World stocks slipped from this week's six-month peak and the dollar fell to its lowest in almost five months on Thursday after the Federal Reserve lowered its forecast of U.S. economic growth for the next three years.
Minutes from its April meeting showed the Fed projected the world's biggest economy to contract by up to 2 percent this year with the unemployment rate rising to as high as 9.6 percent.
They also showed that Fed policymakers had considered buying more securities to spur recovery -- a move which would inject more dollars into the market.
A disappointing 2009 outlook from Hewlett-Packard, the world's biggest PC maker, also fanned concerns about corporate profits in a slowing economy.
There are concerns finally coming through about where the underlying growth is going to come from, said Justin Urquhart Stewart, investment director at Seven Investment Management.
We need a growing level of demand. There's a certain amount of restocking happening, and unfortunately the market has been taking that as a sign of a recovery, which it is not. MSCI world equity index fell 0.5 percent after surging to levels last seen in early November on Wednesday.
The FTSEurofirst 300 index fell 1 percent while emerging stocks fell half a percent.
The setback comes after an almost uninterrupted rally from mid-March pushed the benchmark MSCI index up 42 percent.
U.S. crude oil -- whose prices are closely correlated with growth expectations -- fell 0.5 percent to $61.75 a barrel after hitting a six-month peak above $62 on Wednesday.
Despite the fall in risky assets, there have been signs that the worst may be over for the global economy.
The euro zone's services and manufacturing sectors contracted less than expected in May as firms saw the pace of decline in new orders ease. Markit's euro zone flash services purchasing managers' index rose to 44.7 in May from 43.8 last month, beating the consensus estimate of 44.5.
In a further sign of easing tensions in money markets, short-term dollar funding costs dropped further to fresh lows in Asia. In Singapore, 3-month dollar costs fell 4 basis points from Wednesday to 0.70917 percent, nearly half the levels in March.
On Wednesday, the Volatility Index -- Wall Street's fear gauge -- fell as low as 26.57 at one point, hitting its lowest level since September 15, when Lehman Brothers filed for bankruptcy.
Whilst it is encouraging that confidence may be returning, it's dangerous to believe that the credit crunch is now over, and we are heading back to the good old days, said Chris Hossain, senior sales manager at ODL Securities.
The June bund futures was steady on the day.
The dollar fell 0.2 percent against a basket of major currencies, having hit its lowest level since early January.
Sterling hit its highest level against the euro in 3-1/2 months at 87.23 per euro while against the dollar it hit a six-month peak above $1.58.
(Additional reporting by Sitaraman Shankar and Atul Prakash; editing by David Stamp)