TOPWRAP 6-CIT rescue deal; mixed U.S. recovery signs

(For more on the financial crisis, click on [nCRISIS])

* CIT board approves $3 bln deal with bondholders -sources

* U.S. recession easing but not yet ended -survey

* German economy likely contracted in Q2 -Bundesbank

* U.S blue chips jump 104 pts; dollar, yen weaker (Updates market moves, adds more analyst comments)

By John Parry

NEW YORK, July 20 (Reuters) - U.S. lender CIT Group Inc (CIT.N) secured a $3 billion rescue from bondholders, sources said, which some saw as a good omen for credit markets, although the U.S. economy is still struggling to emerge from recession.

Meanwhile, across the Atlantic, the pace of the most bruising global economic downturn in decades is slowing, Germany's central bank said.

The CIT news and a small rise in the U.S. index of leading economic indicators helped lift U.S. and European shares, while Asian stocks outside Japan hit their highest level since last September when Wall St investment bank Lehman Brothers collapsed. Hopes of a recovery in corporate earnings in the months ahead also helped. [MKTS/GLOB].

The Dow Jones industrial average bolted more than 1 percent higher to close at 8848 points .DJI.

The dollar hit a six-week low against the euro, as investors waded back into riskier assets and higher-yielding currencies following fairly solid U.S. corporate earnings posted so far this quarter. [ID:nN20400267]. The yen also weakened.

The board of CIT, which lends to nearly one million small and mid-sized businesses, approved a $3 billion deal with bondholders, keeping the struggling lender out of bankruptcy, a source close to the matter said. [ID:nN206604]

The costs to insure CIT's debt against the risk of default fell and the price of its notes jumped in brisk trade on Monday. See [ID:nNYG001575] and [ID:nN20121351]

CIT's shares (CIT.N) nearly doubled in early trade and held most of their gains in the afternoon, up 79 percent to $1.27.

The company was expected to announce later on Monday the agreement to obtain $3 billion of emergency financing, avoiding bankruptcy, a person close to the matter said.

"The stock holders are cheering because (the rescue) is better than a bankruptcy, and the thought is maybe the markets will improve over the next couple of years," said Sean Egan, managing director at Egan-Jones Ratings Co. in Haverford, Pennsylvania.

CREDIT MARKETS SLOWLY HEAL

Yet several analysts and bankers said emergency financing might only delay a CIT bankruptcy filing, in light of skittishness among the New York-based company's customers and its inability to readily tap capital markets.

The central role of private capital to potentially help CIT survive marked an important chapter in the slow healing of lending markets in the now two-year old global financial crisis, some analysts said.

"At this point in the game the government has signaled that 'We are no longer writing the checks'," said William Larkin, portfolio manager with Cabot Money Management in Boston.

"That is an important indication (that) going forward, people will have to come up with their own solutions. It is another sign the administration believes the economy is healthy enough that the market should be able to deal with CIT no matter what happens," Larkin added.

The U.S. government has committed to spending hundreds of billions in stimulus and has bailed out financial firms including insurer AIG (AIG.N), but talks over a federal rescue of CIT collapsed last week, leaving it to strike a rescue deal with its bondholders.

Record low global interest rates and trillions of dollars in stimulus spending appear to be helping the world recover from the worst recession in at least 25 years.

In New York, the Conference Board's index of U.S. leading economic indicators released Monday rose 0.7 percent in June, exceeding economists' consensus forecast for an 0.5 percent rise, adding to the impression that a feeble economic recovery may be taking hold.

RECESSION EASING BUT NOT ENDED

"In a bull mode like this, the market loves these types of numbers and it gets people giddy, but you have to be careful with that, it's really a circular logic," said Joe Saluzzi, co-manager of trading with Themis Trading in Chatham, New Jersey.

"Overall, I don't put much credence into this leading indicator," he said. "My leading indicators -- housing, unemployment and toxic bank assets -- all three are still a disaster."

And a quarterly survey of economists released on Monday suggested the U.S. recession was easing but had probably not yet ended. [ID:nN17480378]

"Industry demand was still declining in the second quarter of 2009, but the breadth of decline had narrowed considerably since late 2008, raising prospects for stabilization in the second half," Sara Johnson, managing director of global macroeconomics for IHS Global Insight, said of the survey by the National Association for Business Economics.

Germany's economy, Europe's largest, likely contracted slightly in the second quarter of this year but probably with a smaller fall in gross domestic product than the first quarter, its central bank said on Monday. [ID:nLAG003605]

Globally, unemployment continues to rise and banks still sit atop bad debt they will have to shed. Despite billions to help financial firms, governments have struggled in some cases to get banks to increase lending to companies and individuals.

China has committed around $585 billion in stimulus spending and has been more successful than others in getting its banks to lend, but recently that has triggered warnings that the lending could be overdone.

The country's top banking regulator on Sunday warned of the risks from surging bank lending, singling out the dangers of unhealthy growth in the property market. [ID:nHKG14130] (Additional reporting by Dena Aubin, Jennifer Ablan, Paritosh Bansal, Michael Erman, Chuck Mikolajczak, Ransdell Pierson, and Jonathan Stempel, editing by Philip Barbara)