World stocks ease as Fed stimulus seen less certain

Global stocks retreated on Thursday on dimmed expectations for new stimulus from the Federal Reserve and data showing slower economic growth, while the euro rose after sources said Spain is in talks over conditions for aid to reduce its borrowing costs.

Three sources said the favored option for Spain is that an existing rescue fund, known as EFSF, would purchase Spanish debt at primary auctions while the European Central Bank would intervene in the secondary market to lower yields.

However, Spain has not made a final decision to request a bailout, the sources said, and no specific figure for aid has been discussed, one of the sources told Reuters.

The euro rallied to a fresh seven-week high against the dollar, up 0.3 percent at $1.2569, while the U.S. dollar index was down 0.2 percent at 81.334.

Concern over the outlook for the global economy sapped investor sentiment as did comments on Thursday from James Bullard, president of the St. Louis Federal Reserve.

Minutes from the latest Federal Reserve meeting released on Wednesday indicated the U.S. central bank might be ready for another round of stimulus.

But Bullard, a non-voting member of the policy-making Federal Open Market Committee, said on CNBC television that U.S. data has been somewhat better since the July 31-August 1 meeting and the minutes were "a bit stale."

"There could be a tiny bit of steam coming out of the QE3 balloon," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire. De Gan referred to a third round of monetary stimulus known a quantitative easing.

The Dow Jones industrial average s down 105.36 points, or 0.80 percent, at 13,067.40. The Standard & Poor's 500 Index was down 9.80 points, or 0.69 percent, at 1,403.69. The Nasdaq Composite Index was down 16.45 points, or 0.54 percent, at 3,057.22.

In Europe, the FTSEurofirst 300 of top regional shares closed down 0.6 percent at 1,089.13.

Business activity data showed a downturn was spreading further throughout the euro zone, with the weakness that began among the smaller, peripheral states, increasingly taking root in core economies such as Germany.

The Purchasing Managers' Index survey from Markit suggested that the euro zone was destined to return to recession, as the poll notched up a seventh month of contraction.

In addition, Chinese manufacturing PMI data hit their lowest levels since November as new export orders slumped and the stock of unsold goods rose.

U.S. data was mixed. Growth in the U.S. manufacturing sector picked up in August, a sign the economy is resisting the global economic chill, although a rise in new jobless claims last week pointed to a still-sluggish labor market.

U.S. government debt prices rose on the view more stimulus was in the making from the Federal Reserve, despite Bullard's comments.

The benchmark 10-year U.S. Treasury note was up 8/32 in price to yield 1.6677 percent.

Oil slid. Brent crude futures fell 35 cents to $114.56 a barrel.

U.S. light sweet crude oil fell 99 cents to settle at $96.27 a barrel.