Stocks, euro slip as hopes dim on Europe crisis

NEW YORK Tue Aug 16, 2011 4:36pm EDT

Euro banknotes and small coins are pictured in open cash register in a shop in Olching August 16, 2011. REUTERS/Michaela Rehle

Euro banknotes and small coins are pictured in open cash register in a shop in Olching August 16, 2011.

Credit: Reuters/Michaela Rehle

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NEW YORK (Reuters) - Global stocks and the euro fell on Tuesday after the leaders of France and Germany failed to live up to market expectations for a solution to Europe's debt crisis and weak German growth data renewed worries about the world economy.

President Nicolas Sarkozy of France and German Chancellor Angela Merkel unveiled wide-reaching plans for closer euro zone integration, including deficit limits and biannual summits. But they stopped short of increasing the bloc's rescue fund and said joint euro bonds could only be a longer-term option.

The highly anticipated proposals, which included a tax on financial transactions, failed to shore up investor sentiment that already was shaken by poor German gross domestic product data reported earlier in the session.

"Investors were looking for some big-picture solution to the euro zone debt crisis. Looking at these headlines, I don't think much has been achieved," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut.

Concerns about the euro zone's debt crisis have weighed on financial markets in recent weeks and added to worries about weak U.S. economic data that points to a slowdown some investors fear could lead to recession.

U.S. stocks initially pared losses on the comments but quickly reversed course to trade sharply lower, and U.S. Treasuries advanced further as investors shunned risk. The euro also briefly recouped losses against the dollar after Sarkozy said he and Merkel are determined to defend the euro, but later gave up the gains.

The euro fell 0.26 percent to $1.4406 while the benchmark 10-year U.S. Treasury note rose 23/32 in price, driving its yield down to 2.23 percent.

Shares of financial stocks, seen as vulnerable to a European fiscal crisis, extended declines and were the worst-performing sector in the S&P 500. The S&P financial index fell 1.9 percent.

The Dow Jones industrial average closed down 76.97 points, or 0.67 percent, at 11,405.93. The Standard & Poor's 500 Index fell 11.73 points, or 0.97 percent, at 1,192.76. The Nasdaq Composite Index slid 31.75 points, or 1.24 percent, at 2,523.45.

Weak economic growth in Germany clouded the global economic outlook. Germany reported GDP growth slowed to a mere 0.1 percent between April and June, the weakest quarterly rate since 2009.

The data from the euro zone fueled concerns about a Europe already weakened by a fiscal crisis, an issue Merkel and Sarkozy tried to address.

"Overall there are a lot of question marks coming out of this summit," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. "This does not seem to be a game-changer or a show-stopper."

Risky assets such as stocks and commodities have been hit hard in recent weeks. Bank exposure to Greek and Italian debt has raised short-term borrowing costs for European institutions as well as the cost of insuring their debt against default.

The Federal Reserve on Tuesday reported U.S. industrial output climbed in July at its fastest pace in seven months, and Fitch Ratings affirmed its top credit rating for the United States with a stable outlook, but the data failed to quell worries about the global economy.

The dollar was up against a basket of major currencies, with the U.S. Dollar Index up 0.19 percent at 73.974.

Oil prices extended losses.

September Brent crude futures fell 44 cents to settle at $109.47 a barrel in thin trading ahead of the contract's expiry later on Tuesday. The more heavily traded October contract traded gave up 71 cents to settle at $109.13.

Crude oil in New York settled down $1.23 at $86.65.

U.S. gold futures for December delivery settled up $27 at $1,785 an ounce.

(Reporting by Julie Haviv, Ashley Lau, Ellen Freilich, Matthew Robinson and Frank Tang in New York; Writing by Herbert Lash; Editing by Leslie Adler)

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