Wall Street falls on fiscal cliff setback

NEW YORK (Reuters) - U.S. stocks finished lower on Friday after a Republican plan to avoid the "fiscal cliff" failed to gain sufficient support on Thursday night, draining hopes that a deal would be reached before 2013.

Still, stocks managed to rebound from the day's lows near the end of the session, and for the week, major averages still ended higher, with the S&P 500 gaining 1.2 percent.

Trading was volatile as confidence eroded in the prospect of a deal out of Washington, and in part due to quarterly expiration of options and futures contracts. The CBOE Volatility Index <.vix> or VIX, the market's favored anxiety measure, finished below its high of the day.

Republican House Speaker John Boehner failed to garner enough votes from even his own party to pass his "Plan B" tax bill late on Thursday. It was the latest setback in negotiations to avoid $600 billion in tax hikes and spending cuts that some say could tip the U.S. economy into recession.

"The failure with Plan B was disappointing, if not terribly surprising, but now there's a real lack of clarity about what will happen, and markets hate that," said Mike Hennessy, managing director of investments for Morgan Creek in Chapel Hill, North Carolina.

Herbalife dropped for an eighth straight session. Investor Bill Ackman recently ramped up his campaign against the company. The company skidded 19 percent to $27.27 and has lost more than 35 percent this week.

Plan B, which called for tax increases on those who earn $1 million or more a year, was not going to pass the Democratic-led Senate or win acceptance from the White House anyway. But it exposed the reality that it will be difficult to get Republican support for the more expansive tax increases that President Barack Obama has urged.

Still, the declines of less than 1 percent in the three major U.S. stock indexes suggest that investors do not believe the economy will be unduly damaged by the absence of a deal, said Mark Lehmann, president of JMP Securities, in San Francisco.

"You could have easily woken up today and seen the market down 300 or 400 points, and everyone would have said, 'That's telling you this is really dire,'" Lehmann said.

"I think if you get into mid-January and (the talks) keep going like this, you get worried, but I don't think we're going to get there."

Banking shares, which outperform during economic expansion and have led the market on signs of progress on resolving the fiscal impasse, led declines. Citigroup Inc fell 1.6 percent to $39.49, while Bank of America slid 1.9 percent to $11.29. The KBW Banks index <.bkx> lost 1.19 percent.

Volatility on Friday was exacerbated in part by "quadruple witching," the quarterly expiration of stock index futures and options, stock options and single stock futures contracts.

About 8.59 billion shares changed hands on major U.S. exchanges, more than the daily average of 6.47 billion daily in 2012, in part due to expiration.

The Dow Jones industrial average <.dji> dropped 120.72 points, or 0.91 percent, to 13,191.00. The Standard & Poor's 500 Index <.spx> fell 13.52 points, or 0.94 percent, to 1,430.17. The Nasdaq Composite Index <.ixic> lost 29.38 points, or 0.96 percent, to 3,021.01.

"Amazingly, this sharp decline today may not actually change the technical picture much - unless the decline gets worse," said Larry McMillan, president of options research firm McMillan Analysis Corp, in a research note.

The day's round of data indicated the economy was surprisingly resilient in November; consumer spending rose by the most in three years and a gauge of business investment jumped.

But separate data showed consumer sentiment slumped in December. The S&P Retail Index <.spxrt> fell 1.2 percent.

U.S.-listed shares of Research in Motion sank 22.7 percent to $10.91 after the Canadian company, known as the BlackBerry maker, reported its first-ever decline in its subscriber numbers on Thursday alongside a new fee structure for its high-margin services segment.

(Additional reporting by Ryan Vlastelica and Leah Schnurr; Editing by Bernadette Baum, Jan Paschal and Nick Zieminski)

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Russia clashes over energy with Belarus, Ukraine, EU

MINSK/MOSCOW (Reuters) – Russia plunged back into the disputes over energy with Ukraine and Belarus that have repeatedly disrupted oil and gas supplies to European Union countries, and it also termed EU energy policy as “uncivilized”.

Russia on Friday denied remarks by Belarussian President Alexander Lukashenko that it had agreed to increase its crude oil supplies to Minsk, vital for the Belarus economy, and said that it still intended to cut them next year.

