* Shares rebound, then slip on Israeli-Palestinian cease-fire news
* Dollar extends gain against yen after U.S. housing data
* Bond prices slip on housing starts data, fiscal cliff hopes
By Herbert Lash
NEW YORK, Nov 20 World shares rebounded and oil prices fell on Tuesday on news of a possible Egyptian-brokered cease-fire in the Gaza conflict, but comments by Federal Reserve Chairman Ben Bernanke about the potential impact of the U.S. "fiscal cliff" rattled investors, causing Wall Street to close flat.
World equity markets turned positive after a Hamas official said a cease-fire was expected to start at midnight, although Israel later said there was still no deal to end a week of fighting around the Gaza Strip.
Wall Street moved in and out of negative territory, pulled lower by comments from Bernanke, who said the U.S. economy faced a series of "headwinds." He cited damage to the U.S. housing sector and mortgage markets, and a sharp tightening in credit.
In comments before the Economic Club of New York, Bernanke said the Fed does not have the tools to offset a potential recession if politicians fail to strike a deal to prevent a fiscal shortfall of some $600 billion.
"In the short run, we're hostage to the 'fiscal cliff.' I think (Bernanke's) got to be really, really fearful that Washington doesn't get its act together and that creates stresses on the financial system," said Dan Veru, chief investment officer of Palisade Capital Management in Fort Lee, New Jersey.
The Dow Jones industrial average closed down 7.45 points, or 0.06 percent, at 12,788.51. The Standard & Poor's 500 Index ended up 0.92 point, or 0.07 percent, at 1,387.81. The Nasdaq Composite Index closed up 0.61 point, or 0.02 percent, at 2,916.68.
U.S. stocks earlier had snapped their best two-day run in nearly four months, a rally that had pushed the benchmark S&P 500 index up more than 2 percent since Friday over optimism a deal could be reached to stave off a U.S. budget crisis.
Hewlett-Packard Co tumbled 11.95 percent to $11.71 after the company swung to a fourth-quarter loss and took an $8.8 billion charge related to its acquisition of software firm Autonomy, citing "serious accounting improprieties."
Shares of the computer and printer maker were the biggest drag on the Dow and third-biggest on the S&P 500.
Investors also squared positions before the Thanksgiving holiday on Thursday and long weekend.
"Investors right now are looking for signs coming out of Cairo that there might be a brokered truce over the Middle East," said Fred Dickson, chief market strategist at The Davidson Cos in Lake Oswego, Oregon.
"We're rolling into a holiday weekend, tomorrow's going to be a pre-holiday day, we're looking for the markets to slow down," he said.
Growing speculation that euro zone finance ministers will agree to release aid to debt-laden Greece reduced demand for safe-haven assets such as German bonds and bolstered the appetite for European equities.
Moody's announcement late on Monday of a cut in France's credit rating initially sent European shares lower.
While France's downgrade had been expected and was largely priced in, analysts said the previous session's big gains, when the FTSEurofirst 300 posted its biggest daily rise in 10 weeks, led some to take profits.
The index rose 0.27 percent to close at 1,094.46, while MSCI's all-country world equity index rose 0.05 percent at 323.94.
The Gaza conflict had supported crude oil prices over the past week and added to worries in the equity market about the U.S. "fiscal cliff" and the festering euro zone debt crisis.
"Yesterday's big rally was all about fears of a wider conflict stemming from Israel and Gaza, so when the truce was announced it's not surprising we've seen prices come right off," said Andy Lebow, vice president at Jefferies Bache in New York.
The dollar extended gains versus the yen after U.S. housing starts data suggested the housing market recovery was gathering steam, even though permits for future construction fell.
The dollar last traded at 81.68 yen, up 0.34 percent on the day. The euro rose as high as $1.2828 and last traded 0.05 percent higher at $1.2818, according to Reuters data.
Crude oil prices fell below $110 a barrel on expectations of a cease-fire.
Brent crude fell $1.87 to settle at $109.83 per barrel. U.S. crude settled down $2.53 to $86.75 a barrel.
U.S. Treasury debt prices slipped for a second day as the housing data pointed to an improving market and as investors took more faith that lawmakers in Washington will reach a deal to avert a budget crisis.
Benchmark 10-year Treasuries were down 15/32 in price to yield 1.6625 percent.
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