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NEW YORK (Reuters) - The euro rose on Wednesday after media reports suggested that the European Central Bank may buy unlimited amounts of short-term government debt to ease the region's financial crisis.
Markets have been expecting ECB President Mario Draghi to unveil a bold plan at the bank's policy meeting on Thursday. A report from Bloomberg on Wednesday that suggested the purchases of the debt of some euro zone countries could be unlimited dispelled some recent skepticism about the scale of the program.
The report was enough to put a floor under European and U.S. stock markets, which have been pressured by increased wariness about the global economy after Hong Kong shares suffered their worst declines in six weeks and FedEx (FDX.N), the world's second-largest package delivery service, cut its profit forecast due to a weak economic outlook.
Earlier Wednesday, purchasing managers indexes showed slowing activity in the service sectors in China and Europe.
The ECB may also be ready to waive seniority status on government bonds it buys under the new program, which would mean investors would not rank lower in any restructuring of euro zone sovereign debt, making the bonds more attractive to private investors.
"All these reports suggest that the ECB is actually ready to do something," said Sebastien Galy, currency strategist at Societe Generale in New York.
A central bank source, however, told Reuters that the ECB is unlikely to announce that the bond purchases would be unlimited or to set even internal targets for yields or spending beforehand.
The ECB said in August it would start buying Spanish and Italian government bonds again to ease pressure on those countries' borrowing costs, but only if they first sought help from the euro zone's rescue fund and met strict conditions.
The news helped pushed down yields on Spanish and Italian bonds, but stocks in European and U.S. markets struggled to make headway as the ECB would likely "sterilize" its bond buying by taking interest-bearing deposits from banks every week, matching the amount spent on the bonds.
Although sterilization would help allay fears about the inflationary impact of bond purchases - an olive branch to inflation hawks at Germany's Bundesbank who have opposed expanding the ECB's balance sheet - it could also limit the liquidity available to flow into stock and commodity markets.
The euro, which had been down 0.15 percent at $1.2550, jumped to $1.26 after the Bloomberg report, closer to Friday's two-month peak of $1.26378.
After a rally in stocks in Europe and the United States over the summer, traders fear markets have already priced in any ECB move and would take profits when the news was announced on Thursday. The market has also been expecting that the Federal Reserve will announce new measures to stimulate the economy when it meets next week, depending on Friday's U.S. employment report for August.
European shares initially extended gains on expectations on the ECB before settling up 0.01 percent at 1,079.24 points .FTEU3. The blue-chip Euro STOXX 50 index .STOXX50E rose 0.2 percent.
"The ECB's bond-buying plan is welcome, but you can't wax a car and hope it fixes the engine. Europe needs structural changes," said Manish Singh at Crossbridge Capital in a note.
On Wall Street, the Dow Jones industrial average .DJI gained 11.54 points, or 0.09 percent, to 13,047.48. The Standard & Poor's 500 Index .SPX dropped 1.50 points, or 0.11 percent, to 1,403.44. The Nasdaq Composite Index .IXIC dropped 5.79 points, or 0.19 percent, to 3,069.27.
The benchmark 10-year U.S. Treasury note was down 5/32, with the yield at 1.5891 percent.
The growing likelihood of ECB action to ease stresses in the European debt market curtailed demand for safe-haven German bonds at an auction of new 10-year paper earlier in the day.
The German Finance Agency, which managed the debt sale, received bids from investors worth only 3.93 billion euros ($4.9 billion) for the 5 billion of bonds it wanted to sell.
Analysts said demand might have been affected by the heavy supply elsewhere in the euro zone as the Netherlands was selling a three-year dollar-denominated bond, while triple-A rated Austria also sold bonds on Tuesday.
Investors remain concerned about a global slowdown in manufacturing activity as reported by purchasing managers indexes in China, the euro zone and the United States this week.
Hong Kong shares suffered their worst day in more than six weeks on Wednesday, dragged down by the growth-sensitive Chinese banking and energy sectors after brokerage downgrades and falling coal prices compounded fears of an anemic mainland economy.
The euro zone probably slipped back into recession in the current quarter, according to business surveys that also showed Asia's services sector growth remained muted in August as the global economy struggled to get its footing.
The Purchasing Managers' Index for the euro zone, published by Markit, showed the economic rot that began in smaller periphery members of the 17-nation bloc is now taking hold even in Germany, its largest and strongest economy.
The business surveys have added weight to growing fears in the commodity markets that demand is set to wane.
Prices of iron ore and steel have fallen dramatically on signs of slowing activity in China, though the slowdown has renewed hopes for central bank policy easing.
Iron ore prices, which have dropped 36 percent since early July, were below $90 a metric ton (1.1023 tons) .IO62-CNI=SI, their weakest level since October 2009. Steel futures hit an all-time low on the Shanghai Futures Exchange, with further falls expected.
In oil markets the growth worries pushed Brent crude under $114 a barrel on Wednesday, and U.S. crude futures edged up 0.3 percent to $95.56.
Gold, which would benefit if lower growth prompts central banks into action, edged down slightly to $1,692.80 an ounce but is still trading near a six-month high.
($1 = 0.7961 euros)
Additional reporting by Richard Hubbard and William James in London and Nick Olivari in New York; Editing by Will Waterman, Clive McKeef, Leslie Adler, James Dalgleish and Dan Grebler