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Fed caution, weak US data disappoint markets

Global markets mostly fell Thursday after the Federal Reserve balked at providing major new economic stimulus, and weak economic indicators for the U.S., China and Europe raised concern over the world economy.

At the end of a two-day policy meeting Wednesday, the Fed said it was extending a program called Operation Twist, under which the Fed swaps short-term bonds for longer-term ones to help keep long-term interest rates low.

But analysts said the program's extension might not provide much benefit. Businesses and consumers who aren't borrowing now aren't that likely to change their minds just because rates dropped a little more.

Britain's FTSE 100 closed 0.9 percent lower at 5,571.15 while Germany's DAX shed 0.6 percent to 6,351.45 and France's CAC 40 dropped 0.2 percent to 3,118.96. The euro slumped 0.9 percent on the day to $1.2572.

Wall Street fell, with the Dow shedding 0.8 percent to 12,727.14 and the S&P 500 dropping 1 percent to 1,342.43.

Stan Shamu of IG Markets in Melbourne said in a market commentary that investors were "disappointed" that the Fed had not chosen to embark on a third major round of bond purchases, known as quantitative easing.

Such purchases would lower rates even further. The Fed has completed two such programs, buying more than $2 trillion in Treasury bonds and mortgage-backed securities, to help prop up the economy.

Meanwhile, economic indicators in the U.S. continued to offer a gloomy outlook.

The National Association of Realtors said Thursday that sales of previously occupied homes dropped 1.5 percent in May from the previous month, raising fears that the housing market recovery is weakening. A separate survey showed manufacturing in the Philadelphia region contracted for the second straight month, providing more evidence that the economy is faltering.

Appetite for financial assets such as stocks was also dented by the results of a monthly HSBC survey which showed that manufacturing in China, the world's No. 2 economy, has continued to contract. China's growth has been a pillar of the global economy in recent years, so its slowdown has been of particular concern to investors.

In the 17-country eurozone, the equivalent manufacturing survey, called the purchasing managers' index, fell to 44.8 points in June from 45.1 the previous month. A number below 50 indicates contraction. A related survey on the services sector also showed declining activity, suggesting a drop in GDP in the second quarter.

European finance ministers are meeting in Luxembourg later in the day to discuss ways to ease the uncertainty over their currency bloc. Fears that individual states like Spain or Italy could be overwhelmed by their debts has caused investors to shy away from lending to those countries.

Markets in some European countries — particularly Spain — had earlier risen on hopes that leaders will this month come up with new measures to ease the debt fears and after Madrid found good demand for bonds it sold Thursday. But the losses on Wall Street wiped out those gains.

Spain saw good demand for its bonds, suggesting it will not imminently need foreign assistance to cover its debt obligations, even though the higher rate it has to pay on the bonds remains a problem.

Spain has seen its government borrowing costs rise in recent weeks to levels that are unsustainable over a period of months. An improvement in investor confidence in Spain's government debt will likely depend on how much the government needs to give to its banks to keep them solvent.

An independent audit on the Spanish banks' capital needs will be delivered to the government on Thursday. Estimates have ranged from €50 billion to €100 billion ($64 billion to $127 billion).

European leaders are struggling to decouple the risk that banks and government finances pose to each other in Europe. Bank bailouts threaten government finances and weakened government bond prices are causing big losses for banks.

The leaders of Italy, Spain and France support various means of spreading those risks across the eurozone, among which jointly-issued debt. The latest move being considering is allowing the European bailout fund to buy government bonds in the markets, which would lower those countries' borrowing rates. Germany, however, resists such measures for fear they will cost it too much. All four leaders will meet in Rome on Friday to come up with a common position ahead of an EU summit next week that is expected to deliver a broad new plan to strengthen confidence in the eurozone.

Earlier in Asia, Japan's Nikkei 225 index bucked the trend to rise 0.9 percent to 8,824.07. Hong Kong's Hang Seng slid 1.3 percent to 19,265.07 and South Korea's Kospi lost 0.8 percent to 1,889.15.

Markets in Australia, mainland China, India and Singapore also fell.

In commodities markets, the benchmark oil contract for August delivery was down $1.97 to $79.48 a barrel in electronic trading on the New York Mercantile Exchange. It was the first time since October that it fell below $80 a barrel.

In currencies, the dollar rose 0.7 percent from the previous day to 80.25 yen.

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Pamela Sampson in Bangkok contributed to this report.