GLOBAL MARKETS-Stocks down, dollar near 5-week low ahead of Fed
* Federal Reserve meeting awaited for clues on stimulus
* U.S. jobs report for July a key focus for week
* ECB and Bank of England meetings also awaited
NEW YORK, July 29 (Reuters) - U.S. stocks fell and the dollar rose from a five-week low on Monday, a day ahead of the Federal Reserve's two-day policy meeting, which will be closely watched for clues on when the U.S. central bank will begin to slow its bond-buying program.
The U.S. government's monthly jobs report due at the end of the week was also keeping investors on edge, particularly because the Fed has made the unemployment rate a cornerstone in its decision on paring economic stimulus.
On Wall Street, stocks dipped broadly, with all three major indexes moving lower.
"I think today we saw some better-than-expected economic data in Europe and here, and that's got people concerned that we are going to see a withdrawal of QE," said Stephen Massocca, managing director at Wedbush Equity Management LLC in San Francisco, referring to the Fed's Quantitative Easing program.
"There's a concern that whatever the FOMC says or does will lead to a dramatic reaction in the market, much like we saw in June."
Until recently, investors have interpreted average or weak economic data as a sign the Fed will continue to stimulate the economy and put a floor under stock prices. However, the prospect of a slightly less accommodative Fed in the near future has increased the market's need for a stronger economy.
An industry group on Monday reported a fall in contracts to purchase previously owned U.S. homes in June, after they hit a more than six-year high in May, suggesting that rising mortgage rates were starting to dampen home sales. The data, however, was better than expected.
In addition to the Federal Reserve, the European Central Bank and the Bank of England also meet this week. The ECB and the BOE are expected to repeat or refine their "forward guidance" that borrowing costs will remain extraordinarily low as long as growth is sub-par and inflation poses no threat.
The Dow Jones industrial average was down 49.95 points, or 0.32 percent, at 15,508.88. The Standard & Poor's 500 Index was down 7.10 points, or 0.42 percent, at 1,684.55. The Nasdaq Composite Index was down 13.37 points, or 0.37 percent, at 3,599.80.
With just three trading days left in the month, the S&P 500 is set to post its best monthly performance since October 2011. The Nasdaq's advance makes July so far the best month in a year and a half.
Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois, said investors will try to decipher what the Fed knows about the U.S. jobs report a couple of days in advance, which could make Wednesday "even more volatile than it usually is" on Fed statement days.
The U.S. payrolls report on Friday is expected to show that 185,000 jobs were added in July and a dip in the jobless rate to 7.5 percent. A strong report would support the case for the Fed to start rolling back its stimulus in September and help the dollar.
European shares finished the day largely unchanged, with a fall in bank stocks offsetting gains spurred by two giant mergers, in the media and pharmaceuticals sectors, which added to a flurry of M&A activity in recent weeks. Bank stocks were hit by speculation about a capital hike at Barclays , whose shares slid 3.5 percent..
The FTSEurofirst 300 index of top European shares closed up 0.07 percent. The benchmark index has risen 9 percent since late June.
Publicis and Omnicom announced plans to merge into the world's biggest advertising group in a $35.1 billion deal. In the pharmaceuticals sector, U.S. group Perrigo agreed to buy Ireland's Elan.
The MSCI index of world stock markets fell 0.5 percent.
The dollar was 0.4 percent lower against the yen at 97.83 yen, while the dollar index was little changed after earlier touching a five-week low of 81.785.
Traders said the dollar's recovery from its low on Monday was an adjustment of positions ahead of the Fed statement after a selloff had over the last three weeks left it down 1.7 percent for the month. The dollar was up 0.2 percent against the euro .
"The dollar faces a lot of key event risk in the week ahead with the release of the U.S. Q2 GDP report and the latest FOMC policy meeting on Wednesday, followed by the release of the U.S. employment report for July on Friday," said Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi.
In debt markets, German Bund futures edged back into negative territory in thin trade and euro zone periphery bonds eased. But investors refrained from placing big bets before this week's monetary policy decisions and data.
Benchmark 10-year Treasury notes fell 9/32 in price, their yields edging up to 2.6 percent from 2.57 percent late on Friday. Ten-year yields have ranged from around 2.43 percent to 2.63 percent in the last two weeks, after hitting two-year highs of 2.76 percent on July 8.
Commodities markets also struggled, although concerns about supply disruptions kept oil off three-week lows. Nervousness ahead of Chinese manufacturing data on Thursday hit copper earlier in the day.
With investors bracing for another round of disappointing economic news from China, the world's No. 2 economy, Asian markets were generally weaker.
Japan's Nikkei dropped 3.3 percent to hit a four-week low. Investors' jitters were compounded by a stronger yen, which is negative for the country's exporters, and concerns that plans to increase the country's sales tax - its most significant fiscal reform in years - could be watered down.