GLOBAL MARKETS-Oil rises, but stocks sputter on Fed jitters

* Equity rally fades before Fed's expected move on economy

* Treasuries, euro in see-saw session as concerns linger

* Crude oil rebounds after sell-off on Europe economy woes
(Adds settlement of oil, gold futures; freshens prices)

By Herbert Lash

NEW YORK, Sept 20 (Reuters) - Expectations that the Federal
Reserve will act to boost the U.S. economy drove up oil prices
on Tuesday, but equities lost steam on caution over what the
Fed will actually announce when its policy meeting ends on
Wednesday.

Wall Street gave up gains of about 1 percent heading into
the close as a wary mood gripped the market following the
overnight downgrade of Italy's credit rating by Standard &
Poor's.

The Fed is expected to unveil a program to buy longer-dated
bonds in a bid to keep already-low, long-term interest rates
low, if not lower, in a move known as Operation Twist when its
two-day policy meeting ends on Wednesday. For details, see
[FED/AHEAD]

"A lot of people are expecting more out of the Fed than
they are going to get -- they are going to get the twist, they
are not going to get a QE3," said Ken Polcari, managing
director at ICAP Equities in New York.

Polcari referred to two previous Fed bond-buying programs
known as quantitative easing.

The expected new Fed program would further ease U.S.
monetary policy, a move that left bond traders anxious
considering the European debt crisis is far from being
resolved.

"When you have the (Fed) basically getting ready to talk
about buying more and longer-dated debt, who wants to bet
against them being successful in bidding prices up," said David
Dietze, chief investment strategist at Point View Financial
Services in Summit, New Jersey.

Taking into account gloomy economic news in the United
States, equity prices faded and safe-haven government debt rose
by the end of the session.

The government reported that U.S. housing starts were down
more than expected in August and the International Monetary
Fund said U.S. growth would be "modest relative to historical
averages for years to come."

"From a bond investor's perspective, there is still
tremendous pessimism on the fundamentals," said Dietze.

The Dow Jones industrial average .DJI closed up 7.65
points, or 0.07 percent, at 11,408.66. The Standard & Poor's
500 Index .SPX fell 2.00 points, or 0.17 percent, at
1,202.09. The Nasdaq Composite Index .IXIC declined 22.59
points, or 0.86 percent, at 2,590.24.

Bond prices turned higher at the end of a see-saw session.

Benchmark 10-year Treasury notes US10YT=RR traded 6/32
higher in price to yield 1.94 percent. ,

Equity trading volumes both in the United States and Europe
were lighter than usual, a sign investors were cautious before
the Fed's meeting ends on Wednesday.

Earlier in Europe, stocks closed up 2 percent, with
big-dividend-paying defensive stocks pushing gains.

MSCI's all-country world equity index .MIWD00000PUS rose
0.4 percent.

Brent crude bounced back a day after suffering heavy
losses, partly on expectations U.S. inventory data will show a
drawdown in stockpiles. [ID:nL3E7KK0JM]

In London, Brent crude LCOc1 settled up $1.40 at $110.54
a barrel.

The U.S. crude contract for October CLc1, which expired
at the close, settled up $1.19 at $86.89 a barrel. The more
heavily traded November contract gained $1.11 to settle at
$86.92 a barrel.

The euro also traded mostly flat against the U.S. dollar
over concerns about Standard & Poor's credit downgrade of
Italy's debt and Greece's ability to avoid default.
[ID:nS1E78J09Y]

Also weighing on the euro was data showing German investor
sentiment dropped to its lowest level in nearly three years.
[ID:nL5E7KK12E] and [ID:nCAT005514]

The euro was up 0.02 percent at $1.3676 EUR=EBS.

Gold headed for its biggest daily gain in a week as Italy's
credit downgrade and speculation of more U.S. stimulus drove
bullion as a safe-haven.

Gold futures for December delivery GCZ1, the most active
contract, settled up $30.20 at $1,809.10 an ounce.
(To read Reuters Global Investing Blog click here; for the MacroScope
Blog click on blogs.reuters.com/macroscope; for Hedge
Fund Blog click on blogs.reuters.com/hedgehub)
(Reporting by Claire Sibonney, Ellen Freilich, Angela Moon and
Nick Olivari in New York, Marius Zaharia and Ikuko Kurahone in
London and Harro Ten Wolde in Frankfurt; writing by Herbert
Lash; Editing by Leslie Adler)