices are now down about 30% since peaking at $147.27 a barrel in July.

FedEx will also shift its meeting with investors and lenders from Oct. 2, to April 1-2, 2009, in China, where it will unveil its Asia-Pacific hub.

The Machinists union has a $140 million strike fund and can sustain support for striking Boeing Co. production workers for five or six months, President Tom Buffenbarger said Tuesday.

Speaking from the convention of the International Association of Machinists and Aerospace Workers in Orlando, Fla., Buffenbarger said support for the strike has been unwavering among delegates, even from local Machinists unions of airlines and other hard-hit sectors.

“This issue has united the convention,” Buffenbarger said. The gathering takes place every four years.

Similarly, Marc Blondin, chief negotiator in contract talks covering 27,000 riveters, electricians, mechanics, painters and other hourly workers, said the strikers are prepared and resolved to stay out “as long as it takes” — a mantra on picket lines — to get an offer they’re willing to accept.

On Sept. 3 union members voted 80% to reject a three-year package estimated by Boeing (BA, Fortune 500) at $34,000 in average gains per worker –bonuses averaging $6,400, raises averaging 11%, pension increases and a 3% cost-of-living boost. They voted by 87% to strike.

The walkout began Saturday morning after a 48-hour contract extension in which a federal mediator tried without success to break the impasse.

Starting three weeks into the walkout, union members are entitled to $150 a week in strike pay. Average pay at Boeing is more than seven times that amount, although about 5,000 of the most recently hired employees get less than $32,000 a year.

“That fund gets replenished every month from union members who are not on strike,” although less will be coming in than going out, Blondin said.

In the first impact on air travel, RyanAir announced that the strike had resulted in a six-week delay in opening a new hub from Edinburgh, Scotland, with service to 11 European destinations. The opening has been pushed back to Nov. 5, when aircraft from its existing fleet will be available, deputy chief executive Michael Cawley said.

A federal judge has approved a plan to distribute more than $7.2 billion recovered as part of a lawsuit by Enron Corp. shareholders and investors in connection with the company’s collapse.

U.S. District Judge Melinda Harmon also approved $688 million in attorneys fees, the largest ever in a securities fraud case.

About 1.5 million individuals and entities will be eligible to share in the distribution under the settlement plan. The plan was part of a $40 billion lawsuit claiming financial institutions participated in the accounting fraud that led to Enron’s downfall.

The $7.2 billion comes mostly from settlements made with such financial institutions as Bank of America Corp (BAC, Fortune 500).,JPMorgan Chase & Co. (JPM, Fortune 500) and Citigroup Inc. (C, Fortune 500)

Russian stock markets fell sharply on Tuesday, weighed down by concerns over oil profits following a continuing slide in prices for crude and reports that the Kremlin might not support tax cuts for the industry.

The dollar-denominated MICEX index tumbled 9.1%, bringing it to a low of 40% below its May high of 1158.1 points. The ruble-denominated benchmark RTS — which dropped 7.5% Tuesday — has fallen 44% to 1395.1 points in the same period.

Investor sentiment toward Russia has suffered in the wake of high-profile corporate conflicts, and Prime Minister Vladimir Putin’s public attack on steelmaker Mechel in July. Russia’s conflict with Georgia and resulting tension with the United States and Europe persuaded many portfolio investors to turn to safer markets.

“There are no serious reasons why the market should collapse,” Roman Goryunovin, the chairman of Russia’s main stock exchange, RTS, said in televised comments. “The economic situation is good. Stocks are increasingly undervalued now, which may act as a signal for investors that they can buy cheaply into the assets they find attractive.”

Mining company Norilsk Nickel and Sberbank led the blue chips down on the RTS on Tuesday, falling by 12.8% and 10.2%, respectively.

The plunge of stock prices in Russia, the second-largest producer of oil in the world after Saudi Arabia, has coincided with a slide in prices for crude. Oil slipped below $104 a barrel Tuesday for the first time since early April as Saudi Arabia’s oil minister signaled OPEC won’t cut production.

Crude’s decline puts the contract within striking distance of the psychologically important $100 threshold, a level first reached on Feb. 19.

“It seems like every step down in oil is reflected at least as much in percentage terms in the Russian stock market,” said Erik DePoy, a strategist at Alfa Bank. “It’s a very thin market and … it doesn’t take much to send it down. There are no buyers, and several sellers.”

Investors were further spooked after news reports cited Russian Finance Minister Alexei Kudrin as saying that his ministry did not support further tax cuts in the oil sector, given that energy exports will account for less of GDP in coming years.

“This was a huge bucket of cold water on the market, which was already shivering in the cold,” DePoy said.

During her speech at the Republican National Convention, vice presidential nominee Sarah Palin said she tried to slash Alaska’s budget by putting the state jet up for sale on eBay.

The plane never sold through eBay. After all, there’s a limited pool of potential customers hunting for used jets online. But what is booming is the market for more practical used goods at an increasing number of stores that buy and sell secondhand products.

As the economy struggles, the resale industry has thrived. Not only are cash-strapped consumers discovering that selling their unused or unwanted items is a great way to pad their pockets, but heading to secondhand shops to buy discounted goods can also save a substantial amount of money.

“It’s a win-win situation for the buyer who is getting what they need used and the seller who is making a little extra money,” Marsha Collier, author of the book “eBay for Dummies,” said of the growing secondhand marketplace. That adds up to big bucks for those in the business of bringing secondhand buyers and sellers together.

Tucson, Ariz.-based chain Buffalo Exchange has been in the business of buying and selling secondhand clothing and accessories since 1974. “In hard times, businesses like ours do better,” said Kerstin Block, president and co-founder of Buffalo Exchange.

Banking on a bust

According to the company, revenue grew 11% last year and 16% in the first half of 2008. There are currently 33 stores and 2 franchises with more stores slated to open later this year and in 2009.

Sellers bring in bags of used clothing and walk away with store credit or a fraction of the resale value in cold hard cash. A pair of designer jeans might fetch anywhere from $25 to $75, depending on the style and condition. Buyers can purchase them for a fraction of the retail cost.

“We’ve noticed more selling taking place, our stores seem to be having no trouble getting merchandise in,” says Vella Austin, a spokeswoman for the company.

Also contributing to the growing interest in secondhand shopping over the last few years is an increased awareness of the environment and the importance of reusing and recycling. Secondhand shopping not only makes financial sense but is better for the planet too.

“The whole green thing really does seem to be part of the success formula and, coupled with the economic times, is just playing out beautifully for us,” Austin said of the Buffalo Exchange stores.

And though used clothing has always been a retailing niche, stores that cater to new corners of the secondhand marketplace are springing up. Once Upon A Child, Play it Again Sports, Plato’s Closet and Music Go Round are just a few of the other growing franchises out there that sell new and used children’s clothing, furniture, toys, musical instruments and sporting equipment.

Generally, items are bought for a fraction of their cost and resold for about half of the retail price. A customer can sell their $1000 treadmill to Play it Again Sports for $250 to $300 and the sporting goods store will resell it for about $500.

