* Slower expansion in U.S. service sector dents optimism
* Poor U.S. retail sales also casts pall over market
* Euro rallies after upbeat assessment from ECB's Draghi
By Herbert Lash
NEW YORK, May 3 (Reuters) - Global stocks and crude oil fell on Thursday after a slower-than-expected expansion in the U.S. economy's service sector and weak retail sales damped optimism a day before a highly anticipated labor market report for April.
Stocks turned lower, government debt pared losses and the U.S. dollar trimmed gains against the yen after the Institute for Supply Management said its services sector index fell to 53.5 in April from 56.0 the month before.
The report missed economists' forecasts for a reading of 55.5, according to a Reuters survey. A reading above 50 indicates expansion in the sector.
"What's most concerning is the decline in the employment component. That could point to a softer nonfarm payrolls report. Economists expect a rise in payrolls, but other indicators point to softer job growth," said Kathy Lien, research director at GFT Forex in Jersey City, New Jersey:
"The bulls might be in for a bigger surprise than the bears."
Wall Street moved lower on the ISM report after hovering near break-even after the open.
The number of Americans filing new claims for jobless aid fell more than expected last week, easing fears the U.S. labor market recovery was stalling. Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 365,000, the Labor Department said.
Weakness in retail sales data also weighed on U.S. stock indexes. According to Thomson Reuters data, 52.9 percent of retailers missed monthly same-store sales expectations for April. Costco Wholesale Corp's April sales missed estimates, sending shares down 2.2 percent to $84.71.
The Dow Jones industrial average was down 39.43 points, or 0.30 percent, at 13,229.14. The Standard & Poor's 500 Index was down 5.73 points, or 0.41 percent, at 1,396.58. The Nasdaq Composite Index was down 13.94 points, or 0.46 percent, at 3,045.91.
In Europe, the FTSEurofirst 300 index of top regional shares retreated 0.2 percent to 1,041.62 points.
MSCI's all-country world equity index also retreated, falling 0.4 percent to 327.11.
The euro rallied from two-week lows against the U.S. dollar after European Central Bank chief Mario Draghi gave a more upbeat assessment of the euro zone than expected, reducing expectations of further monetary easing.
Draghi, in comments after the ECB kept rates unchanged at 1 percent, said the euro zone's economy was likely to recover this year, although the outlook remained vulnerable to downside risks. He added that inflation was likely to remain above 2 percent this year..
The euro was up 0.02 percent at $1.3158, while the dollar index up 0.06 percent at 79.176.
Traders said investors holding short euro positions were squeezed when Draghi disappointed their rate cut expectations by not signaling further easing or outlining measures to boost what many believe is still a struggling euro zone economy.
Oil slipped under $117 a barrel after OPEC said it had opened the taps more to weaken prices.
Brent crude for June delivery fell $1.46 to $116.74 a barrel. U.S. crude futures fell $1.87 to $103.35 a barrel.
Government debt pared losses to trade near break-even.
The benchmark 10-year U.S. Treasury note was flat in price, yielding 1.93 percent. The 30-year U.S. Treasury bond was up 1/32 in price to yield 3.11 percent.