U.S. stocks slip, bonds rise ahead of debt vote

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange July 26, 2011.

NEW YORK (Reuters) - U.S. stocks turned lower and bond prices rose on safe-haven demand on Thursday as investors expressed skepticism that a key vote in Congress would lead to a deal to avoid a U.S. default.

A rally on Wall Street driven by surprisingly strong economic data faded late in the session as buyers kept to the sidelines while lawmakers in Washington tried to hash out an agreement on the deficit. The S&P 500 has fallen every day so far this week.

The dollar climbed to a session high against the Swiss franc as investors awaited a vote on a deficit-cutting plan presented by Republican House Speaker John Boehner.

The vote was scheduled for after the markets' close.

The Swiss franc had risen to a record high against the dollar of 0.79900 franc, but the dollar gained and last traded at 0.80180, up 0.1 percent.

"During the course of the day, it became clear that even if Boehner does get the vote, when it's turned over to the Senate, the Senate is going to reject it," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

The price of gold, a gauge of fear as investors struggle with the European debt crisis and Washington's inability to come to grips with its fiscal woes, slid as European stock markets turned higher just before their close.

U.S. Treasuries prices rose as credit worries about Europe fed safety demand for U.S. bonds, temporarily pushing aside concern over the potential of a U.S. default.

Benchmark 10-year notes traded 5/32 higher in price to yield 2.96 percent.

The euro was hurt by disappointing demand at an Italian debt auction, sparking worries that Italy, the euro zone's third-biggest economy, is closer to the brink of the debt conundrum plaguing some of its neighbors.

In late afternoon New York trading, the euro was down 0.4 percent at $1.4308,

The Dow Jones industrial average .DJI ended down 62.44 points, or 0.51 percent, at 12,240.11. The Standard & Poor's 500 Index .SPX was down 4.22 points, or 0.32 percent, at 1,300.67. The Nasdaq Composite Index .IXIC finished up 1.46 points, or 0.05 percent, at 2,766.25.

The market was up most of the day on data that showed the number of Americans claiming new unemployment benefits last week dropped below the 400,000 level for the first time since early April, a hopeful sign for the anemic U.S. economy.

An unexpected rise in June from the previous month in pending sales of existing U.S. homes also buoyed Wall Street, a day after U.S. stocks suffered their worst day in eight weeks.

Gridlock in debt ceiling talks and a possible downgrade of U.S. credit ratings have weighed on global equities.

MSCI's all-country world stock index .MIWD00000PUS fell 0.5 percent to 337.66.

European shares turned positive in late trading on hopes that the bill to cut the U.S. deficit would pass.

The FTSEurofirst 300 index .FTEU3 of top European shares rose 0.05 percent to close at 1,089.24 points.

Brent oil pared gains above $118 to trade little changed as a storm heading toward the Gulf of Mexico raised the threat of supply disruption and wary traders awaited the outcome of the vote in Congress.

ICE September Brent crude closed down 7 cents at $117.36.

U.S. crude for September delivery settled 4 cents higher at $97.44 a barrel.

U.S. gold futures for August delivery settled down $1.70 an ounce at $1,613.40.

(Reporting by Ashley Lau, Chris Reese, Julie Haviv, Frank Tang and Gene Ramos in New York; Writing by Herbert Lash; Editing by Leslie Adler)