U.S. shares struggle, bond yields, dollar fall

NEW YORK (Reuters) - Weaker-than-expected July jobs growth in the United States pushed U.S. Treasury yields and the dollar lower on Friday while capping stock indexes as investors grew cautious on the outlook for U.S economic growth and Federal Reserve plans for trimming stimulus.

The number of jobs outside the farming sector increased by 162,000 last month, although the unemployment rate fell to 7.4 percent, its lowest in over four years. The result was below the median forecast in a Reuters poll for 184,000 new jobs.

"Stock investors are scared of both the tapering and a potentially slowing economy," said Brian Reynolds, chief market strategist at Rosenblatt Securities in New York. "They're not sure what they're scared of, but they know they're scared. And very few people want to buy stocks at an all-time high."

The Dow Jones industrial average was down 12.76 points, or 0.08 percent, at 15,615.26. The Standard & Poor's 500 Index was down 1.36 points, or 0.08 percent, at 1,705.51. The Nasdaq Composite Index was up 4.12 points, or 0.11 percent, at 3,679.87.

European shares erased gains after the data but then recovered some of the drop, with the FTSEurofirst 300 closing up 0.3 percent. Earlier, the index touched a two-month high on a rally in insurers after earnings reports from AXA and Allianz.

The MSCI world equity index was last up 0.4 percent.

The benchmark 10-year U.S. Treasury note, which was in negative territory before the jobs report, was up 27/32 afterward, its yield easing to 2.6036 percent.

Traders of short-term U.S. interest-rate futures boosted bets that the Federal Reserve will wait until 2015 before raising short-term borrowing costs.

German Bund futures rose 0.2 percent to 142.60.

Italian bonds braved growing political uncertainty after Italy's top court upheld a jail sentence against former Premier Silvio Berlusconi that could throw the country's coalition into crisis.

Italian government bond yields were last at 4.269 percent.

DOLLAR FALLS

The dollar fell against the euro and yen. It was last at 98.96 yen, down 0.6 percent, and $1.3281 against the euro, a gain of 0.6 percent for the common currency.

"The report takes away more than it offers in the sense that it means that the decision to taper QE3 in September has become that much more difficult for the Federal Reserve," said Christopher Vecchio, currency analyst at DailyFX in New York. "As we learned after this Wednesday's FOMC policy meeting, the Fed isn't exactly excited about where the U.S. economy is right now."

Gold rebounded as the dollar dropped. Spot gold fell as much as 1.9 percent to $1,282.69 an ounce ahead of the data but was last up 0.2 percent to $1,311.

U.S. crude oil futures fell 1.1 percent to $106.70 a barrel but were still heading for 1.9 percent rise on the week.

Brent crude oil reached a four-month peak of $110.09 a barrel and a weekly increase of 1.5 percent after two weeks of losses as the improving economic outlook for the world's biggest consumer adds to concern over supply disruptions in Iraq, Libya and Nigeria.

(Reporting by Nick Olivari; Editing by James Dalgleish and Dan Grebler)