* U.S. stocks falter, European shares edge up to two-month high
* Dollar falls against yen but draws support from data
* U.S. and euro zone service sector growth picks up
By Leah Schnurr
NEW YORK, Aug 5 Stocks on Wall Street pulled back from record levels on Monday, while the dollar fell against the yen as investors weighed the likelihood of when the Federal Reserve will pare back its economic stimulus program.
Encouraging signs of growth in the global economy, however, gave the U.S. currency support and kept declines in U.S. and European equities in check, while a better-than-expected pick-up in the U.S. service sector pushed bond yields to near two-year highs.
U.S. shares added to the modest declines in the mid-afternoon after Richard Fisher, the president of the Federal Reserve Bank of Dallas, said the Fed should cut its massive bond-buying program next month, unless economic data takes a decided turn for the worse.
"It's a minor move in the market because we knew that this was Fisher," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
"It's a guessing game every day because different speakers have different opinions."
The S&P 500 stock index has risen for five of the past six weeks, gaining more than 7 percent over the period. It closed at an all-time high on Friday despite a disappointing read on the U.S. labor market.
Given that advance, further gains may be difficult at these levels, analysts said, especially with the corporate earnings season largely over.
"We have had such a strong run, a little bit of retracement could be expected in the markets over the coming weeks," said Sean Lynch, global investment strategist at Wells Fargo Private Bank in Omaha, Nebraska.
The Dow Jones industrial average fell 53.49 points or 0.34 percent, to 15,604.87, the S&P 500 lost 3.4 points or 0.2 percent, to 1,706.27 and the Nasdaq Composite dropped 2.243 points or 0.06 percent, to 3,687.345.
European shares closed up 0.1 percent at a two-month high, while the MSCI world equity index slipped 0.2 percent.
Some investors took last week's weaker-than-expected U.S. jobs report as an indication that the Fed was likely to hold steady with its monetary stimulus program, though Monday's service sector data tempered that view somewhat.
"The thoughts of what the Fed is going to do seem to dominate a lot of the concerns that investors have right now," said Lynch. "We don't think that (jobs) number was such an outlier that it will cause a change to what the Fed is going to do."
The central bank is currently buying $85 billion in bonds monthly to keep borrowing costs low, a program that has helped U.S. stocks surge nearly 20 percent this year. The Fed has said it will start to slow the pace of asset purchases later this year if the economy progresses as expected.
The U.S dollar fell 0.6 percent to 98.34 yen, and slipped 0.1 percent against a basket of currencies.
"Ongoing uncertainty about whether the Federal Reserve will be able to taper its monthly bond buying as part of its quantitative easing program continues to weigh on the greenback," said Samarjit Shankar, director of market strategy at BNY Mellon in Boston.
The outlook for the global economy improved slightly with purchasing managers' surveys covering thousands of companies worldwide. One such report showed China recovered some momentum in July, while activity in the euro zone expanded for the first time in 18 months, though the pace was modest.
It is still unclear if the recession-hit euro area has turned the corner. But the data pointed to more sustainable strength in Britain, where the services sector is growing at its fastest pace in more than six years.
Growth in the U.S. service sector also accelerated, picking up from a three-year low as new orders surged to their highest in five months.
Benchmark 10-year Treasury notes were down 10/32 in price to yield 2.6362 percent, just below a two-year high.
News of rebounding production in Libya and the North Sea sent Brent crude down 23 cents to $108.72 a barrel. U.S. crude gave up 40 cents to $106.54.
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