* Dollar slips against euro, yen as Bernanke seen keeping policy
* U.S. Treasuries rise slightly ahead of Bernanke testimony
* Brent crude oil hits three-month high before drifting lower
* European shares close down after ZEW sentiment index dips
By Herbert Lash
NEW YORK, July 16 (Reuters) - The dollar eased and U.S. stocks fell on Tuesday, snapping an eight-day advance by the benchmark S&P 500 index, as investors took a cautious stance ahead of the Federal Reserve chief's testimony to a U.S. congressional panel on Wednesday.
Analysts expect Fed Chairman Ben Bernanke to reiterate previous remarks that U.S. monetary policy will remain accommodative. But investors will look for clues as to when the U.S. central bank might start reducing its bond-buying program.
The dollar's weakness against the euro was curbed by data showing an unexpected fall in German investor sentiment in July and subdued euro zone inflation which added to expectations the European Central Bank also will keep rates low to aid the region's recovery.
U.S. stocks initially traded near break-even, but later fell in tandem with a sharper decline in European stock markets.
The euro rose 0.70 percent to $1.3153, recovering from a level of $1.3057 struck after the German ZEW survey of investor sentiment. Against the yen, the dollar lost 0.71 percent to 99.14 yen.
The dollar fell late last week after Bernanke said highly accommodative monetary policy would be needed for the foreseeable future. Bernanke's remarks on the U.S. economy and monetary policy will be released at 8:30 a.m. (1230 GMT) on Wednesday.
"Bernanke will be a dove in his testimony and it will continue to surprise me that it is actually not fully priced in," said Sebastien Galy, foreign exchange strategist at Societe Generale in New York.
The Dow Jones industrial average closed down 32.41 points, or 0.21 percent, to 15,451.85. The Standard & Poor's 500 Index fell 6.24 points, or 0.37 percent, to finish at 1,676.26. The Nasdaq Composite Index slid 8.99 points, or 0.25 percent, to close at 3,598.50.
Shares of Coca-Cola Co fell after the company reported second-quarter sales were weaker than expected as global economic weakness and cool weather crimped consumption of soft drinks. The Dow component's shares fell 1.9 percent to $40.23.
The pan-European FTSEurofirst 300 index closed down 0.73 percent at 1,191.15, while a measure of global equity markets, MSCI's all-country world index, fell 0.06 percent.
U.S. Treasuries traded near break-even ahead of Bernanke's testimony. He is expected to stress the Fed will hold rates low for a long time.
Yields on 10-year U.S. government debt have fallen from two-year highs of 2.76 percent on July 8 as officials have tried to soothe concerns over the pace at which the Fed will begin to phase out its unprecedented quantitative easing stimulus measures.
The benchmark 10-year U.S. Treasury note was up 3/32 in price to yield 2.5317 percent.
Tom Tucci, head of Treasuries trading at CIBC in New York, said the central banks would like to stop their bond-buying to help the economy.
"The way they are going to get out of it is by giving forward guidance that they are going to be extremely easy in the front end for a long period of time, which will anchor rates lower overall," Tucci said.
U.S. consumer prices accelerated in June, but underlying inflation pressures showed signs of stabilizing, keeping on track expectations the Federal Reserve will start tapering its bond purchases later this year.
Other data on Tuesday showed U.S. industrial production pushed higher in June, raising hopes that a recent slowdown in factory activity was either over or close to running its course.
Brent crude edged higher as U.S. gasoline surged to four-month highs, fueled by refinery problems in the midst of the summer driving season and rising prices for ethanol credits.
A spate of refinery outages across the United States over the past week has helped push U.S. RBOB gasoline futures up nearly 15 percent so far in July, while government data showed demand rising faster than expected.
U.S. crude oil prices were marginally lower as traders awaited government and industry data that should show a draw in crude oil supplies for the third consecutive week.
Brent crude settled up 31 cents at $109.40 a barrel. U.S. oil declined 32 cents to settle at $106.00 a barrel.