On Thursday, Russian President Vladimir Putin criticized Ukraine for failing to agree on a deal, in return for cheaper gas, under which it would lease its pipeline network to Moscow and the European Union.

Russia, the world’s top energy producer, supplies over a quarter of Europe‘s gas and oil needs. Ukraine ships around two thirds of Europe’s imports of Siberian gas through pipelines across its territory, while Belarus is mainly responsible for oil deliveries

Clashes over energy pricing and pipeline transit with Ukraine and Belarus have led over the past decade to cuts or halts in Russian oil and gas supplies to Central and Western Europe. These have most often happened over the New Year, when Russia failed to agree on energy supply terms with the two countries.

The European Union has accused the Kremlin of using its energy might as a political tool, while Moscow has argued it wants its neighbors to pay fair prices promptly for energy.

On Friday, Belarussian state news agency BelTA quoted Lukashenko as saying Russia had agreed to increase oil supplies next year to 23 million tonnes (460,000 barrels per day) from 21.5 million this year.

“We have really agreed on the supply … We will get the oil without any issues,” he said.

Moscow was quick to deny the report, insisting it was offering 18.5 million tonnes, an effective cut in supplies.

“As of today, an agreement on supplies to Belarus in 2013 has not been signed,” Russia’s Energy ministry said in a statement. “The Russian side’s offer is supplying 18.5 million tonnes of oil. Supplies in the first quarter of 2013 will be based on the suggested volume.”

Russian oil is crucial for the economy of Belarus and is supplied free of Russia’s normally hefty export duties as Moscow seeks to keep the country within its political orbit.

Belarus has two large oil refineries that process Russian crude and export gasoline and diesel to the West.

The refining business earns vital hard currency, but Moscow has occasionally bridled over supply terms, part of a complex arrangement that also covers pipeline supplies of Russian oil and gas to Europe via Belarussian pipelines.

Belarus, which suffered from a balance-of-payments crisis in 2011, faces a foreign debt repayment crunch next year when about $ 3 billion of its liabilities fall due.

UNCIVILISED DECISION

The stand-off with Belarus comes as Moscow is struggling to reach a deal with Ukraine over gas deliveries. Ukraine’s reluctance to strike a deal on its gas transit system led to the last-minute cancellation of a visit to Moscow by its President Viktor Yanukovich this week.

Although Moscow has regularly been at odds with both neighbors, it has never faced a situation of simultaneous cuts through both countries to Europe.

At the same time tensions between Moscow and the European Union have risen over economic, political and human rights issues.

Putin, in Brussels on Friday for a Russian-EU summit, said it was unacceptable that EU rules were applied retroactively. He was particularly referring to the Third Energy Package of EU legislation to create a single energy market and prevent those that dominate supply from also dominating distribution.

An EU antitrust case against Russia’s gas export monopoly Gazprom as well as EU attempts to diversify its energy suppliers away from Russia and legislation to encourage competition have angered Moscow.

“Of course the EU has the right to take any decisions, but … we are stunned by the fact that this decision is given retroactive force,” Putin told reporters in Brussels.

“It is an absolutely uncivilized decision.”

Russia presented the European Commission with new proposals on the legal status of its gas pipeline infrastructure to accommodate its export projects in Europe, Energy Minister Alexander Novak told reporters.

Russia has been seeking exemptions from EU regulation that would allow it to make full use of pipelines bringing gas to Europe by routes that skirt around Ukraine.

(Additional reporting by Alexei Anishchuk in Brussels; Writing by Dmitry Zhdannikov; Editing by Anthony Barker)

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Douglas wins AP female athlete of the year honors

When Gabby Douglas allowed herself to dream of being the Olympic champion, she imagined having a nice little dinner with family and friends to celebrate. Maybe she'd make an appearance here and there.

"I didn't think it was going to be crazy," Douglas said, laughing. "I love it. But I realized my perspective was going to have to change."

Just a bit.

The teenager has become a worldwide star since winning the Olympic all-around title in London, the first African-American gymnast to claim gymnastics' biggest prize. And now she has earned another honor. Douglas was selected The Associated Press' female athlete of the year, edging out swimmer Missy Franklin in a vote by U.S. editors and news directors that was announced Friday.

"I didn't realize how much of an impact I made," said Douglas, who turns 17 on Dec. 31. "My mom and everyone said, 'You really won't know the full impact until you're 30 or 40 years old.' But it's starting to sink in."

