Euro falls on ECB outlook; U.S. stocks pare gains

By Caroline Valetkevitch

NEW YORK (Reuters) - The euro fell 1 percent on Thursday on a darkening euro zone outlook, while U.S. stocks pared sharp early gains as investors grew cautious ahead of Friday's key jobs report.

Stocks rallied earlier following European Central Bank President Mario Draghi's pledge to beef up or prolong the bank's economic stimulus if necessary.

The comments came as the bank cut its inflation and growth forecasts for the euro zone, which weighed on the euro.

Nervousness ahead of the U.S. Labour Department's monthly jobs report on Friday and what it may mean for the U.S. interest rate outlook took out some of the early gains in stocks, though.

The Federal Reserve, which meets on September 16-17, has said it will raise rates when it sees sustained economic recovery. While the labour market has strengthened, inflation remains below the Fed's 2 percent target.

"After a waterfall decline like we had over a week ago, you can have violent moves both up and down. That's a little of what we're seeing now as well as positioning in advance of not the jobs number tomorrow, but a long weekend where we will be digesting the jobs number and whatever else we get over the weekend," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

The Dow Jones industrial average rose 4.51 points, or 0.03 percent, to 16,355.89, the S&P 500 gained 0.81 points, or 0.04 percent, to 1,949.67 and the Nasdaq Composite dropped 14.35 points, or 0.3 percent, to 4,735.63. MSCI's all-country stock index rose 0.6 percent, while the FTSEuroFirst leading index of 300 shares closed up 2.4 percent. Germany's DAX shot up 2.7 percent <.GDAXI>.

Economic data showing the U.S. trade deficit shrank in July to its lowest level in five months as exports rose broadly also helped U.S. stocks in early trading. Other reports showed activity in the global manufacturing and service sectors expanded in August at the same pace as in July, with both the U.S. and euro zone doing better than Asia.

China's stock markets, the root of much of the global volatility in recent weeks, were closed on Thursday for the start of a two-day holiday.

The euro fell, surrendering most of the solid gains it put up against the dollar since China devalued the yuan last month.

During Draghi's news conference, the euro dropped 1.4 percent against the dollar to touch a two-week low of $1.1108. It was last off 0.90 percent at $1.1122 after earlier this week reaching a high of $1.1332 as investors spooked by markets turmoil in China moved heavily into the euro and yen.

Oil prices settled higher, following gains in equities.

Brent rose 18 cents to settle at $50.68 a barrel, while U.S. crude rose 50 cents to $46.75 a barrel.

U.S. BONDS RISE

U.S. Treasuries prices rose after the dovish outlook from the ECB made U.S. government debt more attractive than European

counterparts. But caution ahead of Friday's monthly U.S.

employment report limited gains.

Benchmark 10-year Treasury notes were last up 7/32 in price to yield 2.166 percent.

(Additional reporting by Jamie McGeever in London and Michael Connor; Editing by Dan Grebler and Chizu Nomiyama)