NEW YORK (CNNMoney.com) -- "The heat on U.S. mortgage lenders and servicers was turned up a few degrees this week when the country's chief bank regulator publicly proposed that they permanently freeze interest rates on subprime adjustable-rate mortgages (ARMs) for many homeowners.

      "Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it," Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor's conference.

      ARMs often have a low introductory interest rate for two or three years and then reset to much higher levels.

      Roughly 1.3 million subprime ARMs are due for a rate reset between now and the end of 2008, according to data from First American Loan Performance.

      Bair proposed that servicers convert only those ARMs that haven't reset yet and only for borrowers who are current in their payments and occupy their homes. Loans taken out by speculators who don't live in the homes they bought would not qualify for the automatic conversion.

      Consumer advocates have also been calling on lenders and servicers to modify subprime mortgages to make the payments affordable for homeowners who would struggle to keep the house once their rates reset. But rate reductions, while they do happen in some cases, are far from widespread, they say.

      "We can't just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs," Bair said, citing a recent Moody's survey, which found that less than 1 percent of problem subprime ARMs were being restructured.

      "[Bair's recommendation] is exactly what's needed," said Michael Shea, executive director of ACORN Housing, which has offices around the country where counselors have been working with troubled homeowners to renegotiate their subprime mortgages with servicers.

      Mortgage servicers - those that administer and collect payments on the loans - may be restricted by the terms of their pool servicing agreements (PSAs), which are their contracts with the investors who own the loans being serviced. Those contracts may specify when and how many loans may be modified.

      The Bottom Line:  How far will this fallout spread?

      "We're in a world of triple digit oil prices for the foreseeable future," Rubin said during a speech to investors here.

      Rubin said oil exports from OPEC countries, Russia and Mexico will likely decline by about 3 million barrels per day over the next five years. The biggest drop, he expects, will come from Mexico, a key U.S. supplier.

      "Of the 3 million barrels, we're probably talking about 2 million barrels are going to come directly out of U.S. supplies," he said.

      Rubin expects Mexican oil imports to the U.S. will dry up by about 2012. Some of that decline will be made up by imports from other parts of the world, but the lions' share -- nearly a third of all U.S. oil imports -- will come from Canadian oil sands, he predicted.

      But replacing relatively easy-to-refine liquid crude with petroleum from oil sands is certain to increase costs, he said. By the end of the decade, Canadian oil sands are likely to represent the world's largest source of new oil supplies, he said.

      "We're basically replacing low-cost oil with high-cost oil," he said.

      Looking ahead, Rubin expects crude oil prices to average as much as $90 a barrel next year, rising to around $100 by the end of 2008. That would represent an increase of nearly 25 percent over Tuesday's settlement price of $80.05 a barrel for light, sweet crude on the New York Mercantile Exchange.

      Countries around the world are stockpiling Tamiflu in the belief it will help curb any future outbreak of H5N1 avian flu among humans.

      Tamiflu, whose lab name is oseltamivir, is not a cure for flu but can ease its symptoms, thus aiding vulnerable patients such as the elderly, and reduce the time of illness, thus easing the burden on caregivers.

      Scientists led by Jerker Fick, a chemist at Umea University, tested the survivability of the Tamiflu molecule in water drawn from three phases in a typical sewage system.

      The first was raw sewage water; the second was water that had been filtered and treated with chemicals; the third was water from "activated sludge," in which microbes are used to digest waste material.

      Tamiflu's active ingredient survived all three processes, which means that it is released in the waste water leaving the plant.

      The finding is important because of the risk that Tamiflu, if overprescribed, could end up in the wild in concentrations high enough to let H5N1 adapt to this key drug, the authors say.

      Flu viruses are common among waterfowl, especially dabbling ducks such as mallards which often forage for food near sewage outlets.

      "The biggest threat is that resistance will become common among low pathogenic influenza viruses carried by wild ducks," said co-author Bjoern Olsen, professor of infectious diseases at the University of Uppsala and University of Kalmar.

      These avian viruses could then recombinate with ordinary human flu viruses, creating new strains that are resistant to Tamiflu, he said..."

      WASHINGTON (AP) -- "An index that forecasts near-term home sales fell in August to a record low as would-be homebuyers had difficulty getting mortgages. Economists said the housing market's woes show no sign of improving soon.

      The National Association of Realtors said Tuesday its seasonally adjusted index of pending sales for existing homes fell 6.5 percent from July and 21.5 percent from a year ago.