In a year filled with standout performances by female athletes, those of the pint-sized gymnast shined brightest. Douglas received 48 of 157 votes, seven more than Franklin, who won four gold medals and a bronze in London. Serena Williams, who won Wimbledon and the U.S. Open two years after her career was nearly derailed by a series of health problems, was third (24).

Britney Griner, who led Baylor to a 40-0 record and the NCAA title, and skier Lindsey Vonn each got 18 votes. Sprinter Allyson Felix, who won three gold medals in London, and Carli Lloyd, who scored both U.S. goals in the Americans' 2-1 victory over Japan in the gold-medal game, also received votes.

"One of the few years the women's (Athlete of the Year) choices are more compelling than the men's," said Julie Jag, sports editor of the Santa Cruz Sentinel.

Douglas is the fourth gymnast to win one of the AP's annual awards, which began in 1931, and first since Mary Lou Retton in 1984. She also finished 15th in voting for the AP sports story of the year.

Douglas wasn't even in the conversation for the Olympic title at the beginning of the year. That all changed in March when she upstaged reigning world champion and teammate Jordyn Wieber at the American Cup in New York, showing off a new vault, an ungraded uneven bars routine and a dazzling personality that would be a hit on Broadway and Madison Avenue.

She finished a close second to Wieber at the U.S. championships, then beat her two weeks later at the Olympic trials. With each competition, her confidence grew. So did that smile.

By the time the Americans got to London, Douglas had emerged as the most consistent gymnast on what was arguably the best team the U.S. has ever had.

She posted the team's highest score on all but one event in qualifying. She was the only gymnast to compete in all four events during team finals, when the Americans beat the Russians in a rout for their second Olympic title, and first since 1996. Two nights later, Douglas claimed the grandest prize of all, joining Retton, Carly Patterson and Nastia Liukin as what Bela Karolyi likes to call the "Queen of Gymnastics."

But while plenty of other athletes won gold medals in London, none captivated the public quite like Gabby.

Fans ask for hugs in addition to photographs and autographs, and people have left restaurants and cars upon spotting her. She made Barbara Walters' list of "10 Most Fascinating People," and Forbes recently named her one of its "30 Under 30." She has deals with Nike, Kellogg Co. and AT&T, and agent Sheryl Shade said Douglas has drawn interest from companies that don't traditionally partner with Olympians or athletes.

"She touched so many people of all generations, all diversities," Shade said. "It's her smile, it's her youth, it's her excitement for life. ... She transcends sport."

Douglas' story is both heartwarming and inspiring, its message applicable those young or old, male or female, active or couch potato. She was just 14 when she convinced her mother to let her leave their Virginia Beach, Va., home and move to West Des Moines, Iowa, to train with Liang Chow, Shawn Johnson's coach. Though her host parents, Travis and Missy Parton, treated Douglas as if she was their fifth daughter, Douglas was so homesick she considered quitting gymnastics.

She's also been open about her family's financial struggles, hoping she can be a role model for lower income children.

"I want people to think, 'Gabby can do it, I can do it,'" Douglas said. "Set that bar. If you're going through struggles or injuries, don't let it stop you from what you want to accomplish."

The grace she showed under pressure — both on and off the floor — added to her appeal. When some fans criticized the way she wore her hair during the Olympics, Douglas simply laughed it off.

"They can say whatever they want. We all have a voice," she said. "I'm not going to focus on it. I'm not really going to focus on the negative."

Besides, she's having far too much fun.

Her autobiography, "Grace, Gold and Glory," is No. 4 on the New York Times' young adult list. She, Wieber and Fierce Five teammates Aly Raisman and McKayla Maroney recently wrapped up a 40-city gymnastics tour. She met President Barack Obama last month with the rest of the Fierce Five, and left the White House with a souvenir.

"We got a sugar cookie that they were making for the holidays," Douglas said. "I took a picture of it."

Though her busy schedule hasn't left time to train, Douglas insists she still intends to compete through the Rio de Janeiro Olympics in 2016.

No Olympic champion has gone on to compete at the next Summer Games, but Douglas is still a relative newcomer to the elite scene — she'd done all of four international events before the Olympics — and Chow has said she hasn't come close to reaching her full potential. She keeps up with Chow through email and text messages, and plans to return to Iowa after her schedule clears up in the spring.

