The dollar fell toward a seven-month low against the yen but world stocks recovered earlier losses on Thursday after Federal Reserve chairman Ben Bernanke painted a gloomy outlook for the U.S. economy.

Bernanke said the Fed stood ready to ease monetary policy further if the budding U.S. economy recovery withers, describing the outlook as unusually uncertain.

The publication of European bank stress tests, due on Friday, also kept investors cautious. Europe is testing how 91 banks would cope with another economic slump and losses on government debt in the wake of the euro zone sovereign debt crisis.

The yen is gaining after Bernanke on risk aversion and as an interest rate play in reaction to U.S. yields falling further and rate differentials moving in favor of the yen, said Niels Christensen, currency strategist at Nordea in Copenhagen.

The dollar fell 0.4 percent to 86.59 yen, close to last week's seven-month low of 86.25. The dollar <.DXY> was down 0.4 percent against a basket of major currencies.

Two-year U.S. Treasury yields briefly matched a record low of 0.556 percent hit the previous day, while the benchmark 10-year yield held near a 15-month low of 2.855 percent. The MSCI world equity index <.MIWD00000PUS> and the Thomson Reuters global stock index <.TRXFLDGLPU> were virtually unchanged on the day. The FTSEurofirst 300 index <.FTEU3> ticked slightly higher.

Japan's Nikkei index <.N225> had earlier closed down 0.6 percent at its lowest close since July 2.

Uncertainty over the detail of the bank stress tests persists. Major listed banks, which face constant investor scrutiny, are expected to pass the tests, but the results may show the worst problems lie with smaller players such as Spanish cajas and German landesbanks, which are mainly unlisted.

No one is wanting to put on any big positions ahead of the outcome of the bank stress tests tomorrow, said Justin Urquhart-Stewart, investment director at Seven Investment Management.

Emerging stocks <.MSCIEF> fell 0.3 percent on the day.

U.S. crude oil rose a quarter percent to $76.75 a barrel, supported by forecasts for a fourth consecutive weekly drop in U.S. crude inventories.

The bund futures rose 30 ticks.

The euro rose 0.3 percent to $1.2794 after better-than-expected German purchasing managers' surveys on manufacturing and services.

(Additional reporting by Jessica Mortimer; Editing by Susan Fenton)