NEW YORK (Reuters) - A bond market selloff that had shaken financial market confidence waned on Thursday, while the euro took a breather after a strong two-day run against the dollar, as investors looked for signs of progress in Greek debt negotiations.
German bonds have sold off recently on the belief the European Central Bank's quantitative easing policy may have sidestepped the threat of deflation. On Wednesday, the ECB increased its inflation forecast for 2015 to 0.3 percent from zero.
German 10-year Bund yields, the benchmark for European debt costs, pulled back to 0.832 percent after rising to 0.998 percent, the highest since September 2014. The euro was last down 0.25 percent at $1.1246 after powering up to $1.1379, its highest since May 18.
"The topic of the day and the topic of certainly the next few trading days, or even longer than that, is going to be this very volatile European bond market," said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute in St. Louis, Missouri.
"Certainly there is a lot of people leaning one way, especially in Bunds or many other European bonds."
The euro had surged more than 3 percent over the prior two days, its biggest such run since March 2009.
Wall Street stumbled, and the S&P 500 broke through support near its 50-day moving average of around 2,100. The benchmark index had bounced from that level several times in the past week.
Marginally better-than-expected U.S. jobless claims data was balanced by a plunge in productivity figures. The data is likely keep the Federal Reserve on track to raise interest rates later this year. Investors awaited the U.S. employment report for May, due Friday, for more clues on the Fed's interest rate path.
In its annual assessment of the U.S. economy, the International Monetary Fund said the Fed should delay a rate hike until the first half of 2016 until there are signs of a pickup in wages and inflation.
The Dow Jones industrial average .DJI fell 176.66 points, or 0.98 percent, to 17,899.61, the S&P 500 .SPX lost 18.85 points, or 0.89 percent, to 2,095.22 and the Nasdaq Composite .IXIC dropped 47.15 points, or 0.92 percent, to 5,052.08.
MSCI's all-country world index .MIWD00000PUS of stock performance in 46 countries was down 0.87 percent. The pan-European FTSEurofirst 300 stock index .FTEU3 closed down 0.86 percent.
U.S. Treasury yields rose as high as 2.425 percent before retreating, and prices were last up 17/32 to yield 2.3052 percent.
After a 4 percent jump on Wednesday, Greek shares .ATG ended 1.3 percent lower as uncertainty clouded the country's hopes of clinching an aid deal with euro zone creditors in coming days.
German Chancellor Angela Merkel said the end is not in sight in negotiations between Greece and its international lenders on a cash-for-reforms deal.
Crude oil prices dropped ahead of an OPEC decision likely to keep the market oversupplied. Brent crude LCOc1 slumped to $61.95 a barrel, a 2.9 percent fall, while U.S. crude was down $1.70 at $57.94 a barrel.
Reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Meredith Mazzilli