      The pending home sales index has done a farily good job of predicting sales levels over the following two months said Joshua Shapiro, chief U.S. economist with MFR Inc. in New York.

      Shapiro and other analysts expect prices to fall further before home sales rebound. Developers are already making big price cuts to move unsold new homes, but existing homeowners are more reluctant to do so.

      "We haven't reached bottom yet," Shapiro said.

      August's reading of 85.5 was below analysts' expectations and the lowest ever for the index, which started in January 2001. An index reading of 100 is equal to the average level of sales activity in 2001.

      With defaults rising among borrowers with weak credit, lenders in August backed off from all but the safest mortgages.

      The problems, experts say, were seen especially in expensive areas where borrowers need to take out "jumbo" home loans above $417,000 that can't be sold to government-sponsored mortgage companies Fannie Mae and Freddie Mac

      In late August, the gap in mortgage rates between jumbo loans and "conforming" loans below the $417,000 limit widened to 0.93 percentage points, up from a typical level of 0.2 percentage points, according to financial publisher HSH Associates.

      That difference makes it harder for prospective buyers -- particularly in the pricey Northeast and West Coast markets -- to afford more expensive homes.

      "This is probably the most challenging credit market environment that's faced the housing market in 10 years," said Keith Gumbinger, vice president of HSH.

      As of last week, the gap had narrowed to a difference of 0.76 percentage points, with 30-year fixed rate jumbo home loans nationwide averaging 7.22 percent and conforming loans averaging 6.46 percent, according to HSH's weekly survey.

      While that's an improvement, Gumbinger said, it could take months for the situation to improve.

      In some areas, up to 30 percent of signed contracts fell through in August, said Lawrence Yun, senior economist at the real estate trade group.

      "Some creditworthy people are trying to buy homes but can't," Yun said in a prepared statement.

      The Realtors' index is based on a sample representing about 20 percent of existing home sales nationwide.

      Last week the trade group said that sales of existing single-family homes dropped by 4.3 percent in August to the lowest point in five years. Sales dropped to 5.5 million units that month, the slowest pace since August 2002..."

      The Bottom Line:  Beginning of the end?  Or merely the end of the beginning?

      The changes are worrying, said Dr. Yoshihiro Kawaoka of the University of Wisconsin-Madison.

      "We have identified a specific change that could make bird flu grow in the upper respiratory tract of humans," said Kawaoka, who led the study.

      "The viruses that are circulating in Africa and Europe are the ones closest to becoming a human virus," Kawaoka said.

      Recent samples of virus taken from birds in Africa and Europe all carry the mutation, Kawaoka and colleagues report in the Public Library of Science journal PLoS Pathogens.

      "I don't like to scare the public, because they cannot do very much. But at the same time it is important to the scientific community to understand what is happening," Kawaoka said in a telephone interview.

      The H5N1 avian flu virus, which mostly infects birds, has since 2003 infected 329 people in 12 countries, killing 201 of them. It very rarely passes from one person to another, but if it acquires the ability to do so easily, it likely will cause a global epidemic.

      All flu viruses evolve constantly and scientists have some ideas about what mutations are needed to change a virus from one that infects birds easily to one more comfortable in humans.

      Birds usually have a body temperature of 106 degrees F, and humans are 98.6 degrees F usually. The human nose and throat, where flu viruses usually enter, is usually around 91.4 degrees F.

      "So usually the bird flu doesn't grow well in the nose or throat of humans," Kawaoka said. This particular mutation allows H5N1 to live well in the cooler temperatures of the human upper respiratory tract.

      H5N1 caused its first mass die-off among wild waterfowl in 2005 at Qinghai Lake in central China, where hundreds of thousands of migratory birds congregate..."

More:

Bird flu virus mutating into human-unfriendly form

      FRANKFURT (iht.com) - "The chief political spokesman for the euro has added his voice to demands for the United States to make a greater effort to curb the dollar's strong fall - presaging tense times at the Group of 7 meeting this month in Washington.

      Jean-Claude Juncker, who heads the group of finance ministers from the 13-nation euro zone, criticized the perceived indifference in Washington toward U.S. policies - including trade and budget deficits - that most economists believe are contributing to the intense downward pressure on the dollar.

      "Europe cannot be the area of the world's economy that will bear the consequences of others' inaction," Juncker said late Monday, Reuters reported.

