NEW YORK Global stocks retreated on Thursday as expectations dimmed for new stimulus from the Federal Reserve and data indicated an economic slowdown in Europe and China, while the euro rose after sources said Spain was in talks over conditions for aid to reduce its borrowing costs.
Three sources said the favored option for Spain is for an existing rescue fund, the European Financial Stability Facility, to purchase Spanish debt at primary auctions while the European Central Bank would intervene in the secondary market to lower yields.
Spain has not, however, made a final decision to request a bailout, the sources said, and no specific figure for aid has been discussed, one of the sources told Reuters.
The euro rallied to a seven-week high against the dollar, up 0.3 percent at $1.2563, while the U.S. dollar index .DXY was down 0.2 percent at 81.366.
Concern over the outlook for the global economy sapped investor sentiment as did comments on Thursday from James Bullard, president of the Federal Reserve Bank of St. Louis.
Minutes from the latest Federal Reserve meeting released on Wednesday indicated the U.S. central bank might be ready for another round of monetary stimulus, or quantitative easing.
But Bullard, a non-voting member of the policy-making Federal Open Market Committee, said on CNBC television that U.S. data has been somewhat better since the July 31-August 1 meeting and the minutes were "a bit stale.
"There could be a tiny bit of steam coming out of the QE3 balloon," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
The Dow Jones industrial average .DJI closed down 115.30 points, or 0.88 percent, at 13,057.46. The Standard & Poor's 500 Index .SPX slid 11.41 points, or 0.81 percent, at 1,402.08. The Nasdaq Composite Index .IXIC fell 20.27 points, or 0.66 percent, at 3,053.40.
In Europe, the FTSEurofirst 300 .FTEU3 of top regional shares closed down 0.6 percent at 1,089.13.
Business activity data showed a downturn was spreading further throughout the euro zone, with the weakness that began among the smaller, southern states increasingly taking root in core economies such as Germany.
The Purchasing Managers' Index survey from Markit suggested that the euro zone was destined to return to recession, as the poll notched up a seventh month of contraction.
In addition, Chinese manufacturing PMI data hit the lowest levels since November as new export orders slumped and the stock of unsold goods rose.
U.S. data was mixed. Growth in the U.S. manufacturing sector picked up in August, a sign the economy is resisting the global economic chill, although a rise in new jobless claims last week pointed to a still-sluggish labor market.
U.S. government debt prices rose on the view more stimulus was in the offing from the Federal Reserve, despite Bullard's comments. The weaker Chinese factory data and worries about Greek and Spanish finances also spurred safe-haven bids for bonds.
The benchmark 10-year U.S. Treasury note was up 7/32 in price to yield 1.6711 percent.
U.S. crude futures fell and North Sea Brent pared gains as the revived hopes for more Fed stimulus faded and doubts about Europe's ability to address its debt crisis crept back in focus.
Brent crude futures settled up 10 cents at $115.01 a barrel after trading much of the day about $1 higher.
U.S. light sweet crude oil fell 99 cents to settle at $96.27 a barrel.
(Editing by Chizu Nomiyama, Andrew Hay, Dave Zimmerman and Leslie Adler)