Steve Murphy, president of franchising for Minneapolis, Minn.-based parent company Winmark Corp., credits the economic slowdown as a major contributor to the company’s recent success.

“More people are looking to get money for their goods to help pay for gas or buy milk,” Murphy said.

The past two quarters have been Winmark’s best in its history, with revenue up 50 percent this year over the same time period a year ago, the company said.

“When things are good people were out there buying $200 jeans and not giving it a second thought,” he said, but “the last couple of years have brought people back to reality.”

U.S. Treasury prices fell Tuesday as investors hedged against falling stocks and got a weaker reading on the housing market.

The benchmark 10-year note rose 20/32 to 103 10/32, with its yield falling to 3.59% from 3.67% late Monday. Yields fall as prices rise, since the amount of money returned to a bond or note-holder when it comes due remains fixed.

The 30-year long bond jumped 1-10/32 to 105 8/32, sending its yield down to 4.18% from 4.26%.

Meanwhile the 2-year note rose 5/32 to 100 9/32, with its yield falling to 2.21% from 2.31%.

Stock hedging: The major stock indexes fell Tuesday, following a more than 40% drop in the share price of investment bank Lehman Brothers (LEH, Fortune 500).

Investors worry the bank will not be able to raise the needed cash to stay afloat.

“There’s concern now about the ultimate fate of that institution,” said Carl Lantz, interest-rate strategist with Credit Suisse.

The economic uncertainty drove investors to the relative safety of government-backed bonds.

“It’s a reminder of the fragility of our financial system and any potential problems that are still out there,” said Tony Crescenzi, bond strategist with Miller, Tabak & Co. in New York.

Investors remain wary of the emergence of more unforeseen problems, according to Crescenzi.

In addition to the housing report, investors were paying close attention to a government report that put the federal budget deficit on track to hit $407 billion by the end of the fiscal year.

Housing weakness: Bond prices also rose after a report showed that pending home sales had fallen in July, a reversal from the increase of the previous month.

Pending home sales fell 3.2%, according to the National Association of Realtors. The report triggered concerns that the U.S. housing market was still weak.

Investors also considered the long-term implications of the government’s takeover of mortgage finance companies Fannie Mae and Freddie Mac this past weekend.

Exactly how much the takeover will repair the housing market and the economy as a whole remains to be seen - as does the final cost to the U.S. government, which may eventually need to sell new debt to pay for it.

Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPod music player, but failed to deliver the surprises that finicky investors have come to expect.

The new iPod line announced by CEO Steve Jobs at a press event in San Francisco, which Apple (AAPL, Fortune 500) dubbed “Let’s Rock.” Among other things, Jobs cut the price on the year-old iPod Touch and unveiled a new Nano video player.

Shares, which were flat throughout the presentation, fell 3% at the end of Jobs speech as investors signaled their disappointment that more sweeping changes in products and pricing weren’t in the works.

A fresh line of iPods was widely expected ahead of the holiday shopping season. This time last year Apple announced the Touch and the Nano the year before that.

This time, however, the iPod is facing stiff headwinds as the iPhone, which comes with its own built-in MP3 player, threatens to make them obsolete.

As of July, Apple has sold more than 184 million iPods since their debut in 2001. Sales of the iPod, which once accounted for nearly 50% of Apple’s annual revenue, were nearly flat last Christmas. Apple, citing NPD data, says the iPod has 73.4% of the portable music device market.

Watching Jobs closely

The new Nano is thinner than previous models and slightly curved. Among other features, the display screen changes orientation from horizontal to vertical depending on how the user holds the device. An 8-gigabyte model costs $150, the same price as the original 1-gigabyte model from two years ago.

The Nano also features a new service called Genius, which recommends songs or movies based on a user’s interests and creates playlists based on songs the user has chosen. The device will also shuffle the playlist if a user shakes it.

Jobs also unveiled cheaper models of its Touch music player, a touchscreen-only device. An 8-gigabyte version now costs $229, down from $299. A 32-gigabyte model costs $399, down from $499.

All eyes Tuesday were also on Jobs and any sign of his health. Jobs was treated for pancreatic cancer several years ago and has been looking surprisingly thin in recent sightings, unnerving investors. He looked as thin Tuesday as he did at his last appearance in June.

Two Democratic lawmakers on Tuesday said the $24 million in pay awaiting Fannie Mae’s and Freddie Mac’s departing chief executives should be reduced by the federal agency that just took control of the mortgage finance companies.

Sens. Charles Schumer, D.-N.Y., and Jack Reed, D-R.I. — both of whom sit on the Senate’s banking committee — said the financial mismanagement that led the government to take over the companies on Sunday justifies such a move.

‘Out of line’

“We find it way out of line that these two executives will be rewarded with millions of dollars in bonus compensation at a time when taxpayer dollars may have to be deployed to cover any financial losses caused by errors in management.,” Schumer and Reed wrote in a letter to James Lockhart, director of the Federal Housing Finance Agency.

The senators noted that Lockhart will have authority to reduce the executives’ compensation under a provision in a sweeping housing bill passed in July.

They said taxpayer dollars should not “enrich the same individuals who are responsible for preventable financial problems that have weakened Fannie’s (FNM, Fortune 500) and Freddie’s (FRE, Fortune 500) ability to weather the current crisis in the financial markets.”

Former Fannie CEO Daniel Mudd is due to receive up to $8.4 million in compensation, while Richard Syron, Freddie Mac’s former chief executive is due to receive up to $15.5 million, according to David Schmidt, a senior consultant at executive compensation consulting firm James F. Reda & Associates.

Syron’s package, Schmidt said, is “very unusual” because it allows him to receive $8.8 million in cash to replace stock grants and options that are now worth little or nothing. Representatives of Fannie and Freddie declined to comment. A FHFA spokeswoman did not immediately comment.

Herbert Allison was named the new chief executive of Fannie and David Moffett, the new CEO of Freddie on Sunday as part of the Treasury Department’s takeover of the two huge mortgage financing agencies. The two companies own or guarantee about $5 trillion of the nation’s outstanding mortgages, about half the nation’s total.

Lockhart said Sunday that compensation for the new executives will be “significantly lower than the outgoing CEOs.”

Mudd received $12.2 million in compensation in 2007 and Syron was paid $19.8 million, prompting some members of Congress last month to seek curbs on pay for the companies’ executives.

OPEC’s president says oil ministers will likely decide to maintain crude output at present levels.

OPEC President Chakib Khelil’s statement reflects the feeling among the majority of members that the 13-nation producing group should not cut back production despite concern about rapidly falling prices.

A formal decision by OPEC is expected to be announced following consultations that will begin later Tuesday.

OPEC is holding its meeting in Vienna, Austria.

The National Highway Traffic Safety Administration has put out another recall warning the owners of some Ford (F, Fortune 500), Lincoln and Mercury SUV’s, pickup trucks, vans and cars that their vehicles have a defect that could cause them to catch fire at any time.

It’s the second advisory NHTSA has put out on this problem, which it describes as a “defective cruise control switch that could lead to a fire at any time, even while the vehicle is turned off, parked and unattended.”

NHTSA spokeswoman Karen Aldana says it’s being put out again because of the 12 million vehicles recalled in February, nearly 5 million still have not been brought in for repair.