      The statement from Juncker, who generally avoids speaking about exchange rates, represented the strongest evidence to date that European discomfort with the euro was spreading beyond France, where complaints about the euro's strength have increased since the election of President Nicolas Sarkozy.

      Juncker's remarks helped break an eight-day streak of records for the euro, which peaked at nearly $1.43 late Monday in New York, but closed Tuesday at $1.415.

      Nevertheless, there is rising frustration in Europe about the lack of effective tools for slowing the euro's appreciation, which could eventually hamper economic growth by making European exports - a vital ingredient in the current recovery - more expensive to customers outside the euro zone.

      But the European Central Bank, focused on inflation risks, appeared intent on maintaining a course for higher interest rates when it meets on Thursday. That will offer little relief to the euro - and may even accelerate its rise.

      Protestations to the contrary, U.S. officials seem content to let the dollar decline and there is little prospect of an agreement to the contrary when the G-7 finance ministers and central bankers meet in Washington on Oct. 19.

      "The Europeans are having a one-way conversation with themselves," said Stephen Jen, head of currency research at Morgan Stanley in London. "And really, only the European politicians, not even the central bankers."

      Juncker, who is also prime minister and finance minister of Luxembourg, cited "global imbalances" as his main concern, a reference to last year's $850 billion U.S. current account deficit, a broad measure of the trade deficit that includes capital flows. That deficit has put downward pressure on the dollar for years, because of fears that investors might stop providing Americans with the money to continue their import binge.

      "Italian exports are enjoying a boom even with the euro at $1.41, but there's no hiding certain concerns for the global macroeconomic situation," Emma Bonino, Italy's European affairs minister, said Tuesday, Reuters reported.

      Jean-Claude Trichet, president of the European Central Bank, has declined to try to talk the euro down any more than G-7 officials already have.

      On Monday, he said he had "noted with extreme attention" recent statements by U.S. officials that they favor a strong dollar - a slightly stronger version of the formulation that the G-7 settled on at its last meeting earlier this year in Germany, and one that did not impress currency traders then or now.

      The jury is still out on whether the euro-zone countries can hammer out a common position on currency policy when they meet next Monday - especially since Germany, their largest member, has been notably reluctant to wade into the matter.

      The Bottom Line:  Can anyone say "botched"?

      But a successful test of a missile defense program completed last week is giving military leaders more confidence that an airborne attack from Iran can be thwarted — if the United States is able to convince Europe to go along with the plans to build an anti-missile system there against strong Russian opposition.

      "Most of the intelligence experts predict that sometime before 2015, or in that time frame, the Iranians will have developed the capabilities to threaten the United States, from a missile technology perspective, "Lt. Gen. Henry Obering, chief of the U.S. missile defense program, said Tuesday in a Pentagon interview with FOX News. Of concern Obering said is Iran's ability to take shorter range technology and improving it to longer and longer ranges.

      Growing international political tension with Iran over its nuclear program and its role in orchestrating insurgent attacks in Iraq has given military officials here reason to step up their efforts in developing a workable missile defense system.

      Right now, the administration is working on a plan to build a missile defense system to protect against Iranian weapons in friendly host countries in Europe. But those plans have been loudly criticized by Russia — which thinks the system could be used to attack their own missiles

      Additionally, U.S. lawmakers have stripped $85 million from the program in their consideration of the Defense Authorization bill. Prior to its passage in the Senate Monday, lawmakers said there should be an approval from the host countries, including Poland and the Czech Republic, before that money slated for construction is authorized.

      That sounds just fine to the League of the South, a conservative group that refuses to give up on Southern independence.

      "We believe that an independent South, or Hawaii, Alaska, or Vermont would be better able to serve the interest of everybody, regardless of race or ethnicity," said Michael Hill of Killen, Ala., president of the League of the South.

      Separated by hundreds of miles and divergent political philosophies, the Middlebury Institute and the League of the South are hosting a two-day Secessionist Convention starting Wednesday in Chattanooga.

      They expect to attract supporters from California, Alaska and Hawaii, inviting anyone who wants to dissolve the Union so states can save themselves from an overbearing federal government.

      If allowed to go their own way, New Englanders "probably would allow abortion and have gun control," Hill said, while Southerners "would probably crack down on illegal immigration harder than it is being now."

      The U.S. Constitution does not explicitly prohibit secession, but few people think it is politically viable.

