Upbeat factory data buoys euro but Wall St retreats

By Leah Schnurr

NEW YORK (Reuters) - Wall Street sagged on Tuesday, pulling back further from recent records as investors found few reasons to buy, but the euro was supported by data that showed a surge in factory output in Britain and Germany.

With the U.S. earnings season winding down, a dearth of domestic economic data and the focus on Federal Reserve policy, trading in U.S. stocks has been muted. Monday marked the lightest volume for a full session this year.

The sole U.S. economic report of the day showed the trade deficit narrowed sharply in June, suggesting an upward revision to second-quarter growth. Stocks took no direction from the data, though it did weigh on Treasuries prices.

"We're in a post-earnings season environment, and it would take a pretty major catalyst to move us significantly higher from here," said Art Hogan, managing director at Lazard Capital Markets in New York.

"Still, that we've been drifting higher without any major pullback augurs that there's really support for the levels we're at now. The only thing that could really take us lower would have to be something unexpected."

European shares cut gains to trade lower, though economic data overseas was supportive. The strong growth at factories in Germany, Europe's largest economy, and in Britain, the euro zone's biggest trade partner, in June extended a run of recent upbeat data that points to an early end to the currency bloc's 18-month recession.

Still, analysts were quick to stress that the region was far from seeing the kind of recovery underway in the United States.

"We think that austerity as well as a financial system that is not willing to lend money to companies will still suppress growth for a longer time," said Ronald Doeswijk, chief strategist at fund managers Robecco.

Despite the data, Europe's broad FTSEurofirst 300 index broke a six-day winning streak, provisionally closing down 0.4 percent . World stocks fell 0.3 percent.

The Dow Jones industrial average fell 91.76 points, or 0.59 percent, at 15,520.37. The Standard & Poor's 500 Index was down 9.30 points, or 0.54 percent, at 1,697.84. The Nasdaq Composite Index was down 24.96 points, or 0.68 percent, at 3,667.99.

The euro climbed as high as $1.3316 and last traded at $1.3304, up 0.4 percent on the day.

Germany said industrial orders at its factories surged by a surprisingly strong 3.8 percent in June, their largest monthly rise since October as contracts for big-ticket items jumped and euro zone demand rebounded.

Britain's manufacturers reported their biggest annual rise in industrial production in over two years, adding to growth already seen in service sector activity, the housing market and in retail sales.

"The broad-based improvement seems to suggest that the current improvement in activity has good foundations and further progress is likely in the coming months," said Annalisa Piazza, a senior economist at Newedge Strategy.

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Graphic - Economic growth since 2008 http://link.reuters.com/zyx46s

Graphic - U.S. trade balance http://link.reuters.com/vyx54t

Graphic - German output and growth http://link.reuters.com/zyx46s

Graphic - UK Industrial production http://link.reuters.com/nep78

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U.S. Treasuries prices slipped as investors pared their bond positions before a $32 billion auction of new three-year debt. Benchmark 10-year Treasury notes were 5/32 lower in price to yield 2.659 percent.

Oil prices tumbled after Iran's President Hassan Rouhani said he was ready to enter "serious and substantive" negotiations over Tehran's nuclear program, reducing the geopolitical risk potential.

Brent Crude down 77 cents to $107.93, while U.S. crude dropped $1.20 to $105.36.

(Additional reporting by Richard Hubbard in London, Ryan Vlastelica in New York; Editing by Dan Grebler)