“This is kind of another plea to say the manufacturer has all the parts available. There is no excuse for not bringing your vehicle in to be fixed,” explained Aldana. “It poses a serious fire hazard to vehicles and to dwellings. And that’s scary.”

Aldana says the agency has received nearly 60 complaints of fires that occurred in the affected vehicles.

Aldana added that NHTSA is currently investigating a similar problem in Ford Windstar vans. The agency has received more than 130 complaints of alleged fires in those vehicles.

Consumers are urged to contact their local Ford/Lincoln/Mercury dealer at 888-222-2751 or go to www.ford.com.

The following vehicles are affected:

1. 1993 - 2004 Ford F150
2. 1993 - 1999 Ford F250 (gasoline engine)
3. 1993 - 1996 Ford Bronco
4. 1994 - 1996 Ford Econoline
5. 1997 - 2002 Ford Expedition
6. 1998 - 2002 Lincoln Navigator
7. 1998 - 2002 Ford Ranger
8. 1992 - 1998 Ford Crown Victoria, Mercury Grand Marquis and Lincoln Town Car
9. 1993 - 1998 Lincoln Mark VIII
10. 1993 - 1995 Ford Taurus SHO with automatic transmission
11. 1994 - Mercury Capri
12. 1998 - 2001 Ford Explorer and Mercury Mountaineer
13. 2001 - 2002 Ford Explorer Sport and Explorer Sport Trac
14. 1992 - 1993 and 1997 - 2003 Ford E-150-350 gasoline or natural gas vehicles
15. 2002 - Ford E-550 gasoline engine vehicles
16. 1996 - 2003 Ford E-450 gasoline or natural gas vehicles
17. 1994 - 2002 Ford F-250 through F-550 super Duty trucks (gasoline engine)
18. 2000 - 2002 Ford Excursion (gasoline engine)
19. 2003 - F250 - F550 Super Duty, Ford Excursion
20. 1995 - 2002 Ford F53 Motor home chassis
21. 2002 - 2003 Lincoln Blackwood

Overseas consumers spent more at McDonald’s Corp. in August than Wall Street expected, leading the nation’s No. 1 hamburger chain to surprise investors by posting a big rise in global same-store sales on Tuesday.

The chain said its worldwide same-store sales, or sales at locations open at least a year, jumped 8.5% during the month.

Same-store sales are a key indicator of restaurant performance since they measure growth at existing locations rather than newly opened ones.

The increase follows a rise in global same-store sales of 8% in July and compares to a boost of 8.1% in August last year.

Analysts were largely expecting a lower increase, with U.S. consumers cutting back on spending, pockets of economic weakness appearing in some overseas markets and the dollar strengthening against currencies abroad.

“It’s a real strong performance,” said Morningstar analyst John Owens. “It’s impressive.”

Breakfast menu drives sales in U.S.

Same-store sales grew in every region. In the U.S., the chain said they rose 4.5%, driven by the company’s breakfast menu, a promotion tied to the Olympics for the Southern Style Chicken sandwich and biscuit, and “everyday affordability” with a focus on beverages. In August, McDonald’s (MCD, Fortune 500) priced its Sweet Tea at $1 nationwide.

The rise in U.S. same-store sales, though, fell short of the 6.7% jump in July and the 7.4% rise the company recorded last August.

Most restaurant chains are seeing slower sales this year as consumers cut back on discretionary spending due to high gas prices, tight credit and the weak housing market. McDonald’s — with its dollar menu and fast service — has fared better than most, but the chain has said it is not immune to the effects of the economic slowdown.

Still, the U.S. bump either met or beat the expectations of most Wall Street analysts.

Owens said the chain served more customers during the month and also may have benefited from price increases made during the last quarter.

The big surprise was the strong performance of the chain’s overseas locations.

Strong same-store sales in Europe

In Europe, where the economy is also slowing down in some areas, same-store sales climbed 11.6%. Performance was particularly strong in the U.K., France and Germany, McDonald’s added. Same-store sales jumped 10% in the Asia-Pacific, Middle East and Africa division, helped by promotions tied to the Olympics in Beijing.

Most analysts had expected same-store sales overseas to rise by single-digit percentages.

Systemwide sales, which includes franchisees, rose 14% during the month worldwide and climbed about 5% in the U.S.

Several analysts, including Stifel Nicolaus’ Steve West, raised their estimates for profit in the third quarter and full year based on the strong monthly sales.

“McDonald’s solid results continue to have us, ‘Lovin’ It’,” West said in a note to investors.

Buckingham Research analyst Mitchell J. Speiser, meanwhile, said in an analyst note that he expects the company to raise its dividend by at least 20%. Speiser also raised his price target by $2, saying there’s “lots to look forward to in 2009,” including the national rollout of espresso coffee beverages and an Angus burger sandwich in the U.S.

Shares of McDonald’s rose $1.36, or 2.2%, to $63.78 in midday trading.

Wall Street likes Henry Paulson’s plan to break the logjam in the mortgage markets. But the Treasury secretary and other policymakers still have much work to do to get the economy on a more steady footing.

Financial markets rallied Monday in the wake of Treasury Secretary Henry Paulson’s plan to take the two biggest U.S. mortgage-finance companies, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), into government custody. But Tuesday’s pullback - fed in part by reports that struggling brokerage Lehman Brothers (LEH, Fortune 500) has failed in its bid to sell a stake to investors in Korea - offers a reminder that merely easing the housing bust won’t get the economy humming again.

That said, the early success of the Paulson plan is noteworthy. The stock market got a significant bounce Monday, even as Fannie and Freddie themselves became penny stocks, trading for the first time in history below a dollar each. Far more important, though, was the action in the markets for the mortgage-backed securities Fannie and Freddie traffic in.

As Paulson had hoped, the spread between the yield on mortgage-backed securities and risk-free Treasury bonds narrowed sharply Monday and mostly held those gains Tuesday. The tightening of those spreads has the effect of bringing down rates on the mortgages the companies are eligible to buy or guarantee - so-called conforming loans, typically those of $417,000 or less though up to $729,000 in some pricier areas. The rate for a conforming 30-year fixed mortgage fell to 5.88% Monday from 6.26% a week ago, according to BankRate.com.

The steep decline in mortgage rates will be good news for the housing market if it holds, by allowing some troubled homeowners to refinance and by generally making financing more available.

“Mortgages tightened a ton,” says Merrill Lynch mortgage-backed securities strategist Akiva Dickstein. “The question now is whether there’s more tightening to come.”

If so, people looking to buy houses could find purchasing a house more affordable. That could bring more buyers into a market struggling to digest near record levels of houses for sale, and slow the decline of prices. Prices in 20 big metro areas have fallen 16% over the past year, according to data from the S&P/Case-Shiller national survey.

In an additional bit of good news, Treasury bond prices rose in the wake of the rally in mortgage-backed bonds, and the dollar continued its two-month-long ascent against other major currencies. There has been some concern that a bailout of the GSEs could prompt a selloff in the dollar and Treasurys, because the sheer scope of Fannie and Freddie’s gross obligations - together they own or guarantee more than $5 trillion of mortgages - stands to add significantly to the government’s liabilities.