      Vermont, one of the nation's most liberal states, has become a hotbed for liberal secessionists, a fringe movement that gained new traction because of the Iraq war, rising oil prices and the formation of several pro-secession groups.

      Thomas Naylor, the founder of one of those groups, the Second Vermont Republic, said the friendly relationship with the League of the South doesn't mean everyone shares all the same beliefs.

      But Naylor, a retired Duke University professor, said the League of the South shares his group's opposition to the federal government and the need to pursue secession.

      "It doesn't matter if our next president is Condoleeza (Rice) or Hillary (Clinton), it is going to be grim," said Naylor, adding that there are secessionist movements in more than 25 states, including Hawaii, Alaska, New Hampshire, South Carolina and Texas.

      The Middlebury Institute, based in Cold Spring, N.Y., was started in 2005. Its followers, disillusioned by the Iraq war and federal imperialism, share the idea of states becoming independent republics. They contend their movement is growing.

      The first North American Separatist Convention was held last fall in Vermont, which, unlike most Southern states, supports civil unions. Voters there elected a socialist to the U.S. Senate..."

      NEW YORK (Reuters) - "Global volumes in credit derivatives grew 32 percent in the first half of 2007, and are up 75 percent on the year, the International Swaps and Derivatives Association said on Wednesday.

      Credit derivatives volumes surged to $45.46 trillion, from $34.42 trillion at the end of 2006, ISDA said. Interest rate derivatives also grew 21 percent in the same period to $347.09 trillion, from $285.73 trillion, with volumes increasing 38 percent on the year.

      "We expect this strong volume to continue over the 2007 second half, as privately negotiated derivatives have provided liquidity and functioned efficiently through the recent market volatility," Robert Pickel, chief executive officer of ISDA, said in a release.

      Over-the-counter derivatives are privately negotiated contracts and are not traded on exchanges.

      Volumes in equity derivatives also grew 39 percent in the first half of the year, and are up 57 percent over the past year, to $10.01 trillion, ISDA said. Volumes in the securities were $7.18 trillion at year end..."

      The Bottom Line:  This derivatives bubble is starting to make some funky noises.

      Washington (MSNBC) - "It has been said before: from any standpoint, Iran is among the most dangerous countries on the face of the earth. Now, in the October 8 edition of The New Yorker, Seymour Hersh reports that the Defense Department is preparing plans for a bombing campaign, principally targeting Revolutionary Guard Corps facilities. The article is a bit breathless and hyperbolic, and not surprisingly, it has generated some hysteria about a potential war with Iran. Nevertheless, Hersh isn’t the only one thinking about a strike on Iran.

      Most people outside the Pentagon don’t realize that the Defense Department makes plans for every conceivable national security contingency — and quite a few that are almost inconceivable. And by law these plans are reviewed and re-certified every year. There are plans to defend the island of Taiwan if China attacks it. There are plans to attack North Korea in a wide variety of scenarios. What happens if Russia attacks Western Europe? Well, we have a plan for that.

      So, it should come as no surprise that we have plans for Iran too..."

      LONDON (Reuters) - "Financial markets could face wild swings and the dollar may fall further into uncharted territory in the fourth quarter as investors eye more U.S. interest rate cuts after the credit squeeze that started in August.

      Emerging and commodity markets, and high-yielding commodity-linked currencies, may offer a silver lining, however, as the resilience of some economies helps the world to weather a storm triggered by a fallout in U.S. subprime mortgages.

      Financial markets began the July-September quarter with a rosy picture for the global economy, which was enjoying the best growth in three decades. World stocks hit a lifetime high in July and other risky assets rallied broadly.

      But a downturn in the U.S. housing market has raised concerns about the health of banks who might have had exposure to bad loans. This has pushed up wholesale funding costs and threatened to seize up the entire financial system.

      World stocks, as measured by MSCI, fell more than 10 percent by mid-August from the July record high, while benchmark U.S. yields hit their lowest since January 2006. Volatility shot up to a 5-year high.

      The market upheavals persuaded the Federal Reserve to follow up its surprise cut in the discount rate in August with a reduction in the benchmark and discount rates in September.

      The Bottom Line:  The banks are hurting something fierce.

      Beijing (wsj.com) - "Rising prices and surging demand for the crops that supply half of the world's calories are producing the biggest changes in global food markets in 30 years, altering the economic landscape for everyone from consumers and farmers to corporate giants and the world's poor.