Of course, plenty of other athletes have said similar things and never made it back to the gym. But Douglas is determined, and she gets giddy just talking about getting a new floor routine.

"I think there's even higher bars to set," she said.

Because while being an Olympic champion may have changed her life, it hasn't changed her.

"I may be meeting cool celebrities and I'm getting amazing opportunities," she said. "But I'm still the same Gabby."

___

AP Projects Editor Brooke Lansdale contributed to this report.

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Goodbye, U.S. Postal Service?

This Christmas could be the Post Office's last, says John Avlon.

STORY HIGHLIGHTS

• The U.S. Postal Service is bleeding money and heading toward insolvency


• John Avlon: Congress can save the postal service in deal on the fiscal cliff


• He says the urgency is clear, let's hope for a Christmas miracle


• Avlon: But be prepared that Washington dysfunction can doom the postal service

Editor's note: John Avlon is a CNN contributor and senior political columnist for Newsweek and The Daily Beast. He is co-editor of the book "Deadline Artists: America's Greatest Newspaper Columns." He is a regular contributor to "Erin Burnett OutFront" and is a member of the OutFront Political Strike Team. For more political analysis, tune in to "Erin Burnett OutFront" at 7 ET weeknights.

(CNN) -- It's the time of year for dashing through the snow to the crowded post office, with arms full of holiday gifts for family and friends.

Not to break the atmosphere of holiday cheer, but this Christmas could be the last for the U.S. Postal Service. It is losing $25 million dollars a day and staring down insolvency -- unless Congress steps in to pass a reform package that reduces its costs.

With just a few days left in the congressional calendar, there is still some small hope for a Christmas miracle -- maybe the Postal Service can be saved as part of a deal on the fiscal cliff. But with even Hurricane Sandy relief stalled, skepticism is growing.

John Avlon

The real question is, what's taken them so long? After all, back in April the Senate passed an imperfect but bipartisan bill by 62-37. It would have saved some $20 billion, cut some 100 distribution centers, and reduced head count by an additional 100,000 through incentives for early retirement, while reducing red tape to encourage entrepreneurialism and keeping Saturday delivery in place for at least another two years. At the time, Sen. Tom Carper of Delaware said, "The situation is not hopeless; the situation is dire. My hope is that our friends over in the U.S. House, given the bipartisan steps we took this week, will feel a sense of urgency."

To which the House might as well have replied, "Not so much."

In August, the Postal Service defaulted for the first time, unable to make a $5.5 billion payment to fund future retirees' health benefits. The headline in Government Executive magazine said it all: "Postal Service defaults, Congress does nothing."

The usual suspects were at fault -- hyperpartisan politics and the ideological arrogance that always makes the perfect the enemy of the good.

House Oversight Committee Chairman Darrell Issa greeted the news of the Senate bill by calling it a "taxpayer-funded bailout." His primary complaint was that the Senate bill did not go far enough. He was not alone -- Postmaster General Patrick Donahoe also expressed disappointment at the scope of the Senate bill, saying that it fell "far short of the Postal Service's plan."

But Issa's alternative couldn't even get to a vote in the Republican-controlled House. And so nothing happened. Even after the USPS defaulted on a second $5.5 billion payment, the response was crickets.

Washington insiders said that action would be taken after the election, when lawmakers would be free to make potentially unpopular decisions. But despite a series of closed-door meetings, nothing has been done.

It's possible that the nearly $20 billion in savings could be part of a fiscal cliff deal. Sen. Joseph Lieberman has suggested that ending Saturday delivery, except for packages, could be part of a compromise that could save big bucks down the road. Another aspect of a savings plan could be suspending the USPS' onerous obligation to fully fund its pension costs upfront, a requirement that would push many businesses into bankruptcy. And last fiscal year, the post office posted a record $15.9 billion loss.

"As the nation creeps toward the 'fiscal cliff,' the U.S. Postal Service is clearly marching toward a financial collapse of its own," says Carper. "The Postal Service's financial crisis is growing worse, not better. It is imperative that Congress get to work on this issue and find a solution immediately. ... Recently key House and Senate leaders on postal reform have had productive discussions on a path forward, and while there may be some differences of opinion in some of the policy approaches needed to save the Postal Service, there is broad agreement that reform needs to happen -- the sooner the better."

