GLOBAL MARKETS-Shares fall in volatile session, dollar drops
* U.S. shares recover, but growth outlook still uncertain
* Japan, Europe tumble after weak data from China, euro zone
* Dollar index lower, yen gains against dollar
NEW YORK, May 23 (Reuters) - Stock markets around the world fell on Thursday, extending the previous day's steep decline on concerns over the pace of global economic growth and when the U.S. Federal Reserve's stimulus program would end.
U.S. stocks partially recovered from steep early losses and bond yields slipped. While the modest recovery was viewed as a sign that Wednesday's sharp decline was overdone, the S&P 500 remained on track for its worst two-day decline since April.
Weakness in the previous session was sparked when Fed chief Ben Bernanke broached the possibility of reducing stimulus if U.S. economic conditions improve. While Fed officials stressed that no action was likely for months, investors are anxious about the timing of any change in monetary policy, which is widely credited with fueling massive gains in stocks and high-yield corporate bonds this year.
"The commentary was very benign and wasn't anything unexpected; the sell-off came because we were looking for an excuse to correct after the big moves this year," said Eric Green, senior portfolio manager at Penn Capital Management in Philadelphia.
The Dow Jones industrial average was down 47.72 points, or 0.31 percent, at 15,259.45. The Standard & Poor's 500 Index was down 10.22 points, or 0.62 percent, at 1,645.13. The Nasdaq Composite Index was down 14.85 points, or 0.43 percent, at 3,448.45.
Thursday's measured rebound continued a recent trend of investors using any equity market decline as a buying opportunity. A rally in Hewlett-Packard Co, which jumped 13 percent to $24.09 a day after raising its profit outlook, helped limit losses and keep the Dow in mildly positive territory.
Still, overseas markets were sharply lower, driving investors to safe-haven currencies. At the session peak, the yen rose more than 2 percent against the dollar and the euro, which both lost 1 percent against the Swiss franc , also seen as a safe haven.
Chinese factory activity shrank for the first time in seven months, adding to concerns that the world's second-biggest economy had stalled. European factory sentiment dropped, suggesting that the euro zone's economy was likely to contract again in the second quarter.
Japanese shares were hit hardest in overnight action, with the Nikkei losing 7.3 percent, its biggest one-day fall in two years. European shares ended 2.1 percent lower and MSCI's world equity index lost 1.5 percent.
"Even though we were overdue for a correction, the Chinese data certainly didn't help things. If it proves to be part of a trend, that's very concerning for the global economy," said Green, who helps oversee $7 billion in funds.
U.S. light crude oil, which is closely tied to the pace of economic growth, fell 1.2 percent. The U.S. dollar index fell 0.76 percent.
The Euro STOXX 50 Volatility Index, Europe's widely used measure of investor risk aversion, surged nearly 15 percent to a three-week high. The CBOE Volatility Index rose 3 percent.
Concern the Fed will wind down its stimulus initially took its toll on bonds, but investors' sales of equities caused money to flow into safer government debt, leaving yields on U.S. Treasuries and German Bunds down from their highs. The benchmark 10-year U.S. Treasury note was up 6/32, the yield at 2.014rcent.
Investors expect the bond market will adjust to changing Fed policy, and that suggests higher yields in the coming months.
Demand for riskier euro zone debt softened, although bonds remained underpinned by expectations the European Central Bank may yet ease monetary policy further. That would contrast with any tightening by the Fed but follow a massive stimulus package launched by the Bank of Japan.
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