      "The days of cheap grain are gone," says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.

      This year the prices of Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.

      In the past, such increases have been caused by temporary supply disruptions. Following a poor harvest, farmers would rush to capitalize on higher crop prices by planting more of that crop the next season, sending prices back down. But the current rally, which started a year ago in the corn-futures trading pit at the Chicago Board of Trade, is different.

      Not only have prices remained high, but the rally has swept up other commodities such as barley, sorghum, eggs, cheese, oats, rice, peas, sunflower and lentils. In Georgia, the nation's No. 1 poultry-producing state, slaughterhouses are charging a record wholesale price for three-pound chickens, up 15% from a year ago.

      What's changed is that powerful new sources of demand are emerging. In addition to U.S. government incentives that encourage businesses to turn corn and soybeans into motor fuel, the growing economies of Asia and Latin America are enabling hundreds of millions of people to spend more on food. A growing middle class in these regions is eating more meat and milk, which in turn is increasing demand for grain to feed livestock. In the U.S., a beef cow has to eat roughly six pounds of grain to put on a pound of weight, and a hog about four pounds.

      The reversal of a long-term trend toward lower grain prices could have profound effects on the world's ability to feed its poor. Global grain stockpiles are being drawn down to their tightest levels in three decades, leaving the world vulnerable to shocks brought on by bad harvests. And it's far from clear how much more land could be brought into production or to what extent advances in biotechnology might increase crop yields in the future.

      American families, which spend 9.9% of their disposable income on food, are facing the fastest-rising food prices in 17 years. The consumer's cost for everything from yogurt and popcorn to breakfast cereal and fast-food french fries is climbing. In U.S. cities last month, the average retail price of a pound loaf of whole-wheat bread was up 24% from a year ago, according to the Bureau of Labor Statistics. Whole milk hit $3.807 a gallon, up 26%.

      Similar increases are showing up abroad. Italian shoppers are protesting soaring pasta prices, and Mexican authorities have capped the price of corn tortillas. Pakistan is curbing wheat exports to counter rising food-price inflation while Russian authorities, worried about rising bread prices, are considering a similar clampdown.

      Food companies are struggling to figure out how to pass on higher costs to supermarkets and restaurant chains, which have gotten bigger and thus gained clout since the last prolonged rise in food prices in the 1970s.

      "We're in uncharted territory," says Christopher Fraleigh, chief executive of the food and beverage division of Sara Lee Corp., which earlier this month raised its bread prices 5%.

      The biggest winner is the U.S. Farm Belt, which is primed for an unusually long expansion, even as a nationwide housing slump damps the broader economy. The Agriculture Department expects U.S. net farm income to soar 48% this year to a record $87.1 billion.

      Iran (jpost.com) -- "Iran threatened Monday to attack some 170 American targets in the Middle East and around the world if it is attacked by Israel or the US, Israel Radio reported.

      A high-ranking officer from the country's Revolutionary Guards told the force's official journal, The Guards, that Teheran succeeded, after extended and comprehensive work, to identify hundreds of strategic American targets in the Middle East and around the world.

      The Revolutionary Guards' Ground Forces Command is able to easily kill American nationals staying in the Middle East. "Several years ago they [Americans] were far away from us by thousands of kilometers. Now they are so close we can touch them," the Iranian general said.

      On Sunday former US ambassador to the United Nations John Bolton told Tory delegates in Britain that efforts by the UK and the EU to negotiate with Iran had failed and that he saw no alternative to a pre-emptive strike on suspected nuclear facilities in the country..."

      NEW YORK (Bloomberg) -- "Unemployment in the U.S. probably rose to a one-year high in September and manufacturing slowed for a third month as the housing recession reverberated through the economy, economists said before reports this week.

      The jobless rate rose to 4.7 percent even as hiring rebounded, according to the median forecast in a Bloomberg News survey of economists before an Oct. 5 government report. Industry data tomorrow is forecast to show factories expanded at the weakest pace in six months.

      Fallout from rising borrowing costs and declining home prices will hit the economy in full force in the fourth quarter as consumer spending fades, economists said. Waning demand may in turn prompt companies to scale back hiring and investment.

      ``As home prices continue to fall, consumers will spend less,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. ``Adding to consumer gloom, the labor market is starting to show signs of weakness.''

