World stocks cautious ahead of crucial Greek audit

In see-sawing sessions both US and European bourses opened higher and then sank toward the close, with US stocks taking a sharp drop in the last hour of trade, ending three straight days of optimistic rises.

The Dow Jones Industrial Average skidded 1.61 per cent to 11,010.90, while the broader S&P 500 gave up 2.07 per cent to 1,151.06 and the Nasdaq Composite lost 2.17 per cent to 2,491.58.

All 30 Dow blue chips fell, led by a 4.9 per cent loss for Bank of America, facing new shareholder lawsuits over its purchase of Merrill Lynch.

Earlier London's FTSE-100 index lost 1.44 per cent to 5,217.63 points; Paris's CAC-40 fell 0.92 per cent to 2,995.62 points; and in Frankfurt the DAX slid 0.89 per cent to 5,578.42 points. Madrid dipped 0.61 per cent and Milan 0.47 per cent.

Opening up the Wednesday trading day, Asian stock markets had mostly risen but the gains were capped by the lack of concrete evidence of a eurozone plan, traders said.

The euro also fell back during the day to $1.3536 from $1.3590 late Tuesday, after rising strongly for two days.

Stocks came under the shadow of the push in Europe on Wednesday on landmark proposals to tax the financial sector, ignoring US opposition in a move also sure to provoke a row with London which fears capital flight from the City.

But the main current worry was the ongoing Greek crisis.

"Signs of progress on the eurozone debt crisis prompted healthy gains on Monday and Tuesday, but traders opted to take some profits off the table ahead of a German vote regarding the proposed expansion of the European Financial Stability Facility," said Elizabeth Harrow at Schaeffer's Investment Research in the United States.

Eyes were on the new mission to judge Greece's progress under its 110 billion euro ($150 billion) EU-IMF bailout; approval would lead to a new eight billion euro disbursement that could help Greece avoid defaulting on its debts.

Shares in Europe and the US had soared on Monday and Tuesday on fresh hopes that European leaders would get to grips with the debt crisis.

"European stock markets have been ... cutting short the recent stunning rally," Rabobank analyst Jane Foley said on Wednesday.

"Reality seems to have set in. Reports in the financial press today suggest the EU is split on how to solve the sovereign debt crisis, which may dampen investor sentiment."

The Financial Times said Greece's second bailout had run into trouble, with some eurozone members pushing for private creditors to take a bigger writedown on their Greek bond holdings.

In addition, there was no good news on the economic front to encourage bullishness.

"While the euro zone remains in the driver's seat, a dose of lackluster US data only served to aggravate the Street's jitters," said Harrow, pointing to the slight fall in monthly durable goods orders for August, an indicator of the strength of manufacturing and investment.

US energy stockpiles data for last week, released Wednesday, suggested slowing growth in oil and gasoline consumption.

Meanwhile, with volatility still a problem, the European Union's markets supervisor ESMA said Wednesday that Spain and Italy have extended a ban on short selling of banking and insurance stocks, in place since August.

The French markets regulator AMF meanwhile confirmed its ban on short-selling 10 stocks would remain in place until November 11.