"The bottom line: Despite last week's disappointing employment report, the latest ISM and NFIB data suggest momentum is more up than down," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics . "Of course, slightly better does not mean good. The trend still looks weak enough to encourage the Fed to ease again this week."

Also, the Census Bureau reported the U.S. trade deficit increased to $42 billion in July from a downwardly revised $41.9 billion in June. Economists expected the trade deficit to widen to $44 billion.

"July's U.S. trade figures are not as good as they look and it won't be long before the deficit widens more significantly as the global slowdown takes a greater toll on U.S. exports," said Paul Dales, senior U.S. economist at Capital Economics.

Moody's, however, warned it would likely downgrade the U.S.'s government's debt rating to Aa1 from Aaa if budget negotiations during the 2013 congressional legislative session failed to produce specific policies that would produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term.

The FTSE in London pared losses, slipping 0.12%, while the DAX in Germany added 1.09%. The Hong Kong Hang Seng index closed up 0.15% and the Nikkei in Japan finished down 0.7%.

Traders are also looking ahead to the German Constitutional Court's ruling on the legality of the permanent bailout fund Wednesday. The decision will then be followed by a meeting of European finance ministers in Cyprus on Friday for talks about banking supervision and possible extra aid for Spain and Greece.

The benchmark 10-year Treasury fell 12/32 Tuesday, raising the yield to 1.699%, while the greenback dove 0.64%, according to the dollar index.

October crude oil futures edged up 63 cents to settle at $97.17 and December gold futures settled up $3.10 at $1,734.90 an ounce.

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