But Rebecca Patterson, global head of foreign exchange at J.P. Morgan’s Private Bank, says currency traders are less concerned with the oft-invoked $5 trillion figure than with the putative actual cost of the bailout. The tab associated with Treasury’s plan could run into the hundreds of billions of dollars, given possible outlays tied to a decision to extend Fannie and Freddie an unlimited credit line, to purchase preferred shares in the companies, and to buy mortgage-backed securities. And it could end up costing a good deal less if the companies’ credit losses don’t spiral out of control.

“The net amount is not that large” in the context of the $5 trillion in existing on-balance sheet government obligations, Patterson says. She adds that investors generally are reacting favorably because the move “removes one more tail risk” - the improbable but highly costly prospect of a default by the companies.

While the early reaction to the Fannie-Freddie takeover has been roundly positive, history shows that could change. Dickstein points out that mortgage spreads initially narrowed in response to Paulson’s decision in July to ask Congress for the authority to use taxpayer dollars to backstop the companies. Paulson famously insisted at the time that he didn’t believe he would have to use the authority, likening his legislative blank check to a bazooka he would never have to fire.

But after the initial success of that shock-and-awe effort, mortgage rates surged again. Dickstein says the problem was that the capital-constrained GSEs were unable to purchase mortgage-backed securities at a time when other investors were fleeing risk as well. That sent the prices for those issues higher at a time when Treasury prices were falling, widening the spreads. “It was more of a supply-demand trade,” he says.

Dickstein adds that he believes Treasury’s decision to purchase mortgage-backed securities - a move he calls “unprecedented” - will lend substantial backing to the market for MBS paper.

But if the mortgage market is getting a boost, there’s little hope it will help the economy avert the recession it has been heading toward for more than a year. For one thing, economists expect to see further house-price declines, as weak demand and a glut of supply inexorably bring the cost of buying a house back into line with rental rates and incomes.

Meanwhile, there is no end in sight to other dour trends. Banks stuffed with bad loans remain unwilling to extend credit, and joblessness is on the rise. The U.S. has lost private-sector jobs in each of the past eight months. But Ashraf Laidi, currency strategist at CMC Markets in New York, notes that the job-loss cycles in the 1990-91 and 2001-2002 recessions lasted 11 and 15 months, respectively.

Meanwhile, big financial sector employers such as Lehman and AIG confront a souring credit market as they consider how to raise new money to fill holes in their balance sheets left by the multibillion-dollar mortgage-related losses of the past year.

The flood of bad news has some observers saying someone in the nation’s leadership is going to have to come up with a more sweeping answer before the markets, and the economy, are able to make a sustained recovery.

“Government actions continue to attempt to maintain the status quo among financial institutions,” Merrill Lynch equities strategist Rich Bernstein writes in a note Monday. “There has yet to be a remedy that approaches the credit crisis as a systemic problem. As with the Bear Stearns situation, the GSEs are being treated as a one-off problem.”

Regional banks aren’t the only ones hurting from this weekend’s government takeover of Fannie Mae and Freddie Mac. Some of the country’s largest insurance companies are facing a massive headache too.

Hartford Financial Services Group, CNA Financial and a handful of other major publicly-traded insurance companies bought more than $4 billion of preferred shares of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500), according to a Goldman Sachs report and a review of the companies’ regulatory filings.

When the Treasury Department seized Fannie and Freddie on Sunday - placing both companies in the equivalent of bankruptcy - it effectively halted dividend payouts of more than $30 billion to preferred stock holders, rendering their investments almost worthless.

Regional banks like Sovereign Bancorp (SOV, Fortune 500) were especially big holders of preferred shares, which pay a higher dividend than common stock and were generally thought to be safe investments before Fannie and Freddie began running into serious problems this spring. But some insurers are taking a beating too.

The devastation is best seen in the collapse of Fannie and Freddie’s most recent sale of preferred stocks: the 8.75% mandatory and 8.25% series T convertible preferred securities issued in May. The 8.75% preferred closed Monday at about $1.45, down $16.11 from Friday’s close of $17.56. The 8.25% dividend preferred closed Monday down more than $11, at $2.66, having closed Friday at $13.66.

Both securities won’t make their first dividend payment, due Sept. 11.

The bloodbath isn’t limited to the May preferred investors. Traders told Fortune.com that declines of 90% in price were the norm for other Fannie and Freddie preferred issues.

Insurers that are suffering run the gamut from mainstream behemoths like Hartford (HIG, Fortune 500) and CNA (CNA) to lower-profile players like W.R. Berkley.

Greenwich, Ct.-based W.R. Berkley (WRB, Fortune 500), for example, has $217 million in so-called government sponsored enterprise preferred stock on their books. This is about 4.9% of their post-tax tangible equity value, according to Goldman’s insurance analysts. A W.R. Berkley spokeswoman declined comment.

Erie Indemnity (ERIE) of Erie, Pa., owns $96 million of the devalued paper, according to Goldman, which represents a sizable 6.4% of its post-tax tangible equity. A company spokeswoman did not return a call.

Hartford had about $488 million Fannie and Freddie preferred securities on its books, although with a nearly $20 billion market cap, the hit to shareholders is certainly minimal. A Hartford spokeswoman did not return an e-mail seeking comment.

CNA, meanwhile, held $268 million of preferred Fannie and Freddie stock, or 1.9% of its post-tax tangible equity. A CNA spokeswoman did not respond to a call seeking comment.

Of course, given the massive losses in the banking sector - which appears to own between $15 billion and $20 billion of preferred stock in Fannie and Freddie - all eyes have been on banks. Indeed, Treasury Secretary Henry Paulson acknowledged that certain banks with outsized positions (relative to their equity capital bases) may be forced to work with regulators to develop a plan to cope with the hit to their capital.

Monday afternoon, Wells Fargo (WFC, Fortune 500) became the first major bank to acknowledge its losses. In a statement, it said that it had $480 million in Fannie and Freddie preferred stock and that these positions are trading at “between 5% and 10% of their original value.”

To be fair, Wells Fargo is in an enviable position, having avoided owning (or underwriting) much of the worst mortgage-related loans and securities.

The suspension of the Fannie Mae and Freddie Mac preferred dividend was also painful for hedge funds, some of which owned hundreds of millions dollars worth of these securities.

Depending on the hedge ratios - which is trader parlance for the amount of stock sold short to hedge the position - numerous convertible hedgers took a sizable hit, especially if they had a bullish bias and a lighter hedge. This is an unwelcome development given both the brutal performance of many hedge funds over the summer, as well as the convertible sector overall.

Photos published on several automotive Web sites Monday show a production version of the Chevrolet Volt, a plug-in electric car General Motors plans to produce in 2010.

GM executives, engineers and designers, including vice president for product development Bob Lutz, are shown standing with the car.

The photos were released accidentally, a GM spokesman said.

GM (GM, Fortune 500) had been hoping to keep the images under wraps until the car’s official unveiling, which is expected later this month.

GM regularly uses the Volt concept car in its advertising, noting that it is a “future product.”