The urgency couldn't be clearer -- but even at this yuletide 11th hour, signs of progress are slim to none. If Congress fails to pass a bill, we'll be back to square one in the new year, with the Senate needing to pass a new bill which will then have to be ratified by the House. There is just no rational reason to think that lift will be any easier in the next Congress than in the current lame duck Congress, where our elected officials are supposedly more free to do the right thing, freed from electoral consequences.

So as you crowd your local post office this holiday season, look around and realize that the clock is ticking. The Postal Service is fighting for its life. And Congress seems determined to ignore its cries for help.

"Neither rain nor snow nor sleet nor gloom of night" can stop the U.S. Postal Service from making its appointed rounds -- but congressional division and dysfunction apparently can.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of John Avlon.

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3 charged with murder in Indianapolis house explosion

A man and woman who lived in an Indianapolis house that exploded in November killing two neighbors and damaging scores of homes, have been charged with felony murder and multiple counts of arson for allegedly blowing up the home, prosecutors said.

Monserrate Shirley and Mark Leonard, who lived in the home that exploded, and Leonard's brother, Bob Leonard Jr., were charged on Thursday in connection with the explosion and arrested on Friday, authorities said.

The personal property insurance on the home had been raised recently to $304,000 and photographs and personal financial records removed before the explosion, prosecutors allege.

The three face murder charges in the deaths of neighbors Jennifer and John Longworth and multiple other charges for the injuries to 12 other area residents in the blast and for the 33 neighborhood homes that had to be demolished, Marion County Prosecutor Terry Curry told a news conference.

This was a “thoroughly senseless act” that cost the lives of two young people, Curry said.

Investigators believe a programmable microwave that exploded from the inside out was the source of ignition and valves that regulate natural gas into the home and to a fireplace were removed, allowing gas to build up over hours, Curry said.

Authorities are still working to determine whether others were involved.

The three suspects are expected to appear in court Monday morning.

The blast destroyed five houses including the Longworths' home located next door to Shirley's home in the Richmond Hill subdivision on the city's far south side. The late-night explosion, which was heard from miles away, damaged about 90 more homes and sent residents fleeing, some in their pajamas.

"We have to acknowledge that we are helpless to alleviate the pain and anguish of such innocent victims and their families," Curry said.  "However, what we as a public safety community can do and must do is devote our best efforts to see that justice is served on behalf of those victims."

Officials ordered the demolition of 33 homes of the mostly heavily damaged homes and say the blast caused an estimated $4.4 million in damage.

On Nov. 19, authorities launched a homicide investigation into the blast after city arson investigators, along with agents from the Bureau of Alcohol, Tobacco, Firearms and Explosives, concluded it was not an accident.

Officials said they believed the explosion was intentional and caused by natural gas, but released no other details. Federal authorities are offering a $10,000 reward for information in the case.

Authorities told Fox 59 in Indianapolis that the home was filled with natural gas for six to eight hours prior to the explosion.

Attorney Randall Cables has said Shirley and Leonard were away at a southern Indiana casino when the explosion happened. Shirley's daughter was staying with a friend, and the family's cat was being boarded.

Shirley has said Leonard had replaced the thermostat and that the furnace was working. Cable has said the daughter told her mother she had smelled an odd odor in recent weeks, but they hadn't reported it.

John Longworth was an electronics expert and his wife was a second-grade teacher.

Curry also said that Shirley and Leonard attempted to cause damage to their home the weekend prior to the explosion but their attempt failed. Curry stated their actions the weekend before mirrored the actions taken the weekend of Nov. 10, including going to a casino for the night, boarding their pet cat and leaving their daughter at a babysitter’s house.

Associated Press, Fox 59 and Reuters contributed

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Italy PM Monti resigns, elections likely in February

ROME (Reuters) - Italian Prime Minister Mario Monti tendered his resignation to the president on Friday after 13 months in office, opening the way to a highly uncertain national election in February.

The former European commissioner, appointed to lead an unelected government to save Italy from financial crisis a year ago, has kept his own political plans a closely guarded secret but he has faced growing pressure to seek a second term.

President Giorgio Napolitano is expected to dissolve parliament in the next few days and has already indicated that the most likely date for the election is February 24.

