September 4, 2012 / 3:15 PM / 5 years ago

GLOBAL MARKETS-Stocks off on U.S. data, ECB hopes help Spanish yields

* U.S. manufacturing shrinks for third straight month

* ECB bond-buying hopes cut Spanish and Italian bond yields

* U.S. markets reopen after long holiday weekend

By Luciana Lopez

NEW YORK, Sept 4 (Reuters) - U.S. stocks slid on Tuesday in the first session after a long holiday weekend as disappointing data underscored weakness in the world's largest economy, but hopes for European Central Bank bond-buying nudged Spanish and Italian yields lower.

U.S. equity indexes fell after data showed U.S. manufacturing shrank at the sharpest clip in more than three years in August and construction spending fell in July by the most in a year.

The U.S. dollar also trimmed gains against the euro after the data, as some analysts saw the U.S. Federal Reserve moving to prop up the economy.

"This soft report leading into Friday's payrolls will only solidify additional action from the Fed if we see another soft jobs report," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

The Dow Jones industrial average dropped 97.28 points, or 0.74 percent, at 12,993.56. The Standard & Poor's 500 Index was down 8.26 points, or 0.59 percent, at 1,398.32. The Nasdaq Composite Index was down 18.10 points, or 0.59 percent, at 3,048.87.

The euro was off 0.18 percent against the dollar to $1.2570, after having risen as high as $1.2627 earlier in the session.

Investors were also eyeing possible action across the Atlantic from the European Central Bank, with hopes for more bond buys from the ECB helping drive Spanish and Italian bond yields to multi-week lows.

Spanish two-year yields dropped to 3.118 percent, the lowest since early April, while their Italian counterparts fell to 2.425 percent, the lowest since late March.

The benchmark 10-year U.S. Treasury note was down 2/32, with the yield at 1.5535 percent.

The ECB is expected to unveil a new debt-purchasing scheme to tackle the region's debt crisis at a policy meeting o n Th ursday, when it may also cut interest rates as the 17-nation euro area heads toward a recession.

Mario Draghi, the ECB's president, told European lawmakers o n M onday that buying short-term sovereign debt did not breach any European Union rules, which investors took as a sign the bank would resume purchases of short-dated Spanish and Italian bonds.

"Markets are taking a bit of confidence from Draghi, who apparently indicated that purchases of up to three years maturity wouldn't be in contravention of EU policies on financing of sovereigns," said Brian Barry, a strategist at Investec.

Still, European equity investors have turned more cautious over the impact of the ECB plan, having enjoyed a strong rally since Draghi pledged on July 26 to do "whatever it takes" to protect the euro from the crisis.

The FTSEurofirst 300 index of top European stocks, which has risen 7 percent since late July, was down 1.09 percent at 1079.72.

"If the ECB disappoints, the reaction would be on the negative side. But I don't expect a dramatic sell-off as focus will shift to other events," said Christian Stocker, equity strategist at UniCredit.

The MSCI world equity index, which gained late last week on renewed hopes of more monetary stimulus by the Federal Reserve, was down 0.74 percent at 320.33.

Oil prices fell below $115 per barrel on Tuesday as renewed fears about weaker demand outweighed hopes of further stimulus measures from central banks in the United States and Europe.

Front-month Brent crude futures were down $1 to $114.78 a barrel by 1413 GMT. U.S. crude futures were down 89 cents to $95.58 a barrel from Friday's settlement.

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