* European shares lower after ZEW sentiment index dips
* U.S. dollar index down but holds above last week's lows
* U.S. Treasuries flat ahead of Bernanke testimony
* Brent crude oil hits 3-month high before turning lower
By Herbert Lash
NEW YORK, July 16 The dollar fell and U.S. stocks edged lower on Tuesday, pausing after an eight-day advance by the benchmark S&P 500 index, as investors took a cautious stance before the Federal Reserve chief's testimony to a 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 economic stimulus program.
The dollar's losses against the euro were limited after data showing an unexpected fall in German investor sentiment in July and subdued euro zone inflation added to expectations the European Central Bank also will keep rates low to aid the region's recovery.
U.S. stocks fell, in tandem with a sharper decline in European stock markets.
The euro rose 0.52 percent to $1.3130, recovering from $1.3057 struck after the German ZEW survey of investor sentiment survey. Against the yen, the dollar lost 0.57 percent to 99.28.
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 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 fell 32.31 points or 0.21 percent, to 15,451.95, the S&P 500 lost 5.58 points or 0.33 percent, to 1,676.92 and the Nasdaq Composite dropped 10.35 points or 0.29 percent, to 3,597.14.
The pan-European FTSEurofirst 300 index closed down 0.63 percent at a provisional 1,192.40 points, while a measure of global equity markets, MSCI's all-country world index , fell 0.1 percent.
U.S. Treasuries prices were flat before Bernanke's testimony. He is expected to stress the Fed will hold rates low for a long time.
Benchmark 10-year Treasuries yields 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 10-year T-bill was trading flat to yield 2.5430 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 industrial production pushed higher in June, raising hope a recent slowdown in factory activity was either over or close to running its course.
Crude prices traded near break-even.
Brent crude was flat at $109.09 a barrel. U.S. oil was down 13 cents to $106.19.