During the Volt’s development, the carmaker has allowed an unusually high degree of access to the media. Over the past year, GM has even invited journalists into its design and engineering center to see work on the car.

Based on the new photos, the front end of the production version of the Volt looks more rounded than that of the concept car first shown by GM at the 2007 Detroit Auto Show.

The concept car’s angular face wasn’t aerodynamically efficient enough to make it to the final version as GM engineers and designers tried to extract every extra foot of “all electric” range from the car, GM designers have said.

The back end of the car will have a sharp, angular shape. In the rear, where air flows together as it trails off from the vehicle, sharp angles help smooth air flow.

The Volt will be driven by electricity stored in a large T-shaped lithium-ion battery pack running the length of the car, according to information released earlier this year by GM.

After charging for several hours, the Volt will be able to run for up to about 40 miles without using gasoline.

As the battery begins to run down, a small gasoline engine will turn on, generating enough electricity to drive the car to a full range — expected to be about 300 miles.

The gasoline engine will not drive the car directly but will generate electricity which will be routed through the battery pack to drive the wheels.

The Volt will seat four, not five as some other cars its size can, according to GM. The space required by the battery pack would not allow for a center seating position in the back.

Lehman Brothers Holdings Inc. shares plunged to their lowest level in more than a decade Tuesday amid investor concerns that the battered investment bank is running out of options to raise capital.

Investors, anxious about the possibility of a bank failure after the near-collapse of Bear Stearns in March, punished the stock in early afternoon trading. The stock plunged $6.36, or 45%, to $7.79 - the lowest level Lehman’s stock has hit since the financial meltdown of 1998. That low was triggered by the collapse of hedge fund Long-Term Capital Management.

The nation’s fourth-largest securities firm has been seeking to boost liquidity after suffering $8.2 billion in write-downs and credit losses since the financial crisis began last year. Lehman (LEH, Fortune 500) had hoped to find a major investor before announcing third-quarter results Sept. 18, when it is widely expected to take another round of steep losses.

Early earnings: Uncertainty about Lehman’s financial position has prompted speculation that the investment bank might announce quarterly results early, a move that could also stem the stock’s slide. Prashant Bhatia, an analyst with Citigroup, said Lehman could release details about the third quarter in the next day or so.

“At that point, we expect more clarity around where they are in terms of both earnings for the quarter and any strategic initiatives,” Bhatia said. “A pre-announcement will likely be a catalyst to stabilize the stock.”

Lehman could report a loss of between $2 billion and $4 billion, according to analysts. That would be on top of a $2.8 billion second-quarter loss, which was the first since Lehman spun off from American Express Co (AXP, Fortune 500). in 1994.

Credit rating: In addition, Lehman Brothers is working to quell criticism from major credit-rating agencies. On Tuesday, Standard & Poor’s put Lehman’s debt on CreditWatch Negative because of the steep stock decline, which means the agency may lower the company’s ratings within months. Such a move would increase the amount of money Lehman pays to issue debt.

“The CreditWatch listing stems from heightened uncertainty about Lehman’s ability to raise additional capital, based on the precipitous decline in its share price in recent days,” said Standard & Poor’s credit analyst Scott Sprinzen.

Korean rumors: The steep decline in Lehman’s shares began shortly after Dow Jones Newswires reported that the head of South Korea’s financial regulator said talks about a possible investment had ended. Lehman Chief Executive Richard Fuld had been in negotiations with state-owned Korea Development Bank for several weeks about a capital infusion.

However, it appears that report itself is being disputed. Yoo Jae-hoon, a spokesman for South Korea’s Financial Services Commission, flatly denied any such statement was made. He said the regulator was “not in a position” to “broadcast how the deal is going.”

Mark Lane, a spokesman for Lehman Brothers, declined to comment. A spokesman for KDB could not immediately be reached for comment.

Looking under the cushions: Like other investment banks, Lehman has been hit hard by deterioration in the credit and mortgage markets since the middle of 2007. Global banks during the past year have lost more than $300 billion from mortgage-backed securities and other risky investments.

In addition to securing an investment from KDB, speculation has also centered on Lehman selling its asset management division Neuberger Berman, and spinning off a portion of the company - such as its troubled mortgage-assets. Analysts have said Neuberger could fetch $7 billion to $8 billion in a sale.

Ladenburg Thalmann analyst Richard Bove wrote in a research note that the company might be asking too high a price for an investment or asset sales. The stock is down more than 80% so far this year, and traded at $67.72 one year ago.

“Buyers seem to believe that Lehman is overvaluing its assets and refuse to hit the bid,” Bove wrote in a research note. “The net result is no action.”

Fuld, whose own job is said to be on the line, is trying to avoid the same circumstances that caused the near collapse of Bear Stearns. Bear Stearns’ share price plunged in March amid rumors that it did not have enough liquidity to stay in business, and that led to its acquisition by JPMorgan Chase & Co. (JPM, Fortune 500)

However, in this case, Lehman Brothers is said to be having no credit or counterparty risks. A Sanford C. Bernstein analyst, Brad Hintz, said in a note to clients that anxiety about Lehman might be driving the stock lower, but that the government would not let the company simply fail.

“Let’s recognize that the Federal Reserve is supporting the funding of four surviving large capitalization brokers, so the sharp decline in Lehman stock today is an equity issue, not a credit or counterparty issue,” said Hintz, a former chief financial officer for Lehman before he became an analyst.

In Washington, Treasury officials refused to answer specific questions about Lehman Brothers but said Treasury Secretary Henry Paulson and other officers were closely following market developments. “We are monitoring markets and are in regular contact with market participants,” said Treasury spokeswoman Brookly McLaughlin.

The Federal Reserve has auctioned another $25 billion in loans to squeezed banks to help them overcome credit problems.

The central bank on Tuesday released the results of its most recent auction. It’s part of an ongoing program started in December that seeks to ease financial turmoil and credit stresses.

Those programs — along with the depressed housing market — have badly pounded the economy, forcing companies and people to clamp down.

Results are public

In the latest auction, commercial banks paid an interest rate of 2.670 percent for the 84-day loans. There were 38 bidders. The Fed received bids for $31.64 billion worth of the loans. The auction was conducted on Monday with the results made public on Tuesday.

The Fed in mid-December announced it was creating an auction program that would give banks a new way to get short-term loans from the central bank and help them over the credit hump. In late July, the Fed expanded the program, making the longer 84-day loans available, besides the existing 28-day loans.

The worst global credit crisis seen in decades has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses.

The smooth flow of credit is the economy’s oxygen. It permits people to finance big-ticket purchases, such as homes and cars, and helps businesses expand operations and hire workers.

Wanting to avert a broader panic that could endanger the entire U.S. financial system, the Fed has taken a number of extraordinary actions to provide relief.

Emergency lending

In its broadest extension of lending authority since the 1930s, the central bank agreed in March to temporarily let investment firms obtain emergency, overnight loans directly from the Fed, a privilege that only commercial banks had been granted.

The Bush administration stepped in Sunday to snatch control of troubled mortgage giants Fannie Mae and Freddie Mac, effectively putting the government at the heart of the mortgage-finance business.

