(Updates with U.S. market activity before the Fed’s decision, changes dateline, previous LONDON; changes byline)
NEW YORK, Dec 11 (Reuters) - U.S. stocks were flat and European shares declined on Tuesday, while Treasury bonds rallied as investors awaited a likely interest-rate cut from the Federal Reserve that some hope will help the banking sector make a graceful exit from a four-month rut.
The Dow Jones industrial average .DJI was down 17.47 points, or 0.13 percent, at 13,709.56. The Standard & Poor's 500 Index .SPX was down 2.13 points, or 0.14 percent, at 1,513.83. But the Nasdaq Composite Index .IXIC was up 3.74 points, or 0.14 percent, at 2,722.69.
The pan-European FTSEurofirst 300 index .FTEU3 fell 0.5 percent to 1,540.42 after investors sold bank shares before the Fed's rate announcement. About halfway through the European stock trading session, the index had slipped after data from the ZEW research institute showed German investor sentiment fell to a 15-year low.
The dollar drifted higher against most currencies, with analysts noting that what the Fed says in its policy statement could matter as much as what they do. The U.S. Dollar Index .DXY was up 0.2 percent at 76.195, compared with a close on Monday at 76.062. The euro EUR= was down 0.1 percent at $1.4702, while against Japan's yen JPY=, the dollar was up 0.03 percent at 111.66 yen.
The Federal Open Market Committee’s announcement on U.S. interest rates is expected at about 2:15 p.m. EST (1915 GMT).
Credit markets have been paralyzed by a crisis that began with bad investments in mortgage-linked debt, sparking big losses at most major financial institutions and generating a persistent aversion to risk.
The most likely course of action given this scenario, analysts say, is a quarter-percentage-point cut in the target fed funds rate, accompanied by a half-percentage-point cut in the discount rate that would entice banks into borrowing directly from the Fed.
But the bond market was clearly hoping for more, rallying after a week of losses as investors wondered whether a full 50- basis-point reduction in fed funds itself might not be in store.
“There is still a shot the Fed could go 50,” said Ted Ake, head of bond trading at Mizuho Securities.
That whim had taken the benchmark 10-year U.S. Treasury note US10YT=RR up about half a point in price, pushing its yield down to 4.10 percent from 4.16 percent late on Monday.
In the oil futures market, crude rose above $89 a barrel on Tuesday after an ice storm in Oklahoma shut the biggest crude oil terminal and two pipelines there. U.S. crude oil for January delivery was up $1.74 at $89.60 per barrel on the New York Mercantile Exchange.
High energy costs have complicated the Fed’s task of easing monetary policy to stem the effects of the credit crunch on the broader economy. Officials worry energy and food-led inflation could take hold even as growth weakens.
Still, most traders believe the Fed must acknowledge that softer growth is the bigger threat at the moment.
This could lead to a rally in global stock markets, but only if the market senses that the central bank foresees a near-term end to the mortgage debacle. Investors would surely sniff out any scent of fear in the Fed’s words, possibly unwinding share markets’ tentative recovery.
Consumer confidence data on Tuesday suggested both workers and businesses were feeling glum.
An index of small business sentiment about the U.S. economy fell to its lowest level since 1993, according to the National Federation of Independent Business, while an Investor’s Business Daily survey showed consumer moods improved only slightly ahead of the holidays.
Earlier in the trading day, Japan's Nikkei .N225 gained 0.8 percent to end above 16,000 for the first time in more than a month as fund injections into Swiss bank UBS UBSN.VX helped ease concern over the global financial crisis. The Nikkei gained 120.33 points to end at at 16,044.72. (Reporting by Pedro Nicolaci da Costa and Burton Frierson; Editing by Jan Paschal)
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