European and Asian stocks fell on Wednesday as poor U.S. home sales added to fears about the global economic recovery and optimism over China's new flexible yuan policy faded.
The euro held steady against the dollar but sentiment was fragile as concerns over Europe's banking system undermined flows into risky assets, giving support for safe-haven government bonds.
With advanced economies tightening their fiscal policies, the risks of economic slowdown are rising, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
European shares fell for a second day with pan-European FTSEurofirst 300 index <.FTEU3> shedding 0.8 percent by 0746 GMT.
Financial stocks were among the top losers on concerns about the European banking sector after French bank Credit Agricole pushed back profit targets for its struggling Greek unit Emporiki and said it would take a 400 million euro ($536.7 million) write-down as Greece fights its debt load.
The benchmark European index is up more than 62 percent from its lifetime low of March 9, 2009, as major economies return to growth. But it is only up 0.5 percent for 2010, having stumbled in April and May when worries about debt levels in Europe escalated.
Japan's Nikkei share average <.N225> closed down almost 2 percent, sliding to a one-week low and back toward a key support level. World stocks as measured by MSCI <.MIWD00000PUS> were 0.5 percent down.
U.S. stock futures rose 0.5 percent on some bargain-hunting after the previous session's falls.
U.S. stock indexes fell as much as 1.6 percent on Tuesday, hit by the poor housing data and the S&P 500 <.SPX> moving below its 200 day-moving average, which has been seen as a key technical support level for the markets' recent rally. <.N>
U.S. RATES TO STAY NEAR ZERO PERCENT
Sales of U.S. existing homes unexpectedly fell in May, sparking worries that the Federal Open Market Committee may offer a less upbeat economic outlook after a two-day meeting ends on Wednesday.
That is a very sensitive area because don't forget that the whole financial crisis started with the U.S. housing market and the last thing we want to see is a renewed weakness in the U.S. housing market, said Mike Lenhoff, chief strategist at Brewin Dolphin.
The Federal Reserve, in a statement due at 1815 GMT, is widely expected to hold rates near zero and reiterate its commitment to keeping interest rates exceptionally low for an extended period.
The dollar <.DXY> and the yen edged higher while the euro and high-yielding currencies like the Australian dollar were on the defensive as a recent risk rally appeared to have run its course and the euphoria from China's new yuan policy waned.
The euro was up 0.2 percent against the dollar at $1.2290, having dipped to as low as $1.2244 earlier.
The fall in equities helped spur demand for U.S. Treasuries and euro zone government bonds. Benchmark 10-year German Bund yields was down almost four basis points at 2.660 percent while the benchmark 10-year U.S. Treasury yield was about one basis point lower at 3.159 percent.
Energy shares <.GSPE> were also hit as oil prices fell on higher U.S. inventories, and after the Obama administration said it would appeal a court decision which overturned its moratorium on deepwater drilling in the wake of the Gulf of Mexico spill.
U.S. crude for August delivery slid 30 cents to $77.55 a barrel.
(Additional reporting by Tamawa Desai and Atul Prakash; Editing by Toby Chopra)