NEW YORK (Reuters) - Stocks fell and the euro retreated on Thursday as investors pared back expectations that Federal Reserve Chairman Ben Bernanke will signal a new round of economic stimulus in a much-anticipated address on Friday to central bankers.
A successful Italian bond sale earlier in the day pointed to growing confidence among investors that the European Central Bank will take measures shortly to tackle more effectively the debt crisis that has plagued the 17-member currency bloc.
But investors grew more doubtful that Bernanke will deliver firmer hints on more monetary easing in his speech in Jackson Hole, Wyoming. The gathering is the same event where he hinted at the Fed's second round of easing in 2010.
Hopes for further easing have grown since minutes of a recent Fed meeting showed policymakers could act "fairly soon".
U.S. shares slid and European stocks hit a four-week low as investors closed out positions ahead of Bernanke's speech, which is expected to provide some clues to the Fed's next move.
"Everyone's waiting on Jackson Hole and QE3," said Mirko Mikelic, portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "Obviously it would be a disappointment if there wasn't QE3, and there would be a sell-off in risk assets."
All 10 S&P stock sectors were lower. The cyclical groups, which closely track the pace of economic growth, declined.
Over the past three weeks the benchmark S&P 500 index has traded in a tight range between 1,400 and the April 2 high of 1,422.38, which has acted as a resistance point to new peaks.
The Dow Jones industrial average .DJI closed down 106.77 points, or 0.81 percent, at 13,000.71. The Standard & Poor's 500 Index .SPX fell 11.01 points, or 0.78 percent, at 1,399.48. The Nasdaq Composite Index .IXIC slid 32.47 points, or 1.05 percent, at 3,048.71.
In Europe, the FTSEurofirst 300 index .FTEU3 of top European shares closed down 0.8 percent at 1,077.93.
MSCI's all-country world equity index .MIWD00000PUS, which has edged down over the past seven sessions, was 0.9 percent lower at 320.39.
"People are starting to realize that there is not going to be a huge amount of action from the Jackson Hole meeting. But I don't see a massive sell-off either as the market is waiting for a positive action from the European Central Bank," said James Butterfill, global equity strategist at Coutts.
Any signal from Bernanke that the U.S. central bank will embark on another asset-buying program would weigh broadly on the dollar.
The euro fell 0.2 percent at $1.2506, while the U.S. dollar index .DXY was up 0.2 percent at 81.686.
A rise above $1.2590 would mark the euro's strongest level in eight weeks.
Investors and economists have become more skeptical over the past two weeks that the Fed will announce another round of bond buying, or "quantitative easing," at its mid-September meeting, according to Reuters polls during the last week.
"The risk with Jackson Hole is that unless there are further strong signals of more easing, the market will take it as a disappointment," said Christian Lawrence, currency strategist at Rabobank, adding that this would be positive for the dollar.
"The bar is quite high, and if there is any paring back of talk of QE, the market is likely to react more because it is more or less expecting it."
The euro gained some support early in the day after Chinese Premier Wen Jiabao, who met German Chancellor Angela Merkel in Beijing on Thursday, said he was confident the euro zone could pull out of its debt crisis and that China would be willing, after a proper risk assessment, to keep buying the region's government debt.
In other markets, iron ore prices fell to their lowest levels since 2009, dragging down shares in miners, including Rio Tinto (RIO.L) and BHP Billiton (BLT.L), as a slowdown in top consumer China threatened to further sap demand.
Graphic on metals price:
Graphic on central bank balance sheets:
U.S. Treasuries gained in price. Discounting the likelihood of the Fed's launching new stimulus when it meets next month has been the predominant trade in recent weeks despite uncertainty over what debt would be purchased in any new program.
The benchmark 10-year U.S. Treasury note was up 7/32 in price to yield 1.6267 percent.
Growing expectations of a beefed-up bond-buying program from the ECB encouraged solid demand at a sale of 7.3 billion euros ($9.15 billion) of new five- and 10-year Italian sovereign bonds on Thursday.
Brent crude prices edged higher in choppy trading, supported by supply concerns and geopolitical tensions, while U.S. crude fell as oil companies assessed damage after Hurricane Isaac swept the Gulf Coast region.
A possible strike by Norway's oil services workers, upcoming North Sea maintenance and the ongoing dispute over Iran's nuclear program continue to support Brent prices.
Brent crude for October delivery settled up 11 cents at $112.65 a barrel. U.S. crude fell 94 cents to settle at $94.55 a barrel.
Additional reporting by Karen Brettell, Ryan Vlastelica and Wanfeng Zhou in New York and; Richard Hubbard in London; Editing by Dave Zimmerman, Dan Grebler and Andrew Hay