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NEW YORK (Reuters) - U.S. stocks fell and the dollar rallied on Wednesday after the Federal Reserve acknowledged that the economic recovery had lost momentum but announced no new measures to stimulate growth.
Equities and the euro had gained lately as investors bet that central banks in the United States and Europe would take aggressive steps to boost their economies and contain the euro- zone debt crisis.
The Fed said after its two-day meeting it was prepared to do more to support an ailing economy if needed, but disappointed markets by taking no new action. Many economists had expected the Fed to push back its guidance for when it might start to raise interest rates from ultra-low levels, but it stuck with its "late-2014" language.
Attention now turns to a European Central Bank decision on Thursday. ECB President Mario Draghi heightened speculation of further bank purchases of Italian and Spanish bonds when he said last week he would do "whatever it takes to preserve the euro."
"Kind of a disappointment. The market was hoping for more news on (quantitative easing) or a longer time frame for not raising rates," said Nicholas Colas, chief market strategist at the Convergex Group in New York.
"It was very status quo at a time when people are saying the economy is getting worse," he said. "We have to now hope that the ECB will come in with aggressive moves."
Fed officials described the economy as having "decelerated somewhat," a change of tone from its previous assessment in June when it said the economy had been "expanding moderately." Policymakers reiterated their disappointment with high unemployment.
The MSCI world equity index .MIWD00000PUS fell 0.2 percent to 315.46.
On Wall Street, the Dow Jones industrial average .DJI fell 32.55 points, or 0.25 percent, to 12,976.13. The Standard & Poor's 500 Index .SPX shed 3.99 points, or 0.29 percent, to close at 1,375.33. The Nasdaq Composite Index .IXIC fell 19.31 points, or 0.66 percent, to 2,920.21.
"They did absolutely nothing here. It suggests there is a lot of internal debate going on in the Fed," said Steven Ricchiuto, chief economist at Mizuho Securities in New York.
Earlier on Wall Street, a computer glitch at market maker Knight Capital (KCG.N) caused a surge in volume in about 150 share listings at the market's open. Knight said in a statement that it was advising traders to execute their trades elsewhere. Knight shares plunged 31.3 percent to $7.10, at least a seven-year low.
European shares .FTEU3 ended up 0.5 percent.
Investors shrugged off data showing the U.S. private sector added 163,000 jobs in July, topping economists' expectations of 120,000. The report from payrolls processor ADP came two days ahead of Friday's more important monthly government nonfarm payrolls report for July.
Also on Wednesday, surveys showed U.S. and euro zone factory activity struggled again in July while Chinese manufacturing fell to an eight-month low, as economies around the world showed signs of slowing.
In government debt trading, the benchmark 10-year U.S. Treasury note was down 14/32 in price, with the yield at 1.52 percent.
The dollar rallied as the Fed offered few clues about near-term policy easing. The euro fell 0.6 percent to $1.2224. Against the yen, the dollar gained 0.4 percent to 78.45 yen.
Analysts said further dollar gains should be limited ahead of the ECB policy announcement on Thursday.
"I do not expect follow-through U.S. dollar buying given the proximity to the ECB meeting where policy expectations are far from calm," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.
The risk of ECB disappointment is high. Spanish bond yields could jump again and stocks and the euro could sell off if the ECB does not deliver, analysts say.
"On the ECB, the uncertainty is very high," said Jens Nordvig, global head of FX strategy at Nomura Securities in New York. "Some additional commitment to support sovereign bond markets is highly likely, but how firm and how conditional this commitment will be is far from clear."
One of the biggest critics of the ECB buying more government bonds, Bundesbank President Jens Weidmann, said governments overestimated the capacity of the central bank and placed too many demands on it.
Brent crude settled at $105.96 a barrel, gaining $1.04. U.S. crude settled at $88.91, gaining 85 cents. Prices drew support from data showing a bigger-than-expected drawdown in U.S. crude stockpiles last week.
Spot gold fell $12.80 to $1,600.40 an ounce.
Additional reporting by Chuck Mikolajczak, Steven C. Johnson and Anna Louie Sussman; Editing by James Dalgleish and Leslie Adler