* Larger-than-expected drop in U.S. payrolls hits stocks
* Dollar up vs major currencies; bonds up; oil down
* ECB holds key rate at record low 1.0 percent as expected
(Updates with U.S. closing levels)
By Caroline Valetkevitch
NEW YORK, July 2 (Reuters) - U.S. and European stocks fell
more than 2 percent on Thursday after U.S. government data
showed the U.S. economy shed more jobs than expected in June,
dampening the outlook for an economic turnaround.
The U.S. jobs data boosted the safe-haven appeal of
Treasuries and the dollar, sending the greenback up against
major currencies and driving up the price of U.S. government
bonds. Oil prices fell about 4 percent.
After the Standard & Poor's 500 <.SPX> in the second
quarter posted its best performance since the fourth quarter of
1998, investors have been looking for evidence of a sustainable
economic recovery before buying stocks further.
The Labor Department said U.S. employers cut 467,000 jobs
in June, while the unemployment rate rose to 9.5 percent from
9.4.
The world's biggest economy was expected to have lost
363,000 non-farm jobs, while the unemployment rate was seen
ticking up to 9.6 percent. For details, see []
"Rising unemployment is bad for the entire economy," said
Sasha Kostadinov, portfolio manager at Shaker Investments in
Cleveland, Ohio. "It's not positive for discretionary stocks.
It's not positive for financials -- because there's a direct
correlation between the high unemployment rate and charge-offs
and delinquent payments."
The Dow Jones industrial average <> fell 223.32 points,
or 2.63 percent, to close at 8,280.74. The Standard & Poor's
500 Index <.SPX> was down 26.91 points, or 2.91 percent, at
896.42. The Nasdaq Composite Index <> was down 49.20
points, or 2.67 percent, at 1,796.52.
The New York Stock Exchange extended trading by 15 minutes
beyond the regular closing time due to connectivity glitches.
U.S. markets will be closed on Friday for the Independence Day
holiday, with the Fourth of July falling on Saturday this
year.
The pan-European FTSEurofirst 300 <> index fell 2.6
percent to close at 843.0 points.
Unemployment in the euro zone hit 9.5 percent in May, the
highest level in 10 years, the European Central Bank reported
on Thursday.
Stocks in Brazil, Mexico and other Latin American markets
also were lower. Japan's benchmark Nikkei closed down 63.78
points at 9,876.15, partly on caution ahead of the U.S. jobs
data.
In the U.S. Treasury market, the benchmark 10-year note was
up 12/32, with the yield at 3.5023 percent, versus Wednesday's
close of 3.55 percent.
In currency markets, the euro <EUR=> was down about 1
percent at $1.4004 from a previous session close of $1.4150.
The dollar was up against a basket of major trading-partner
currencies, with the U.S. Dollar Index <.DXY> up 0.83 percent
at 80.297 from a previous session close of 79.634.
Demand for the euro fell after European Central Bank
President Jean-Claude Trichet said euro-zone activity would
likely remain weak for the rest of the year, analysts said.
The European Central Bank, as expected, kept interest rates
unchanged at 1 percent.
Also dimming some investors' views, Moody's downgraded its
ratings for euro zone member Ireland to Aa1 from Aaa over
concern about its debt.
OIL FALLS
U.S. crude oil prices dropped as the U.S. government jobs
data sparked more concern about oil demand. On the New York
Mercantile Exchange, August crude <CLQ9> fell $2.58 to settle
at $66.73 a barrel.
Next week's focus could be the Group of Eight summit in
Italy after G8 sources told Reuters that Beijing has asked for
a debate on proposals for a new global reserve currency and the
issue could be referred to briefly in the summit statement.
Chinese Vice Foreign Minister He Yafei said he had not
heard of such a request, but he said China hoped for
diversification of the international currency system in the
future and it would be normal for the issue to be raised at the
G8 summit. For more details see []
(Additional reporting by Jeremy Gaunt in London, and Gene
Ramos, Robert Gibbons, Wanfeng Zhou and Ellis Mnyandu in New
York; Editing by Leslie Adler)
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