In an unexpected move, Napolitano said he would hold consultations with political leaders from all the main parties on Saturday to discuss the next steps. In the meantime Monti will continue in a caretaker capacity.

European leaders including German Chancellor Angela Merkel and European Commission President Jose Manuel Barroso have called for Monti's economic reform agenda to continue but Italy's two main parties have said he should stay out of the race.

Monti, who handed in his resignation during a brief meeting at the presidential palace shortly after parliament approved his government's 2013 budget, will hold a news conference on Sunday at which he is expected clarify his intentions.

Ordinary Italians are weary of repeated tax hikes and spending cuts and opinion polls offer little evidence that they are ready to give Monti a second term. A survey this week showed 61 percent saying he should not stand.

Whether he runs or not, his legacy will loom over an election which will be fought out over the painful measures he has introduced to try to rein in Italy's huge public debt and revive its stagnant economy.

His resignation came a couple of months before the end of his term, after his technocrat government lost the support of Silvio Berlusconi's centre-right People of Freedom (PDL) party in parliament earlier this month.

Speculation is swirling over Monti's next moves. These could include outlining policy recommendations, endorsing a centrist alliance committed to his reform agenda or even standing as a candidate in the election himself.

The centre-left Democratic Party (PD) has held a strong lead in the polls for months but a centrist alliance led by Monti could gain enough support in the Senate to force the PD to seek a coalition deal which could help shape the economic agenda.

BERLUSCONI IN WINGS

Senior figures from the alliance, including both the UDC party, which is close to the Roman Catholic Church, and a new group founded by Ferrari sports car chairman Luca di Montezemolo, have been hoping to gain Monti's backing.

He has not said clearly whether he intends to run, but he has dropped heavy hints he will continue to push a reform agenda that has the backing of both Italy's business community and its European partners.

The PD has promised to stick to the deficit reduction targets Monti has agreed with the European Union and says it will maintain the broad course he has set while putting more emphasis on reviving growth.

Berlusconi's return to the political arena has added to the already considerable uncertainty about the centre-right's intentions and increased the likelihood of a messy and potentially bitter election campaign.

The billionaire media tycoon has fluctuated between attacking the government's "Germano-centric" austerity policies and promising to stand aside if Monti agrees to lead the centre right, but now appears to have settled on an anti-Monti line.

He has pledged to cut taxes and scrap a hated housing tax which Monti imposed. He has also sounded a stridently anti-German line which has at times echoed the tone of the populist 5-Star Movement headed by maverick comic Beppe Grillo.

The PD and the PDL, both of which supported Monti's technocrat government in parliament, have made it clear they would not be happy if he ran against them and there have been foretastes of the kind of attacks he can expect.

Former centre-left prime minister Massimo D'Alema said in an interview last week that it would be "morally questionable" for Monti to run against the PD, which backed all of his reforms and which has pledged to maintain his pledges to European partners.

Berlusconi who has mounted an intensive media campaign in the past few days, echoed that criticism this week, saying Monti risked losing the credibility he has won over the past year and becoming a "little political figure".

(Additional reporting by Gavin Jones, Massimiliano Di Giorgio and Paolo Biondi; Writing by Gavin Jones and James Mackenzie; Editing by Michael Roddy)

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Developers worried about new rules for phone apps

A cellphone game for kids about U.S. geography, "Stack the States," gets rave reviews from parents. Its creator, Dan Russell-Pinson, considered making the 99-cent app better by adding a feature to allow children to play online against one another. But with the Federal Trade Commission issuing more stringent online child privacy rules, he's not even pursuing the idea.

"It would require all kinds of data sharing," said Russell-Pinson, the founder and sole employee of Freecloud Design in Charlotte, N.C. "I would be kind of afraid to do that."

The software industry is bracing for new regulations that it says will stifle creativity and saddle small businesses with legal and technical costs to ensure their cellphone apps don't run afoul of the rules. The changes, which the FTC is expected to approve this week, would update a 14-year-old law prohibiting the collection of personal information from preteens. It raises these questions: What is the value of a child's privacy on the Internet, and who should pay for it?

Businesses said they fear that under the trade commission's proposal, routine transfers of data that pose no threat to a child's safety will be treated the same as the improper gathering of information that can be used to create detailed user profiles that are highly valued by advertisers. Responsible software developers will err on the side of caution and the result will be less kid-friendly content available on the Internet, they said.