      The unemployment rate is projected to increase from 4.6 percent in August. The rate reached a five-year low of 4.4 percent in March and October.

      Employers probably added 97,500 workers to payrolls this month following a 4,000 drop in August that marked the first decline in four years, the Labor Department's report is also projected to show.

      The seeming improvement in hiring will reflect a rebound in government payrolls after three consecutive decreases, economists said. Changes in the timing of summer holidays probably made it difficult for the Labor Department to count the number of teachers hired for the new school year.

`Timing Issue'

      ``This was only a timing issue and there will be either a big upward revision to August and/or a smart rebound in teaching jobs in September,'' said Steven Wood, president of Insight Economics LLC in Danville, California.

      The Institute for Supply Management's factory index fell to 52.5, a six-month low, from 52.9 in August, the Tempe, Arizona- based group may report tomorrow. A reading greater than 50 signals expansion in manufacturing, which accounts for about 12 percent of gross domestic product.

      Applied Micro Circuits Corp., which produces components for communications-equipment makers such as Cisco Systems Inc., plans to cut 4 percent of jobs through fiscal 2008, the Sunnyvale, California-based company said last week.

      A report on Oct. 4 from the Commerce Department may show factory orders fell 2.6 percent in August after a 3.7 percent gain in July, the Bloomberg survey showed.

Auto Sales

      The auto industry will probably be a source of weakness in orders and production in the second half of the year as sales cool following an August surge, economists said.

      Purchases of cars and light trucks probably fell to a seasonally adjusted annual rate of 15.8 million in September, from a 16.3 million pace last month, based on the median estimate of economists surveyed by Bloomberg. Auto sales figures will be released Oct. 2.

      Service industries may also start to feel the pinch from a more hesitant consumer. A second report from the Institute for Supply Management may show banks, builders, retailers and other service industries expanded last month at the slowest pace in six months. The group's report is scheduled for Oct. 3.

      Economists say headwinds for the consumer are likely to grow stronger. A cooling job market and a jump in defaults among subprime borrowers have led banks to raise borrowing rates and made it more difficult to get loans. Home-price declines also mean fewer owners can tap into home equity loans..."

      The Bottom Line:  All of the signs point down the darker path.

      LANSING, Mich. (MSNBC) - "Michigan's state government partially shut down early Monday as the new fiscal year began with no budget deal in place to plug a $1.75 billion deficit.

      The Senate voted to raise the state's income tax from 3.9 percent to 4.35 percent, a key step toward implementing a budget deal, hours after the measure passed the House. It now heads to Democratic Gov. Jennifer Granholm, who is expected to sign it.

      Granholm was waiting for the income tax increase and a bill placing the state's 6 percent sales tax on a wide range of services before she would sign a 30-day continuation budget that would keep government running.

      While the House earlier passed the bill expanding the sales tax, the Senate had not voted on the measure.

      The House and Senate also approve a measure that would change the way some teacher and state worker health benefits are determined.

      In one of the first signs a shutdown was looming, campers were asked to leave some Michigan state parks Sunday night. Some highway rest areas closed and some state troopers did not start their overnight shifts.

      Services that protect public health and safety, including prisons and state police, kept running.

      Without a budget deal in place, 35,000 of the state's roughly 53,000 workers were expected to be barred from going to work Monday morning..."

      Yemen (CNN) -- "A volcano erupted on a small island off the coast of Yemen Sunday evening, belching soot and lava into the air.

      A NATO fleet en route to the Suez Canal witnessed the eruption at Jazirt Atta-Ir and a Canadian naval vessel has joined the hunt for missing in the area, according to the Canadian Forces Web site.

      Yemen is located at the southern tip of the Arabian Peninsula.

      "HMCS Toronto is currently conducting a search-and-rescue operation, at the request of the Yemen coast guard, to locate nine people believed to be at sea," a statement posted on the Web site for National Defence and Canadian Forces said.

      The island of Jazirt Atta-Ir is located about 85 miles (140 kilometers) from Yemen in the Red Sea.

      The Yemeni news agency SABA confirmed the eruption and said a military garrison on the island is being evacuated. According to The Associated Press, it wasn't clear how many people were stationed on the island, which is used for naval control and observation because large cargo ships pass nearby.

      Navy spokesman Ken Allan told the AP that a NATO fleet just outside the territorial waters of the island reported seeing a "catastrophic volcanic eruption" at 7 p.m. local time (1600 GMT).