The takeover has the potential to put billions of taxpayers’ dollars at risk. The action means that Fannie and Freddie won’t be tapping the Fed’s emergency borrowing program for a quick source of cash. The Fed in July told the companies that they could draw loans directly from the central bank if they needed cash to stay afloat.

Pending home sales fell 3.2% in July after gaining in June, according to a real estate group’s report released Tuesday, in the latest in a series of gloomy housing reports.

The Pending Home Sales Index fell to 86.5, after gaining 5.8% in June, according to the National Association of Realtors (NAR). It now stands 6.7% below July 2007’s reading of 92.8.

The index is a forward-looking indicator of housing sales, based on contracts signed during the month.

“This is more evidence that the housing market is still in a malaise,” said Michael Larson, a real estate analyst with Weiss Research.

Tighter lending standards have made it hard for buyers to get loans, which is hurting sales.

“Overly stringent lending criteria imposed by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in the past month no doubt held back contract signings,” said NAR chief economist Lawrence Yuan.

The Midwest was the best performing region in July, with sales contracts up 2.8%. The index fell in the Northeast by 7.5% and in the West by 10.6%, while the South region was unchanged.

The July result was disappointing, according to Richard DeKaser, chief economist for National City Corp. (NCC, Fortune 500), but not unexpected. The index has held in a range between 83 and 89.4 over the past few months, but saw a sharp jump in June to 89.4.

The good news, according to DeKaser, is that the index has plateaued, indicating that a bottom in existing home sales may have been reached. And that bottom may mean that prices could stabilize in some areas, although at lower levels than they once were.

Bargains in areas of the country hard hit by the bust are drawing house hunters back into a few local markets, said Larson.

“We have seen sales pick up in some areas where homes are being basically liquidated for just about any price the sellers can get,” he said.

That could provide a boost to sales volume in the coming months.

Sales have been flat despite the fact that home prices are way down. The most recent S&P/Case-Shriller report found that home prices fell 15.4% nationally during the 12 months ended June 30.

“Pricing remains attractive, but the ability of home buyers to obtain financing has been made more difficult,” said DeKaser. “Lending standards had gotten increasingly tight.”

The weekend takeover of Fannie and Freddie, the two mortgage giants that were created to promote mortgage lending, should help. Funding costs for Fannie and Freddie will be significantly reduced, according to DeKaser, and those savings will be passed on to consumers.

Already interest rates have fallen to 5.88% from 6.26% a week earlier, according to Bankrate.com.

“We want to see if the mortgage rate decline stands,” said Larson. “That would help to stabilize things.”

Stocks tumbled Tuesday, erasing most of the previous session’s rally, as worries about Lehman Brothers’ ability to raise capital, and about the extent of AIG’s mortgage-related losses, exacerbated broad recession fears.

Late Tuesday Lehman Brothers said it will unveil “key strategic initiatives” for the firm, along with its expected third-quarter earnings Wednesday morning before the market opens.

Insurers and regional banks slumped in the aftermath of the government rescue of Fannie Mae and Freddie Mac. Meanwhile, falling oil prices added to worries about the slowing global economy and also dragged on oil stocks.

The Dow Jones industrial average (INDU) lost 280 points, or 2.4%, the Nasdaq composite (COMP) lost 2.6% and the Standard & Poor’s 500 (SPX) index lost 3.4%.

Small caps were hit too, with the Russell 2000 (RUT) falling 3.5%.

In part, the day’s decline was in reaction to the previous day’s huge rally, when the Dow jumped 290 points after the government bailout of Fannie and Freddie.

While the initial reaction showed investors were relieved, Tuesday’s reaction indicated investors are now sifting through the fine print, said Darin Pope, chief investment officer at United Advisors of Secaucus, N.J.

He said Tuesday’s market response was a bit of a reality check.

“It’s the day after, and yes, the ability of the consumer to get a mortgage is better,” he said. “But the economy is still struggling, the consumer is still strapped and we still have more work to do on the housing and credit market mess.”

A weak reading on pending home sales in July demonstrated the persistent problems in the housing market, while the battering of AIG and Lehman Brothers reminded investors that the credit crisis is far from over.

Meanwhile, regional banks and insurers tumbled in the wake of the government takeover of the two mortgage giants. (Full story).

In other news, Standard & Poor’s said late Tuesday that Fannie and Freddie will be removed from the Standard & Poor’s 500 index after the close of trade Wednesday. The news is likely to send the stocks lower tomorrow as managers of index funds need to dump the stocks and buy their replacements.

Also after the close, FedEx (FDX, Fortune 500) lifted its fiscal first-quarter earnings forecast, saying it now expects to earn $1.23 per share versus current expectations for a profit of 95 cents. Shares gained 5% after the close.

Financials get hit: Lehman Brothers (LEH, Fortune 500) skidded 45% on worries that its going to have a hard time raising capital now that talks with the state-run Korea Development Bank have reportedly ended. KDB was thought to be considering buying as much as a 25% stake in the troubled bank.

In response to the stock decline, ratings agency Standard & Poor’s put Lehman’s debt on CreditWatch Negative, meaning it could cut the company’s ratings within months.

Lehman says it will release details about its third quarter Wednesday. The company is expected to post a loss of between $2 billion and $4 billion.

The stock has been sliding of late, as investors worry about the brokerage’s ability to raise capital, and whether it can sell some or all of its operations. Lehman has also been struggling in the shadow of Bear Stearns, which the government had to rescue earlier this year, and in the wake of Fannie and Freddie.

Lehman is a different situation than Bear Stearns in that it has more value, said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Co. He said that, at Bear Stearns, the bad loans ultimately engulfed their other assets. But although the circumstances are different, the concerns are similar.

Additionally, Nyheim said Lehman is suffering in the wake of Fannie and Freddie because while the government intervention helped the mortgage giants’ bonds, the stocks have been tumbling. There may be a similar bet about Lehman, he said.

“The thought is if the Fed comes in and takes action, Lehman bonds might be OK, like Fannie and Freddie, but Lehman equity-holders are going to get hit,” Nyheim said.

Among other financial stocks falling, Washington Mutual (WM, Fortune 500) lost 20%, AIG (AIG, Fortune 500) lost 20%, Wachovia (WB, Fortune 500) lost 14.5% and Merrill Lynch (MER, Fortune 500) lost 10%. Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500) both lost 7%, while Morgan Stanley (MS, Fortune 500) and Bank of America (BAC, Fortune 500) each lost over 6%. Dow components American Express (AXP, Fortune 500) and JP Morgan Chase (JPM, Fortune 500) each lost 5%.

The broad Philadelphia Bank sector index dropped 6% and the Amex Securities Broker/Dealer index tumbled nearly 10%.

Economic reports: Pending home sales fell 3.2% in July after rising in June, according to a report from the National Association of Realtors released Tuesday. The report is a forward-looking indicator of the housing market, tracking contracts signed during the month. (Full story).

Wholesale inventories rose 1.4% in July, according to a government report released Tuesday. That topped forecasts for an increase of 0.7%, according to a consensus of economists surveyed by Briefing.com. June wholesale inventories rose a revised 0.9%.

