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NEW YORK World stocks dropped and the U.S. dollar rose against the yen on Thursday as investors lowered their expectations that the Federal Reserve would signal a dramatic rescue for the economy this week.
Weakness in stocks, which partly reflected jitters over a sharp drop in German shares, helped boost safe-haven gold.
Fed Chairman Ben Bernanke is due to address central bankers at an annual symposium in Jackson Hole, Wyoming, on Friday. His speech last year laid the groundwork for the Fed's $600 billion bond-buying program to revive the economy under the rubric "QE2" for the Fed's second round of stimulus, or quantitative easing.
While investors have speculated Bernanke could signal a new monetary offensive in his talk, many analysts say he could well disappoint those looking for major measures, such as a QE3.
"Over the last couple of days, we have gone from pure excitement about QE3 to being far more muted. I suspect there has been some positioning for a slightly more mundane speech coming from Bernanke," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.
Worries about the faltering U.S. economic recovery as well as the euro zone debt crisis have plagued investors for weeks.
Stocks posted gains earlier this week partly on expectation the soft U.S. economy would trigger another round of monetary stimulus from the Fed.
Under quantitative easing, the Fed effectively prints money to buy bonds, with the aim of depressing U.S. Treasury yields even further and encouraging investors to seek higher returns elsewhere.
An increase of money supply would also erode the value of the dollar relative to other currencies. On Thursday, the dollar rose to 77.48 yen, up 0.7 percent.
The MSCI world equity index .MIWD00000PUS fell 1.1 percent. The benchmark, however, is on track to post its first weekly gain in five weeks, having hit an 11-month low earlier this month.
Talk of a broad short-selling ban in Germany caused a slump in European indexes, with the DAX .GDAXI leading the way and falling to a low of 5,451 points before paring losses and ending down 1.7 percent.
Comments from the German finance ministry and a regulator appeared to quash initial fears, although it was not enough to restore the market's earlier gains and the broader FTSEurofirst 300 .FTEU3 ended the day down 1.25 percent.
In the United States, the Dow Jones industrial average .DJI fell 170.89 points, or 1.51 percent, to end at 11,149.82. The Standard & Poor's 500 Index .SPX lost 18.33 points, or 1.56 percent, to end at 1,159.27. The Nasdaq Composite Index .IXIC dropped 48.06 points, or 1.95 percent, to end at 2,419.63.
"They're selling ahead of Bernanke and being fairly cautious in their positioning," said Len Blum, managing partner of Westwood Capital LLC in New York.
Among U.S. stocks, Apple (AAPL.O) slipped 0.7 percent to $373.72 after the resignation of its founder and chief executive, Steve Jobs.
Bank shares rose, however, after Warren Buffett's Berkshire Hathaway (BRKa.N) said it would invest $5 billion in Bank of America (BAC.N). Shares of the Dow component jumped 9.4 percent to $7.65 but are still down for the month.
GOLD REVERSES LOSS, BONDS AND OIL UP
Worries about a global recession have sent investors scrambling for gold and other safe-haven assets in recent weeks.
Gold traded higher on Thursday, a day after registering its biggest percentage one-day drop since December 2008. Spot gold was last up 0.5 percent at $1,759.99 an ounce.
U.S. Treasury prices also advanced. Benchmark 10-year Treasury notes finished 19/32 higher in price to yield 2.23 percent, down 7 basis points from late on Wednesday.
Data showing higher-than-expected claims for U.S. jobless benefits helped support bond prices and was the latest report to suggest the job market is still struggling to gain momentum.
Thomas Hoenig, president of the Kansas City Federal Reserve Bank, said in an interview with Reuters Insider television that he does not see another U.S. recession looming.
In the oil market, U.S. crude futures edged up in volatile trading as strong gasoline and heating oil futures supported prices on the threat from Hurricane Irene.
The storm was forecast to affect the U.S. Northeast -- and possibly the New York City area -- on Saturday or Sunday.
On the New York Mercantile Exchange, October crude rose 14 cents, or 0.16 percent, to settle at $85.30 a barrel. Brent crude settled at $110.62, up 47 cents.
(Reporting by Caroline Valetkevitch in New York, with additional reporting by Wanfeng Zhou and Ashley Lau in New York and Simon Jessop in London; Editing by Kenneth Barry and Dan Grebler)