GLOBAL MARKETS-Euro falls for 3rd day as euro zone fears rise
* Euro zone debt fears hit euro for 3rd day
* European stocks end lower but U.S. stocks edge up
* Oil edges up; Brent erases early losses (Updates prices)
NEW YORK, July 12 (Reuters) - Investors dumped the euro for a third day on Tuesday as moves by officials to stem the European debt crisis failed to allay concerns that the risk was spreading to Italy and Spain.
Euro-priced gold hit a record high as investors spooked by fears of contagion sought safety. Investors are worried the potential effect on the global economy, especially as the U.S. recovery has struggled to pick up speed.
In a bid to keep Italy and Spain from the same fate as Greece, Portugal and Ireland, euro zone finance ministers promised Monday cheaper loans, longer maturities and a more flexible rescue fund. For details, see [ID:nL6E7IB1PQ]
But they set no deadline, and the Dutch finance minister, Jan Kees de Jager, said a selective default for Greece was no longer being excluded. [ID:nB5E7I401K]
"The situation in Europe continues to deteriorate and uncertainties within the sovereign credit space remain high," said David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut.
Fears over Italy have accelerated concerns over the impact of the debt crisis because the country is the euro zone's third-largest economy.
In equities markets, European stocks hit a four-month low and closed down for a third straight day. Shares tumbled overnight in Asia on fears over the European debt crisis. But on Wall Street, stocks largely managed to edge higher a day after posting their worst day in a month, as two days of heavy selling provided buying opportunities.
Helping support markets, traders cited rumors that the European Central Bank was buying peripheral bonds for the first time in three months, with Portugal the suspected target.
The pan-European FTSEurofirst 300 .FTEU3 closed down 0.54 percent at 1,091.72 points, off its session lows.
In Asian markets, Japan's Nikkei stock index closed off 1.4 percent, in the biggest fall in a month, and Hong Kong shares posted their biggest daily fall in 14 months.
On Wall Street, the Dow Jones industrial average .DJI was up 24.26 points, or 0.19 percent, at 12,530.02. The Standard & Poor's 500 Index .SPX was up 2.76 points, or 0.21 percent, at 1,322.25. The Nasdaq Composite Index .IXIC was down 3.82 points, or 0.14 percent, at 2,798.80.
But even as the Dow and S&P posted gains, investor jitters overhung the market, with the CBOE Volatility Index .VIX, Wall Street's "fear gauge," up 5.3 percent.
"The level of nervousness in the market has certainly grown. We are looking for resolutions, but we're only getting a lot of chatter," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
In European equities, Italian banks rose sharply, a rally mainly seen by traders as short covering following steep losses in the past few days.
"We are reaching nuclear war-like valuation levels on financials. It's not absurd given the indecision of political leaders, nevertheless, a number of investors are trying to catch the falling knife," Thomas Kleb, head of equity sales at Societe Generale CIB, said.
In the foreign exchange market, the euro EUR= was last trading at $1.3986, down about 0.4 percent on the day, after earlier hitting hit four-month lows of $1.3837. It also fell to a record low against the safe-haven Swiss franc EURCHF=.
"The market has woke up to the fact that there's a much larger problem (than Greece). That's what precipitated the large fall," Adam Myers, senior FX strategist at Credit Agricole CIB, said of the fall in the euro. "I very much doubt the European Central Bank, let alone the IMF, can bail out a country the size of Italy."
U.S. government bond prices initially rose on the euro zone concerns, but turned slightly lower as bond dealers made room for $32 billion worth of three-year debt to be auctioned later.
The benchmark 10-year U.S. Treasury note US10YT=RR was down 2/32, its yield at 2.9316 percent.
There was some respite for Italian assets after speculation swirled that the European central bank was buying Italian and Spanish paper, even though traders who usually see those transactions said they had seen no evidence of such trades.
Eurozone pledges new steps to help Greece: [ID:nL6E7IB1PQ]
Italy dragged into eurozone crisis: [ID:nLDE76A0EA]
Graphic on sovereign credit ratings:
BOJ holds fire, more optimistic on economy:[ID:nL3E7IC00Q]
The costs of insuring against a default by the euro zone's peripheral issuers hit record highs, and Italian and Spanish bond yields spiked higher. [GVD/EUR]
Oil prices were higher. U.S. crude futures CLc1 were up $1.22 at $96.37, ahead of weekly inventory data with forecasts that domestic crude stocks fell last week. Brent crude erased early losses to trade higher. Brent crude was last up 6 cents at $117.30. LCOc1
Euro-priced gold rose to a second consecutive record on Tuesday, driven by investors who found little comfort in the pledges from European Union officials to contain the spread of the debt crisis across the single currency bloc.
Spot gold XAU= was down 0.2 percent on the day at $1,550.50 an ounce by 1355 GMT, having risen in each of the last six trading sessions, while gold in euros XAUEUR=R was up 0.3 percent, set for a third daily rise, at 1,109.60 euros an ounce, having hit a record 1,118.58 earlier. (Reporting by Caroline Valetkevitch, with additional reporting by Neal Armstrong, Steve Slater and Naomi Tajitsu in London, and Chris Reese in New York; Editing by Leslie Adler)