Meanwhile, federal officials warned Tuesday that the budget deficit will be substantially higher this year, rising $246 billion to $407 billion, reflecting the tax rebates and an increase in spending. (Full story).

Fannie and Freddie: The Bush administration said Sunday that it was taking control of the two companies in an attempt to help stabilize the battered housing market and bring down mortgage rates.

The plan included putting the companies under a government conservatorship, and replacing both chief executives. Additionally, the Treasury Department will put up to $100 billion in each company to keep them afloat, in exchange for senior preferred stock. (Full story)

The two government-sponsored firms own or back about half the mortgage debt in the country and have lost billions in the housing market collapse. The plan should lower mortgage rates by lowering Fannie and Freddie’s borrowing costs.

There’s a certain level of risk that’s been taken out of the market as a result of this plan, said Tom Sowanick, chief investment officer at Clearbrook Financial, but that doesn’t mean it can stabilize the housing market.

“It mitigates some of the pressure on housing, but it can’t create demand,” said Douglas Peta, market strategist at J. & W. Seligman. “Regulators have led would-be home buyers to water, but they can’t make them drink.”

(Why the bailout is not a quick fix for the economy)

What is more likely is that the plan means that “Wall Street will, at least for a while, be on good behavior,” Sowanick said.

Companies will need to create structured products that will work, and there will be new regulation that will help better protect the investor, he said. “The way companies manage risk is going to be on the front burner for quite some time.”

Fannie Mae (FNM, Fortune 500) shares rallied 35% Tuesday after plunging in the previous session, while Freddie Mac (FRE, Fortune 500) managed to gain 8.6% after sliding in the morning.

Company news: Apple (AAPL, Fortune 500) on Tuesday announced a new version of iTunes and new models of its iPods. But shares tumbled on the announcement. (Full story).

Dell (DELL, Fortune 500) founder Michael Dell bought $100 million of Dell shares last week, it was announced after the close of trade Monday. Shares of the PC-maker ended lower, giving up morning gains.

McDonald’s (MCD, Fortune 500) said August sales at its stores open a year or more rose 8.5% in the month, topping forecasts. Shares gained 1.6%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost seven to one on volume of 1.69 billion shares. On the Nasdaq, decliners topped advancers by over four to one as 2.64 billion shares changed hands.

Fuel prices: Oil prices closed at a 5-month low Tuesday on bets that OPEC, meeting in Vienna, will hold production levels steady despite the recent price slide.

Also impacting oil prices: signs that Hurricane Ike is weakening and is less likely to cause severe damage to oil facilities in the Gulf of Mexico, which accounts for about 25% of U.S. oil production. (Full story).

U.S. light crude oil for October delivery slid $3.08 to settle at $103.26 a barrel on the New York Mercantile Exchange, the lowest close since April 1.

Prices have fallen more than $40 a barrel from a record high of $147.20 in July, on bets that a sluggish global economy is cutting into demand.

Gas prices declined for a ninth straight day, according to a national survey of credit-card activity.

Other markets: In the bond market, Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.59% from 3.67% late Monday. Prices and yields move in opposite directions.

The dollar slumped versus the yen and was barely lower versus the euro.

COMEX gold for December delivery fell $10.50 to $792 an ounce.

The budget deficit will jump by $246 billion to $407 billion this year, the Congressional Budget Office estimates in a report released Tuesday.

“Over the long run, growing budget deficits and the resulting increases in federal debt would lead to slower economic growth,” the agency said.

The budget deficit shot up 153% from last year’s shortfall of $161 billion. The government’s fiscal year ends Sept. 30. The agency attributes the jump to “a substantial increase in spending and a halt in the growth of tax revenues.”

That drop in revenue is driven in part by an estimated 15% decline in corporate tax receipts. They fell as a result of lower corporate profits and tax rules governing how businesses depreciate their investments this year. A second factor is the rebates provided to tax filers from the economic stimulus law Congress passed earlier this year.

The spending hike is partly due to efforts by the government “to cover the insured deposits of insolvent financial institutions,” the agency said.

To date, 11 banks have been seized by the FDIC this year - not a high number historically, but higher than it’s been in recent years - and that number is expected to grow in the coming months.

The CBO said it expected the deficit to exceed $400 billion - or 3% of gross domestic product - for each of the next two years if current policies remain in place. It also forecast several more months of “very slow” economic growth.

“The nation is experiencing a significant period of economic weakness,” said Peter Orszag, director of the CBO, in a press briefing.

The CBO’s estimate for the cumulative deficit over the next 10 years is now $2.3 trillion. Earlier this year, the CBO estimated the country would have a $300 billion surplus by 2018. But that was wiped out in part because of new spending approved by lawmakers for the war in Iraq and Afghanistan and revised economic projections.

And the 2.3 trillion figure doesn’t account for the likelihood that the 2001 and 2003 tax cuts will be extended or that the middle class will continue to be protected from the Alternative Minimum Tax - or so-called wealth tax. If those extensions are made - and both presidential nominees have been calling for that, at least in part - then the 10-year deficit projection jumps to more than $7 trillion.

Putting Fannie and Freddie on the books

The agency’s latest estimates do not reflect the Treasury announcement this weekend that the government would temporarily takeover Fannie Mae and Freddie Mac, the two government-sponsored enterprises that form the backbone of the mortgage market.

But Orszag said that come January, the CBO will be incorporating the activities of Fannie and Freddie in its baseline for the federal budget. The CBO will be working with House and Senate budget committees to address questions of just how transactions by both companies should be accounted for - the answers to which will greatly influence the net effect the companies have on the federal deficit.

“The degree of control exercised by the federal government is so strong that the best treatment is to incorporate [the agencies] into the federal budget,” Orszag said.

To allay one concern that many taxpayers have expressed, the roughly $5 trillion in loans that Fannie and Freddie own or back would not be added wholesale to the debt held by the public, Orszag told CNNMoney.com.

“I don’t see a scenario in which you take a total of the mortgages backed and add that to the federal deficit,” he said.

But beyond all these near-term concerns affecting the government’s debt load, he said the biggest challenge facing the country’s coffers is rising health care costs. Federal spending on Medicare and Medicaid alone is expected to jump 30% in the next decade - from 4.6% of GDP this year to 6% in 2018. By 2050, it could jump to 12% of GDP.

As a result, Orszag said in the press briefing, “The nation is on an unsustainable fiscal course.”

Airbus presented new cost-cutting measures to unions Tuesday as part of parent company EADS’ plan to seek an additional €1 billion euros ($1.42 billion) in savings starting in 2010.

In a bid to compensate for the euro’s rise against the dollar and improve competitiveness, EADS CEO Louis Gallois wants to expand production in the dollar zone or in areas where labor is cheap. He has promised the plans will not involve any additional job losses in Europe.

Failed to sell sites

Having failed to sell production sites in France and Germany as part of its original restructuring plans, Airbus has decided to take on board a plan floated by one of the companies it sought to sell the sites to, Gallois said in an interview with Le Monde newspaper published Tuesday.