The FTC's chairman, Jon Leibowitz, defended the government's approach. "When you are talking about children, you have to give the benefit of the doubt to privacy," he said last week on Capitol Hill.

The cost of the changes to developers just selling educational apps for kids on Apple's iTunes store could be as high as $271 million — nearly 100 times what the FTC has projected for all the businesses it expects to be newly covered, according to the Association for Competitive Technology, a Washington-based trade group that represents small and midsize software development companies. The FTC's estimate is "laughable," said Morgan Reed, the association's executive director.

An outlay of several thousand dollars to design the required privacy policy for an app is small change for larger, established companies. But for the bulk of developers, that's a lot of money. Most have only a few employees and operate on tight profit margins, Reed said.

Russell-Pinson said he can afford the expense now. But two years ago, when he was starting his business, he would have been in a real bind. "I didn't even make $10,000 on my first three apps," he said.

The FTC has imposed steep fines on companies that have violated the current law, the 1998 Children's Online Privacy Protection Act. In a 2011 case, a mobile apps developer, W3 Innovations, paid $50,000 to settle charges it illegally collected and stored the email addresses of preteens that downloaded apps called "Emily's Girl World" and "Emily's Dress Up."

The technological shift from desk-bound personal computers to wireless devices is driving the FTC's push for major revisions to the law, known as COPPA. It was written before an era of cellphones and tablets loaded with apps that can be designed to siphon up a person's precise location and other personal data highly valued by advertisers and data brokers.

The push for tougher online safeguards is supported by parents concerned about the abundance of apps and the easy access kids have to them. But parents can be a first line of defense, said Leticia Barr, a former schoolteacher who runs the website Tech Savvy Mama. Barr also works as a social media consultant to Location Labs, a provider of mobile safety apps to wireless carriers, and she is occasionally paid by other app developers to review their products.

Before Barr allows her two young children to use an app, she tests it thoroughly so she knows whether it can collect data or contains advertising that might be inappropriate for kids. "That's just my personal policy, just as I wouldn't send them over to a stranger's house to play," Barr said.

The FTC's proposed changes prohibit the use of behavioral marketing techniques that target children. The revisions also would expand the definition of personal information to include the location data that comes from a cellphone or tablet, the device's unique identification number and data-tracking files known as "cookies."

As evidence for what it said was the need for updated rules, the FTC announced last week it was investigating an unspecified number of app developers which may have violated the law by gathering information from kids without their parent's consent. The agency examined 400 apps directed at kids that it purchased from Apple's iTunes store and Google's apps store, Google Play. The majority failed to inform parents about the types of data the app could gather and who could access it, the FTC said. The agency did not name the companies or say how many it was investigating.

The co-founder of Launchpad Toys in San Francisco, Andy Russell, said he adheres to the current law and supports more stringent privacy protections for preteens. Russell has eight employees, but his apps business is financed with venture capital and isn't yet profitable. Spending money to ensure he meets the new privacy requirements means it will take him that much longer to get into the black.

"I can't speak for other developers, but I think there are a lot of people out there who would say: 'You know what, that's OK. I'm just going to fold up shop,'" Russell said.

Under the proposed changes, permission from the parent of a preteen must be verifiable. Russell said that requirement alone could pose a major hurdle. What will qualify as proof that the consent is legitimate? A driver's license number? A form that is signed and faxed by a parent?

"Nobody uses a fax machine anymore," Russell said. "Verification is a wonderful thing. But to date there just hasn't been a good way to do so."

The need to balance the impact of regulations against their value to the public has long caused conflict between the private sector and policymakers in Washington. The topic of this debate, kids' privacy, has forced app developers and industry representatives to walk a fine line to avoid being seen as insensitive to an issue parents care deeply about.

The FTC has estimated that 500 existing operators of websites and online services and 125 newly formed businesses would be covered by the rule changes. The overall expense for legal and technical fees to meet the new requirements will be $2.7 million, the agency said. That works out to $9,420 for a new business, and just over $3,000 for an existing one, according to the agency's figures.

But costs for new and existing operators will probably be the same, said the Association for Competitive Technology's Reed. Building the required privacy standards into an app already in the market is usually more expensive that adding those features from the start, he said.

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