Global stocks hit by earnings, data

A man sits in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province, July 25, 2011.

NEW YORK (Reuters) - Stocks suffered their worst day in eight weeks on Wednesday as lackluster earnings and weak economic data hit investors already nervous about faltering debt talks in Washington, while the U.S. dollar rebounded following a sell-off this week.

Despite heightened anxiety about a possible U.S. default, the Treasury managed to sell $12 billion of 5-day cash management bills and $35 billion of five-year notes on Wednesday, suggesting investors are still willing to lend to the U.S. government.

A rallying dollar partly contributed to a pullback in gold prices, which earlier soared to record highs for the sixth time in two weeks. Analysts said the metal, which is up about 9 percent in July, could pull back sharply if a debt deal dampens market fears.

Republicans and Democrats rushed to rework rival plans for deficit reduction, but with the fate of both proposals heavily in doubt, top lawmakers pursued a behind-the-scenes compromise to avert a crippling U.S. debt default.

"That is going to remain front and center in terms of driving market activity," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. "Without a deal and the clock winding down, I think investors' anxiety is only going to increase."

If the two sides fail to break the stalemate, the United States would not be able to borrow more money after August 2 and could run out of cash to pay all of its bills. The cost of insuring U.S. government debt against a default within a year rose to a record high.

The Dow Jones industrial average .DJI ended down 198.75 points, or 1.59 percent, at 12,302.55. The Standard & Poor's 500 Index .SPX was down 27.05 points, or 2.03 percent, at 1,304.89. The Nasdaq Composite Index .IXIC lost 75.17 points, or 2.65 percent, to 2,764.79.

A profit warning from Juniper Networks (JNPR.N) and moderating order growth at Emerson Electric Co (EMR.N) compounded investors' concerns about corporate strength after some high-profile earnings misses.

A late statement from White House that the government would be "running on fumes" if the debt ceiling is not increased by August 2 added fuel to the selling.

Further pressuring the market, new orders for long-lasting U.S. manufactured goods fell unexpectedly in June, and a gauge of business spending plans slipped.

World shares as measured by MSCI .MIWD00000PUS fell 1.7 percent. The FTSEurofirst 300 .FTEU3 ended down 1.1 percent. European shares have also been hit by persistent fears of contagion in the euro zone debt crisis.

Japan's Nikkei .N225 closed down half a percent.

DOLLAR REBOUND

Benchmark 10-year Treasury notes were trading 7/32 lower in price to yield 2.98 percent.

Prices came under mild selling pressure after the sale of five-year notes, with foreign demand hitting a five-month low. But the rising domestic participation suggests some investors, at least, see no alternative to U.S. government bonds even in the face of a default or possible ratings downgrade.

"Not a great auction, but not terrible. If they want a grade to it, I would give it a B-minus or so," said Bret Barker, portfolio manager at TCW in Los Angeles, with $65 billion in fixed income assets under management.

The U.S. currency fell early to an all-time low against the Swiss franc at 0.7996. It also hit a four-month trough of 77.57 yen, approaching a record low of 76.25 set in March, raising concerns Japanese authorities may intervene to stem the yen's strength.

But the dollar later rebounded and rallied against the euro as investors booked profits on bets against the greenback.

The dollar remained vulnerable, however, as most market participants believed the deficit reduction proposals fall short of the required cuts necessary to avert a downgrade.

Analysts polled by Reuters expect the United States will probably lose its top-notch AAA credit rating from at least one major rating agency, believing the wrangling over the debt ceiling has already damaged the economy.

The euro, which often weakens on rising risk aversion, last traded at $1.4367, down 1 percent. Against a basket of currencies, the dollar index .DXY fell as low as 73.421, a 2-1/2 month low, before bouncing back to last trade at 74.126.

Spot gold rose as high as $1,628 an ounce before easing to near $1,613.

U.S. crude fell $2.19 to settle at $97.40 a barrel after data showed the first release of crude from the U.S. petroleum reserve unexpectedly pushed up domestic inventories last week.

(Additional reporting by Edward Krudy, Karen Brettell, Chris Reese, Gertrude Chavez-Dreyfuss and Frank Tang; Editing by Dan Grebler)