The plan calls for Airbus to set up a parts factory in Tunisia to make basic parts and to invest in expanding production of more sophisticated parts made from composite materials in France, Gallois said. His comments were confirmed by spokesman Pierre Bayle.

EADS is looking for extra cost savings on top of its restructuring program, dubbed Power-8, which aims to shed 10,000 jobs and reduce annual spending by € 2.1 billion ($2.98 billion) by 2010.

Airbus, which accounts for two-thirds of EADS’ revenue, will be asked to shave €650 million ($923 million) from costs in 2011 and 2012, with an additional €350 million ($497 million) in savings coming from EADS’ other divisions.

“Further measures to improve our cost base and overall efficiency are necessary to secure the long-term competitiveness of our company,” Airbus Chief Executive Tom Enders said in a statement after the meeting.

The plan will help Airbus secure growth, lower costs and access talent globally, while also supporting jobs and core competencies in Europe, Enders said.

Airbus wants to be present in China to be close to its customers; in India because of the quality of its engineers; in North Africa where costs are lower; and in Mexico to serve the American market, Gallois told Le Monde.

Alabama in sight

If EADS and its U.S. partner Northrop Grumman win a disputed $35 billion contract to build aerial refueling tankers for the Air Force, it will build an assembly line in Alabama, Gallois told the newspaper. EADS and Northrup won the contract in February, but Boeing later filed a protest, prompting the Pentagon to reopen the deal.

EADS also considers having a presence in Russia “important,” he said, adding that Russia’s conflict with Georgia “has no influence on our activities.”

Gallois also said the current euro-dollar exchange rate is still a “dangerous zone,” even if the euro has come down from its July 15 high of $1.6038.

The 15-nation euro bought $1.4099 in morning European trading on Tuesday, down from $1.4106 late Monday in New York. It is the lowest point for the euro against the greenback since late September 2007.

At work I have little need for budget desktop printers. We use high-end, high-resolution machines to proof photography and illustrations at Nesnadny & Schwartz, my graphic design studio in Cleveland. But I also keep an office at home, where my two middle-school daughters use my printer for assignments as liberally as Jackson Pollock used paint.

When it comes to the home office, I need a color printer that delivers maximum-quality output for a minimal price. It doesn’t hurt if the machine can also scan, copy, and fax. But should you choose an all-in-one inkjet printer and shell out for the pricey ink cartridges? Or plump for an all-in-one laser printer, which has lower operating costs but less vibrant colors? I tested one bestselling sub-$500 printer in each category.

The Canon (CAJ) Pixma MX7600 ($399) is an all-in-one inkjet printer. I liked its sleek design and relatively small footprint. The assembly and operating instructions were relatively clear.

Unlike most modern printers, the Pixma’s print head must be connected as an extra step. That’s a minor hassle, but it’s nice that the print head can be replaced easily if a problem arises. There are six ink cartridges, which cost $15 apiece to replace. I didn’t run out of them in my test, but if you’re printing lots of photos, beware.

This unit’s plastic chassis seemed less than solid, and the hinge for changing ink cartridges was downright flimsy. But I found the menus easy to understand and operate.

Print quality was excellent on coated inkjet paper, with sharp type and colorful images. The quality deteriorated sharply when I switched to plain paper stock. Canon claims that the Pixma erases the difference between inkjet and plain stock by first coating plain sheets with a layer of clear ink (from an $18 cartridge). But I still noticed a difference.

The Canon printed fairly quickly for a budget machine. A black-and-white page ambled to the finish line in 18 seconds, while a color page took 30 seconds using the high-quality setting. Photocopy quality was good, with excellent color matching. The scanner, with 600-by-600 dots per inch, worked pretty well for this price point. You can scan directly on the glass - or through the document feeder, if you want to scan both sides. I also liked the slot that allowed me to print photos directly from the memory card in my digital camera.

The Lexmark (LXK, Fortune 500) X500n ($499) is an all-in-one laser printer. The unit is large but sturdy. Lexmark’s image-only instructions were easier to follow than Canon’s, but I still had to download a manual on Lexmark’s website. The machine uses four toner cartridges, each of which costs $100 to replace, but they should last years - far longer than ink cartridges. Print quality was good, with the exception of solid colors, which came out a bit grainy and inconsistent.

Laser printers are supposed to have the advantage of speed, but I found that the Lexmark was slower to print a single page than its inkjet rival. A black-and-white page clocked in at 20 seconds, and a color page took 40 seconds in photo-quality mode. At least I was able to print on regular copier paper. Photocopy quality was fair, with a less-than-perfect color match to the original. Unfortunately, the scanning function didn’t work with my Mac, whereas the Canon scanner did. (Lexmark says this can be fixed via a clunky workaround that involves having a PC and sharing the scanner with your Mac over a network.)

Bottom line? Bring on the Canon. Cartridge prices notwithstanding, this inkjet workhorse is a great option for small businesses that don’t need to produce fancy graphics. It should also suit anyone with a home office - and print-happy children.

British natural gas producer BG Group PLC on Tuesday abandoned its hostile takeover bid for Origin Energy Ltd., Australia’s second-largest power retailer.

BG Group (BRGGY), Britain’s third-largest oil and gas company, conceded defeat after Origin (OGFGF) announced a coal seam liquefied natural gas joint venture with U.S. energy giant ConocoPhillips (COP, Fortune 500) valued at 9.6 billion Australian dollars ($7.9 billion). BG said the price for that investment indicated a takeover of Origin would be too expensive.

Deal to elapse

“The price implied by this newly announced joint venture is higher than BG Group is able to justify,” said BG Group chief executive Frank Chapman in a statement to the London Stock Exchange. “We have therefore decided not to extend or amend our offer, which we expect will now lapse.”

BG shares rose 1.4% to 1,108 pence ($19.56) amid generally rising shares after the announcement.

BG had wanted Origin’s gas resources in eastern Australia to feed a liquefied natural gas plant it is planning to build in Queensland state, but its approaches were repeatedly rebuffed.

Origin last rejected a sweetened 13.7 billion Australian dollar ($11.1 billion) offer in July, before unveiling the ConocoPhillips deal on Monday.

BG Group said it had canceled a shareholder meeting scheduled for Sept. 16 to vote on the offer. It added that Origin shareholders who accepted the BG Group offer will retain their Origin shares if the offer lapses as expected when the formal offer period ends on Sept. 26.

“We remain firmly committed to Australia and our existing LNG joint venture with QGC, which is progressing well,” Chapman added in the statement.

Announcing the ConocoPhillips deal on Monday, Origin said that the U.S. company would make an initial payment of $5 billion to Origin, and carry Origin for the first $950 million in joint venture expenses.

A 50% stakeholder

ConocoPhillips would then make up to four more payments of $500 million each for the development of four gas-processing facilities in Queensland. ConocoPhillips will get a 50% stake in Origin Energy CSG Ltd., which holds Origin’s Queensland, Australia, coal bed methane assets.

Production from the first two processing facilities is expected in 2014, with a capacity of about 3.9 million tons each per year.

Origin said the venture would wipe out its debt and increase its earnings per share by more than 35% in the year ending June 30, 2009.