Safe-haven assets eased from Wednesday's highs while stocks fell after U.S. investment bank Merrill Lynch posted heavy losses, which were less dire than some predictions but did not dispel investor unease over the impact of the credit crisis.

Government bond prices eased off highs, while gold fell and low-yielding currencies such as the Japanese yen trimmed gains.

Merrill Lynch reported $7.9 billion in write-downs for the third quarter, triggering its first loss in six years, as it was hit by lax risk management and bad bets on mortgages and leveraged loans for corporate takeovers.

Speculation earlier in the day that write-downs could run into double figures initially helped bonds and weighed on stocks. Merrill itself had forecast a $5.5 billion write-down earlier this month.

Credit ratings agencies Moody's and Fitch cut their outlooks on the company earlier this month.

The results are disappointing, said Ian Tabberer, a fund manager at Scottish Widows Investment Partnership in Edinburgh.

Tied in with Moody's downgrade of forward earnings guidance, it shows that the problems of the fixed income market are not as contained as the market may wish to believe, he said.

European stocks briefly edged into positive territory while U.S. benchmark index futures recovered from session lows, suggesting Wall Street may not post as large a fall when trading starts.

By 8:45 a.m. the FTSEurofirst 300 index of top European shares was virtually flat, as a drop in mining and oil shares was offset by forecast-beating results from companies such as chipmaker STMicroelectronics.

The market is still hesitating between two fairly extreme scenarios, said Arthur van Slooten, strategist at Societe Generale in Paris, citing fears of either recession or a surge in inflation.

The wide movements that we have seen are more due to data (being) supportive to one scenario or the other, more than actual earning reports coming out.

Emerging market stocks were still flat.

But markets remained on edge ahead of key U.S. housing data that could cement market expectations for the Federal Reserve to cut rates again when it meets next week.

Adding to the jitters was news that derivatives exchange Liffe had declared market maker RV Capital LLP to be in default.


The unease kept cash flowing instead into safe-haven bonds. U.S. Treasury prices rose, leaving the two-year note in sight of its recent two-year high. Two-year euro zone government bond prices also held near their highest in six weeks.

Emerging bond yield spreads widened 2 basis points.

The rise in risk aversion was reflected in the yen, which briefly pared some gains after the Merrill results, to stand 0.4 percent higher against the dollar and 0.6 percent up versus the euro as investors unwound riskier carry trades and bought back the Japanese currency.

High-yielding G10 currencies such as the New Zealand dollar fell, as well as emerging market currencies like the Turkish lira and the South African rand.

The possibility of military attacks by Turkey on Kurdish separatists based in northern Iraq is also impacting risk sentiment, although Ankara has pledged to explore diplomatic avenues first.

Oil prices held near $85 a barrel despite reports that Turkish warplanes and ground troops had attacked the Kurd rebels across the border in Iraq. Turkish army sources said the sortie had not been a large-scale offensive.

Gold slipped to $757.20 an ounce after Tuesday's $6 gain but was not far off the 28-year peak of $770 set on Friday. Analysts said the weaker dollar and Mideast tension were helping to draw money into bullion.

It is the dollar which now sets the tone of the gold market, said Tatsuo Kageyama, analyst at Kanetsu Asset Management in Tokyo. Prior to (the Fed meeting) the dollar is pausing and so is gold.

(Additional reporting by Sujata Rao in London and Blaise Robinson in Paris)