* U.S. stocks, oil rebound after BP agrees to $20 bln fund
* Government debt prices rise on poor U.S. housing data
* Euro rebound stalls on Spain debt worries, U.S. data
(Updates with close of European markets)
By Herbert Lash
NEW YORK, June 16 (Reuters) - U.S. stocks rebounded and the euro pared losses to trade flat on Wednesday after BP Plc agreed to put about $20 billion into a fund to cover claims resulting from the Gulf of Mexico oil spill.
Wall Street turned around on news BP reached a tentative agreement to open an escrow fund demanded by U.S. President Barack Obama, halting a slide sparked by data showing U.S. housing starts fell more than expected in May.
The euro was little changed against the dollar as the rebound in U.S. stocks offset fresh concerns about Spain's credit and banking system outlook. For details see: [
]Spain's central bank will publish stress tests on its lenders. Germany is coordinating disclosure at the EU level, they said, moving Europe's banking sector closer to putting its financial health on public display. See [
]"The banks in Spain are facing a liquidity freeze with other banks reluctant to lend to Spanish banks," said Fergal Smith, managing market strategist, Canada at Action Economics in Toronto. "That's helped cap the recent rally in the euro and in riskier assets."
A lower euro and declining U.S. stocks earlier in the session had given government debt prices a boost, as a tight correlation between bond and stock prices continued to dominate markets.
European shares closed up higher as early gains in the oil sector offset a slide in Nokia <NOK1V.HE> shares after it issued a profit warning, saying profitability at its key phones unit would be weaker than expected this quarter.
Nokia dropped 8.9 percent, wiping about 2.7 billion euros ($3.3 billion) off its market capitalization.
The MSCI world equity index <.MIWD00000PUS> rose 0.3 percent after hitting its highest level since mid-May earlier in the session. The MSCI emerging markets index <.MSCIEF> rose 0.7 percent.
The pan-European FTSEurofirst 300 <
> index of top shares closed up 0.2 percent at 1,039.25 points."We have had a decent run over the past few days and obviously there are limits to the extent which optimism is going to recover," said Peter Dixon, economist at Commerzbank. "U.S. housing starts were also weak and that is going to weigh on market sentiment to a degree."
Beforef 1 p.m., the Dow Jones industrial average <
> was down 17.76 points, or 0.17 percent, at 10,387.01. The Standard & Poor's 500 Index <.SPX> was down 1.08 points, or 0.10 percent, at 1,114.15. The Nasdaq Composite Index < > was up 1.40 points, or 0.06 percent, at 2,307.28.Oil rebounded on the BP escrow news, rising from below $77 a barrel after a U.S. government inventory report showed crude inventories posted an unexpected increase last week. [
]The U.S. Energy Information Administration (EIA) said crude inventories rose 1.7 million barrels last week, against expectations that stockpiles would be down 1.2 million barrels. [
]"It looks bearish to me. Perhaps it's going to put the brakes on the rally of the last few days," said Antoine Halff at Newedge Group in New York of the inventory report.
U.S. crude for July <CLc1> rose 81 cents to $77.75 a barrel.
ICE Brent crude <LCOc1> for delivery in August rose $1.32 to $78.12.
The euro's rebound this week lost steam after the premium investors demand to hold 10-year Spanish government bonds over German bunds hit a euro life high on a report that the European Union, the International Monetary Fund and the U.S. Treasury were drawing up a liquidity plan for Spain. [
]The European Commission denied the report.
Spanish banks' reliance on European Central Bank funding increased to record levels in May, according to RBS research.
"The banks in Spain are facing a liquidity freeze with other banks reluctant to lend to Spanish banks," said Fergal Smith, managing market strategist in Canada at Action Economics in Toronto.
Worries about the Spanish banking sector drove investors to the safety of the euro zone's benchmark bund debt, with 10-year spreads on Greek, Portuguese, Irish and Italian debt widening. [
]The Spanish 10-year yield <ES1OYT=TWEB> shot up 14 basis points to a near two-year high of 4.94 percent.
The benchmark 10-year U.S. Treasury note <US10YT=RR> was up 8/32 in price to yield 3.28 percent, pushed higher by data that showed housing starts fell 10 percent in May to a five-month low. Starts in April were revised lower.
"The housing start numbers weren't great, and you have the concerns about Spain and other euro zone countries' debt situation," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia.
Gold fell $5.80 to $1,227.60 after earlier gains.
Industrial metal prices also fell from two-week highs, as the weak U.S. housing data stoked concerns about the demand outlook for copper. [
] (Reporting by Rodrigo Campos, Wanfeng Zhou, Emily Flitter in New York; Joanne Frearson, Emma Farge, Jan Harvey and Ian Chua in London; Writing by Herbert Lash; Editing by Andrew Hay)