* U.S. equities stage late rally, aided by rebounding euro
* Despite rebound in euro, stocks, sentiment still down
* Oil falls toward $67 a barrel on widening risk aversion
* Bond prices trip gains as stock markets pare losses
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, May 25 (Reuters) - U.S. stocks and the euro pared
deep losses to end mostly flat on Tuesday as investors had
second thoughts that a festering euro zone banking crisis will
spread worldwide and strangle a reviving economy.
A late-day rally pulled the benchmark S&P 500 into positive
territory minutes before the closing bell and wiped out most of
the session's losses for the Dow, which closed above the key
barrier of 10,000.
U.S. Treasuries gave up most of their gains as equities
rebounded from a broad sell-off and the euro staged a rebound
from multi-year lows. Earlier, major stock indexes from Asia to
Europe closed sharply lower and Wall Street fell more than 3
percent. For details see: []
"It's a selling climax. This has all the looks to me of a
capitulation, this being the bottom," said Keith Springer,
president of Capital Financial Advisory Services in Sacramento,
California.
He said investors had overreacted to fears that a European
banking crisis could worsen and fester like the U.S. subprime
mortgage crisis that sparked the global recession.
"We know about the banking crisis. Too many people are
assuming it is going to turn into something different and be a
contagion, and it's not going to be a contagion," Springer
said.
The euro earlier fell to an 8-1/2-year low against the yen
and neared a four-year trough versus the dollar as investors
fretted about the weekend takeover of a small Spanish savings
bank, CajaSur.
Traders said small buy orders pushed the euro higher amid
thin volumes, triggering stops above $1.2300.
The euro <EUR=> was down 0.02 percent at $1.2348,
recovering from losses of more than 1 percent.
Severe stress signs appeared in the credit markets, where
dollar interbank lending rates rose as the debt crisis made
banks wary of lending to European peers. []
Other measures of stress in money markets were at their
highest since the financial system emerged from the subprime
mortgage crisis a little more than a year ago.
The Dow Jones industrial average <> closed down 22.82
points, or 0.23 percent, at 10,043.75. The Standard & Poor's
500 Index <.SPX> gained 0.38 points, or 0.04 percent, at
1,074.03. The Nasdaq Composite Index <> fell 2.60 points,
or 0.12 percent, at 2,210.95.
The rebound in U.S. stocks dimmed the allure of safe-haven
government bonds and erased the day's large price gains.
The benchmark 10-year note <US10YT=RR> cut gains sharply
late in the session, last up 7/32 in price. That was a far cry
from earlier gains that pushed 10-year yields down as far as
3.06 percent, their lowest since April 2009.
"We're just trading off stocks right now," said Keith
Blackwell, U.S. interest rate strategist at RBC Capital Markets
in New York.
The equity sell-off and escalating tensions in the Korean
peninsula had pushed investors to flock to the yen and dollar
for safety.
"Increasingly, market participants are getting scared and
fearful that we may have a repeat of late 2008," said Camilla
Sutton, senior currency strategist at Scotia Capital in
Toronto, said before markets turned around.
U.S. oil futures slid 2 percent, falling below $70 a barrel
as investors fled riskier assets to dollar safety.
[]
U.S. crude <CLc1> fell $1.46, or 2.08 percent, to settle at
$68.75 a barrel, trading in a range from $67.15 to $69.91.
ICE Brent crude <LCOc1> fell $1.62, or 2.28 percent, to
settle $69.55 a barrel.
Dropping from a 2010 peak of $87.15 on May 3, the highest
since October 2008, U.S. crude prices could post their biggest
monthly loss since the height of the financial crisis.
U.S. gold futures finished with moderate gains in a
safe-haven play, as the euro's steep losses to the dollar
capped gold's gains. []
The June gold contract <GCM0> ended up $4.00 at $1,198.0 an
ounce in New York.
The dollar was up against a basket of major currencies,
with the U.S. Dollar Index <.DXY> up 0.39 percent at 86.542.
Against the yen, the dollar <JPY=> was up 0.08 percent at
90.20.
The 19-commodity Reuters/Jefferies CRB Index <.CRB> was
down 1.26 percent after earlier sliding almost 2 percent to its
lowest ebb since Sept. 4, 2009, as oil, copper and sugar traded
below, or just above key support levels. []
(Reporting by Robert Gibbons, Gertrude Chavez-Dreyfuss, Burton
Frierson and Chuck Mikolajczak in New York; Emelia
Sithole-Matarise and Brian Gorman in London; writing by Herbert
Lash; Editing by Leslie Adler)
