Portugal Colonial - US, European stocks rise on retail sales, rate cut expectations

The Dow in New York was headed for another record close as the wider S&P and the tech-heavy Nasdaq were also higher in midday trading.

All the main indexes ended the session higher IN Europe.

The Fed begins its two-day meeting Tuesday, with Fed boss Jerome Powell having already signalled that slowing inflation will allow the central bank to cut rates for the first time in four years when it reports its decision on Wednesday.

Debate has focused on whether officials will go for 25 basis points or 50, with some warning that the bigger option could signal there is some concern about the economy.

Earlier Tuesday, the Commerce Department reported that consumer spending cooled in August, but not as much as analysts had expected, indicating the economy remains healthy.

Retail sales were up 0.1 percent in the month, while expectations had been for a 0.2 percent drop.

"Investors are walking a tightrope in the short term, as the market is cheering for lower inflation but is looking for signs of strength from the consumer," said Bret Kenwell, an analyst at eToro.

"It's a difficult balancing act to see pricing pressures ease without a large dropoff in demand, but we continue to inch toward that reality," he said.

Bets on the US central bank opting for a super-sized cut have jumped in recent days, with observers suggesting officials want to go big before a series of smaller reductions.

"It is extremely rare to go into a Fed meeting with such a high level of uncertainty," said David Morrison, analyst at Trade Nation. "This means there is likely to be considerable volatility after the announcement."

The expectations of lower interest rates have hurt the dollar in recent days, but it steadied Tuesday.

The dollar sank below 140 yen on Monday for the first time in over a year as lower rates make the US currency less attractive to investors.

A string of data in the past few months has indicated that US inflation is easing back to the Fed's two-percent target.

At the same time, the labour market has slowed, giving decision-makers room to loosen monetary policy while also fanning fears of recession.

Some analysts said Tuesday's retail sales report strengthened the case for the Fed going for the more cautious 25 basis point option Wednesday.

"Anyone looking for a weak print that solidified hopes for a 50bp rate cut tomorrow must have been disappointed. There is no evidence that the US consumer is weakening," said Kathleen Brooks, research director at trading platform XTB.

There are concerns too over Europe's biggest economy Germany as a survey Tuesday showed investor confidence fell significantly more than expected this month.

The ZEW institute's closely-watched economic expectations index fell to 3.6 points, down sharply from 19.2 points in August.

But the Frankfurt stock market was up in mid-afternoon deals.

Support has come from the European Central Bank's decision last week to cut rates for the second time this year, according to analysts.

The Bank of England will also hold a policy meeting on Thursday but is widely expected to maintain its key interest rate at 5.0 percent.

Earlier, Tokyo closed down one percent as a strong yen weighed on Japanese exporters.

- Key figures around 1235 GMT -

New York - Dow: UP 0.4 percent at 41,779.85 points

New York - S&P 500: UP 0.4 percent at 5,654.35

New York - Nasdaq Composite: UP 0.6 percent at 17,702.95

London - FTSE 100: UP 0.4 percent at 8,309.86

Paris - CAC 40: UP 0.5 percent at 7,487.42

Frankfurt - DAX: UP 0.5 percent at 18,726.08

Tokyo - Nikkei 225: DOWN 1.0 percent at 36,203.22 (close)

Hong Kong - Hang Seng Index: UP 1.4 percent at 17,660.02 (close)

Shanghai - Composite: Closed for a holiday

Euro/dollar: DOWN at $1.1118 from $1.1131 on Monday

Pound/dollar: DOWN at $1.3164 from $1.3216

Dollar/yen: UP at 141.76 yen from 140.63 yen

Euro/pound: UP at 84.47 pence from 84.22 pence

West Texas Intermediate: UP 1.3 percent at $71.03 per barrel

Brent North Sea Crude: UP 0.9 percent at $73.39 per barrel

Nogueira--PC