U.S. stocks recover late, euro falls

NEW YORK (Reuters) - Wall Street stocks staged a late recovery and the euro flirted with a near two-year low o n We dnesday as investors remained on edge about Greece's possible exit from the euro zone, which threatened to deepen the region's debt crisis and hurt an already fragile global recovery.

Nervous investors piled into low-risk U.S. and German government debt, sending their yields lower. The dollar also was favored as a safe haven by investors.

Each euro zone country will have to prepare a contingency plan for the possibility of Greece's leaving the bloc, three euro zone sources told Reuters, citing an agreement reached by officials.

A scramble for low-risk investments enabled Germany to pay no interest on 5 billion euros in new two-year debt amid the absence of new measures to tackle the region's debt crisis.

"The markets are on edge and sensitive to every possible out-of-control scenario coming out of Europe," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Europe's leaders were expected to discuss boosting growth at a dinner meeting o n W ednesday, as well as the idea of a joint euro-zone bond. French President Francois Hollande supports the bond plan, but German Chancellor Angela Merkel opposes it.

"Most are expecting no concrete solution out of the meeting, just a few ideas discussed on how to boost growth with no real commitment to carry them out, while Angela Merkel is almost certain to reject any proposal by Francois Hollande in relation to euro bonds," said Craig Erlam, market analyst at Alpari.

Perception of a stalemate between the leader of the euro zone's most powerful member and heads of other bloc countries unleashed selling of their common currency and shares worldwide.

The MSCI world equity index was 1.2 percent lower at 299.75. It halved an earlier decline after touching its lowest level in about five months.

Wall Street stocks staged a recovery half an hour before the close. A late rise in material shares and gains in Apple helped pare nearly all of the day's losses.

The Dow Jones industrial average ended down 6.66 points, or 0.05 percent, at 12,496.15. The Standard & Poor's 500 Index finished up 2.23 points, or 0.17 percent, at 1,318.86. The Nasdaq Composite Index closed up 11.04 points, or 0.39 percent, at 2,850.12.

The tech sector was a drag on U.S. shares for most of the session. Its weakness was led by personal computer maker Dell Inc, which reported disappointing second-quarter earnings late on Tuesday. Dell dropped $2.59, or 17.2 percent, to $12.49.

Social networking company Facebook Inc remains a market focus since its stock started trading o n F riday. The stock has been hammered as regulators said they would conduct inquiries into its initial public offering.

Facebook stock snapped a two-day losing streak. It rose $1, or 3.2 percent, to $32.00, still below its $38 IPO price.

The FTSE Eurofirst index of top European shares finished 2.18 percent lower at 971.99 after touching a fresh year low at 970.98.

In Tokyo, the Nikkei index closed down 2 percent at 8,556.60.

The euro fell 0.8 percent to 1.25850 on the EBS trading platform after touching $1.25453, its lowest level since July 2010.

"The euro is mostly selling off because of the dysfunctional process. We don't know what's going to happen and we don't know what the European leaders want - there is no leadership," said Axel Merk, portfolio manager of the $650 million Merk Hard Currency Fund in Palo Alto, California.

Contagion fears from the fiscal woes in Europe, with encouraging data on new U.S. home sales, strengthened the dollar against most major currencies. The dollar index rose 0.67 percent to 82.043 after touching 82.221, its highest since September 2010.

Euro zone finance officials prepared contingency plans for a possible Greek euro exit on Monday afternoon, according to euro zone sources, during an hour-long teleconference of the Eurogroup Working Group. A document seen by Reuters detailed the potential costs to individual member states of a Greek exit and said that if it came about, an "amiable divorce" should be sought.

"It's very frightening to hear about this kind of talk, even if it makes sense as a contingency, because the lack of a clear path there continues to be very problematic for banks," said James Dunigan, chief investment officer of PNC Wealth Management in Philadelphia.

The strong German Schatz auction lifted June Bund futures to a fresh contract high at 144.28, up more than 1 point on the day. Benchmark U.S. Treasury yields slipped to 1.73 percent, within striking distance of the lowest level in at least 60 years.

The United States, like Germany, enjoyed a further drop in borrowing costs when it sold $35 billion of new five-year notes at a yield of 0.748 percent, the lowest ever at an auction of this maturity.

Signs of a potential deal between Iran and the U.N.'s International Atomic Energy Agency to unblock investigations of suspected work on nuclear weapons in the oil-producing country sent Brent crude below $106 a barrel.

July Brent settled down $2.85, or 2.63 percent, at $105.56, flirting with its lowest level in five months. U.S. oil futures ended down $1.95, or 2.12 percent, at $89.90 a barrel after touching its lowest level since November 1.

Spot gold fell for a third straight session but sharply pared its early loss. Bullion prices were last down 0.3 percent at $1,561.70 an ounce, about $35 above the lowest level so far this year, set a week ago.

(Reporting by Ryan Vlastelica and Getrude Chavez-Dreyfuss in New York and; Richard Hubbard, David Brett and Simon Falush in London; Editing by Dan Grebler)

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