NEW YORK World shares and oil prices fell on Monday on worries about dim growth prospects for the global economy and on expectations for a weak U.S. corporate earnings reporting season.
Jitters over the euro zone debt crisis knocked the euro down from two-week highs with uncertainty about Spain persisting after a euro zone finance ministers meeting in Luxembourg said the country did not yet need a bailout.
The lackluster tone in markets was set early after the World Bank cut its growth expectations the East Asia and Pacific region, including economic powerhouse China.
Heading into the U.S. third quarter corporate earnings reporting season - which starts on Tuesday with a report from Alcoa (AA.N) - analysts forecast earnings will fall 2.4 percent from the year-ago quarter
That would mark the first decline in three years and make it difficult to justify keeping U.S. stocks near recent peaks.
Recent warnings from large multinationals such as FedEx Corp (FDX.N), Hewlett-Packard Co (HPQ.N) and Caterpillar Inc (CAT.N) have already made investors wary.
On Wall Street, equities trading volume was the lowest so far this year on Monday as the U.S. government and the bond market were closed for the Columbus Day holiday.
"Certainly there have been a lot of downward revisions in earnings in general," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois. "Some people are predicting that we may see an overall decline in earnings, so there may be some defensive posturing and profit-taking."
U.S. stocks finished the day modestly lower, while European shares .FTEU3 fell 1.0 percent. World shares as measured by the MSCI world equity index .MIWD00000PUS were down 0.7 percent.
The Dow Jones industrial average .DJI slipped 26.50 points, or 0.19 percent, to 13,583.65. The Standard & Poor's 500 Index .SPX was off 5.05 points, or 0.35 percent, to 1,455.88. The Nasdaq Composite Index .IXIC dropped 23.83 points, or 0.76 percent, to 3,112.35.
About 4.1 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, compared with the year-to-date daily average of 6.54 billion to last Friday.
Earlier the World Bank said there was a risk the economic slowdown in China could worsen and last longer than many analysts have forecast. Still, the international lender expects China to have a soft landing. It revised its forecast to growth of 7.7 percent this year and 8.1 percent for next year.
Earlier this year, the World Bank had forecast 8.2 percent growth for China in 2012 and 8.6 percent in 2013.
China's role as the last major growth engine in the world economy amplified the impact of the World Bank's forecasts in commodity markets.
Monday's World Bank forecast deflated some of last week's positive sentiment in markets spurred by an unexpected drop in the U.S. unemployment rate.
Fears slower global economic growth would curb oil demand initially sent Brent crude oil prices lower, but tension in the Middle East helped the commodity pare losses in choppy trading.
Brent edged down 20 cents to settle at $111.82 a barrel, recovering after falling to a session low of $110.54. U.S. crude fell a second straight session, dropping 55 cents to settle at $89.33 a barrel
Uncertainty over the next steps in solving the euro zone's debt crisis, coupled with the weak economic outlook weighed on the euro, which was 0.5 percent lower at $1.2970.
Euro zone finance ministers said Spain was taking steps to overhaul its economy and did not need a bailout, at least for now.
Arriving at a meeting in Luxembourg to discuss Greece and Spain and to inaugurate the euro zone's permanent bailout mechanism, German Finance Minister Wolfgang Schaeuble said Madrid had made clear it wanted no help.
"Perhaps those types of comments are not necessarily positive for the euro in the sense that markets are still looking for a Spanish request as the next big step forward for Europe," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.
The euro had hit two-week highs on Friday. The U.S. dollar was up 0.3 percent against a basket of currencies .DXY.
In Europe, fresh data showed investor sentiment had improved for a second consecutive month in October thanks largely to the monetary easing by central banks and Germany's backing for a new permanent bailout fund for the European currency bloc.
German export data for August also surprised by jumping 2.4 percent month-on-month, surpassing expectations for a drop of 0.5 percent in a Reuters poll of 17 economists.
(Additional reporting by Chuck Mikolajczak, Rodrigo Campos and Wanfeng Zhou)