Stocks rally loses steam, euro slumps

A shadow of a businessman is casted in front of an electronic board displaying share prices outside a brokerage in Tokyo in this January 25, 2010 file photo.

NEW YORK (Reuters) - Global shares slipped from 17-month highs on Friday as weakness in earnings and a rising dollar stunted long-running rallies, while concerns over Greece's debt burden kept pressure on the euro.

Oil suffered its steepest drop in six weeks as the dollar firmed against the euro and other currencies. Cheaper crude oil weighed on energy shares in the United States and Europe.

The euro posted its worst weekly performance against the dollar since late January as traders waited to see if Greece can secure aid from its fellow euro zone members at a European Union summit next week. Greece has said that it might have to turn to the International Monetary Fund for help.

"The tensions surrounding Greece are escalating. This whole IMF situation has become a game of brinkmanship and the whole uncertainty is undermining the euro," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

In equities, an early boost to bank shares came as British lender Lloyds Banking Group (LLOY.L) said it would return to profit this year after two years of heavy losses, helped by lower bad debts and tight cost controls. Shares of Lloyds jumped 8.2 percent in London, but European stocks closed lower on a late-session selloff in resource-related sectors as commodities prices fell.

The MSCI world equity index .MIWD00000PUS fell 0.5 percent.

In U.S. equities, the Dow Jones industrial average .DJI fell 37.19 points, or 0.35 percent, to 10,741.98. The Standard & Poor's 500 Index .SPX slipped 5.93 points, or 0.51 percent, to 1,159.90 and the Nasdaq Composite Index .IXIC declined 16.87 points, or 0.71 percent, to 2,374.41.

Analysts warned of volatility due to "quadruple witching" -- the expiration of U.S. stock index futures, stock index options, stock options and stock futures.

"Even with a one-year rally of almost historical proportions, investors remain in a very skeptical market," said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.

The number of individual investors who were bullish declined nearly 10 percentage points to 35.4 percent in the latest week, according to a survey by the American Association of Individual Investors. Bearish calls rose 4.6 percentage points to 29.9 percent.

Friday's decline was mostly a technical one after an 11 percent rise in the S&P 500 since February 5, Springer said.

Barclays Capital, the investment banking arm of Barclays Plc, on Thursday predicted equity markets would continue their rally this year, but only after signs of stalling earnings cause a second-quarter correction. The firm increased its 2010 target for the S&P 500 Index to 1,210 from 1,120.

Palm Inc's PALM.O stock plunged 29 percent to $4 a day after it warned that quarterly revenue would fall far below expectations, as tepid demand for its smart phones left wireless carriers with piles of inventory.

"When there are fewer and fewer customers ... the low end of the totem pole gets squeezed out," said Capital Financial's Springer. "That's what happens in a downturn."

A rising dollar and lower oil prices sapped energy stocks -- the S&P Energy Index .GSPE fell about 1 percent.

In Europe, the FTSEurofirst 300 .FTEU3 index of top European shares closed 0.4 percent lower at 1,065.48.

The index earlier touched a 17-month high, boosted by bank stocks UBS (UBSN.VX), Barclays (BARC.L) and Credit Agricole (CAGR.PA), which ended up 1.5 percent to 1.7 percent.

But oil and metal prices took a beating while the dollar rose. Dollar-denominated oil and metals become more expensive for holders of other currencies when the dollar rises.

U.S. light sweet crude oil fell $1.54, or 1.87 percent, to $80.66 per barrel, also pressured after an industry report suggested OPEC exports were rising. Spot gold prices fell $20.10, or 1.79 percent, to $1,105.30 an ounce.

GREECE WORRIES

Concerns over Greece and doubts over whether euro zone states will agree to any support package still hurt sentiment, keeping the euro weak and hampering peripheral debt prices as traders waited for next week's European Union summit.

The euro zone currency fell 0.52 percent against the dollar to $1.3535, near its lowest level in more than two weeks, while increased risk aversion helped flows into the U.S. currency. The dollar .DXY rose 0.63 percent against a basket of major currencies to 80.73.

"I think the market doubts whether next week's summit will produce anything more specific in terms of a plan for Greece," said Chris Turner, head of FX strategy at ING.

Against the Japanese yen, the dollar gained 0.24 percent to 90.49 yen.

Weakness in equities aided sovereign debt, but U.S. Treasury debt prices edged lower in the face of $118 billion in debt next week. Benchmark 10-year note yields rose 0.02 percentage point to 3.70 percent.

(Additional reporting by David Brett and Naomi Tajitsu in London and Rodrigo Campos in New York; Editing by Kenneth Barry)