Dollar, stocks fall as investors shun risk

NEW YORK (Reuters) - Stocks markets around the world slipped, with U.S. indexes posting major losses, while the dollar weakened on Wednesday as investors moved to safer government debt given soft U.S. private jobs data and disappointment at Japan's efforts to boost economic growth.

U.S. stocks dropped dramatically as the New York session wound down, with the Dow falling below 15,000 for the first time since May 7, amid concern central banks' easy money policies to rescue the weak economy may not be enough for markets to extend this year's gains.

Stock markets have weakened in recent days as investors weigh the ability of major central banks to boost growth and the possibility that stimulus will be reduced in coming months. MSCI's world equity index .MIWD00000PUS was last down 1.5 percent to a six-week low.

European markets fell after data showed business activity in the euro zone eased in May and on separate confirmation that the region's economy contracted in the first quarter.

Investors sent Japan's main Nikkei share index .N225 tumbling 3.8 percent to a two-month low, unimpressed by pledges from Prime Minister Shinzo Abe to make incomes grow and set up special economic zones.

Market participants are also mulling the outlook for the Federal Reserve's hefty U.S. monetary stimulus program, which is expected to be curtailed in coming months.

The Fed - the U.S. central bank - has explicitly linked the health of the jobs market to the continuation of its ultra-loose monetary policy. While weak jobs data would point to the Fed continuing its bond-buying program to keep rates low, which would be good for stocks, the policy has come under review as some data points to growing economic momentum and officials worry about the collateral effects on funding markets.

The release of the Fed's Beige Book, an anecdotal report on economic conditions by the policy-setting Federal Open Market Committee, did nothing to alter the day's trading trends. The U.S. economy expanded at a "modest to moderate" pace since mid-April while hiring remained subdued, according to the report.

The dollar, which had already fallen below the 100-yen level in Tokyo trading, touched a low of 98.95 yen. The yen had been weakening as Japanese stocks soared in recent months on expectations of improved growth in Japan.

"I think we're at the point where there hasn't been a lot of good news, and the level of concern over the Fed's next action is kind of overwhelming," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

The Dow Jones industrial average .DJI closed down 216.95 points, or 1.43 percent, at 14,960.59. The Standard & Poor's 500 Index .SPX ended down 22.48 points, or 1.38 percent, at 1,608.90. The Nasdaq Composite Index .IXIC was down 43.78 points, or 1.27 percent, at 3,401.48.

Both the S&P 500 and the Dow closed at record peaks on May 21. The S&P 500 has fallen more than 3 percent since its high.

U.S. private sector employers added 135,000 jobs in May, the ADP payroll service reported, fewer than the 165,000 expected. The number increased the likelihood that Friday's Labor Department nonfarm payrolls report, which the Fed tracks closely, will also point to a weak labor market in May.

U.S. Treasuries prices rose after data showed growth in the vast U.S. services sector remained lackluster and a measure of employment fell to its lowest in close to a year. [ID:nL1N0EG1FQ] The benchmark 10-year Treasury note was up 18/32 in price, the yield at 2.0839 percent.

ABE DISAPPOINTS

In the third tranche of measures aimed at boosting Japanese growth, Prime Minister Abe pledged to boost incomes and attract foreign businesses, but did not mention plans to encourage Japan's public funds to seek higher returns by investing more in riskier assets like equities.

The Nikkei index had hit a 5-1/2-year high on May 23, marking a rise of more than 50 percent for 2013, when doubts about the effectiveness of Abe's economic reforms and Bank of Japan stimulus efforts began to cause a change in sentiment.

European shares .FTEU3, which have been in a steady retreat from last month's five-year peaks on mounting expectations of a tapering in the Fed stimulus, closed down 1.5 percent after the U.S. jobs data, the biggest one-day percentage loss in a week.

The weakness across European equity markets followed data showing business activity in the euro zone easing in May and retail sales in April pointed to weak consumer demand.

The data kept pressure on the European Central Bank to do more to stimulate growth but was not seen as changing the prevailing view that the bank will leave monetary policy unchanged after its meeting on Thursday.

The likely lack of action by the ECB and the weaker equity markets caused 10-year safe-haven German government bond yields to ease to 1.512 percent from Monday's 1.534 percent, which was the highest in nearly three months. DE10YT=RR<GVD/EUR>

(Reporting by Nick Olivari; Editing by James Dalgleish)