* Stocks soften further on weaker U.S. GDP data * US consumer sentiment rises, dollar haven flows subside * US financial regulatory reform taken in stride, banks up (Updates U.S. trading)
By Al Yoon
NEW YORK, June 25 (Reuters) - Worries about the fragility of the global economic recovery drained strength from financial markets on Friday, with Wall Street taking an agreement on regulatory reform in stride as lawmakers eased off some draconian rules.
The euro erased losses against the dollar and hit a session high, lifted by a slight comeback in stocks and a rally in commodities. That helped the euro fight off earlier weakness amid concerns of fiscal strains in Europe.
Earlier, a report that showed U.S. first-quarter growth slower than first estimated had prompted safe-haven flows into the dollar. But consumer sentiment in the United States rose, providing limited support for Wall Street stocks and ultimately reversing the bid for dollars.
The U.S. data capped a week in which investors have been pulling back a bit from riskier assets as evidence grew that economic growth, particularly in the United States, may fall short of 2010 forecasts.
"Overall, we have a modest recovery going on," said Paul Ballew, chief economist at U.S. insurer Nationwide in Columbus, Ohio. "The conversation of a double-dip recession is a bit aggressive. You are getting growth in fits and starts, rather than an outright contraction."
On Wall Street, financial stocks gained as uncertainty ebbed following an historic agreement to overhaul financial regulations. Business models were preserved even as provisions cut into profitability and added layers to regulators.
JPMorgan Chase & Co <JPM.N> and Bank of America Corp <BAC.N> gained more than 1 percent.
"It is not very different from what investors and we had come to expect in the last few weeks, with the most onerous provisions getting watered down," analysts at Morgan Keegan said in a note to clients.
U.S. lawmakers hammered out the new Wall Street regulations in the early hours on Friday, though the measure must still win approval from both chambers of Congress before U.S. President Barack Obama can sign it into law.
G8 leaders meeting on Friday in Canada -- turning into the G20 on Saturday -- are set to grapple with fears that the spending cuts and tax increases being promulgated by European governments to cut debt will hurt the recovery. Meanwhile, Washington is warning against cutting too far and too fast.
MSCI's all-country world index <.MIWD00000PUS> declined 0.13 percent, heading for a weekly loss of more than 2 percent and its fourth straight losing session. Its emerging market counterpart <.MSCIEF> slipped 0.53 percent.
In midday trading in New York, the Dow Jones industrial average <
> fell 12.84 points, or 0.13 percent, to 10,139.96.But the Standard & Poor's 500 Index<.SPX> edged up 1.97 points, or 0.18 percent, to 1,075.66 and the Nasdaq Composite Index <
> rose 5.93 points, or 0.27 percent, to 2,223.35.European shares turned negative after initially bucking the trend. The FTSEurofirst 300 <
> fell 0.7 percent to end at 1,013.58, a two-week closing low, adding to three previous days of losses.Earlier, Japan's Nikkei average <
> fell 1.9 percent to finish at 9,737.48, its lowest close in two weeks.EURO AT SESSION HIGH
The euro overcame earlier weakness to wipe out losses against the dollar and hit a session high at $1.2358, according to trading platform EBS, as traders cited a minor comeback in stocks and the rally in commodities.
The dollar fell against the yen after the earlier report of soft U.S. economic growth.
Earlier in the session, funding concerns in the euro zone have prompted caution as banks need to repay some 442 billion euros in one-year loans to the European Central Bank next week.
The dollar slipped against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> down 0.26 percent at 85.506.
Against the yen, the dollar <JPY=> declined 0.23 percent to 89.33 Japanese yen.
U.S. Treasury debt prices rose after the disappointing report on U.S. economic growth. Benchmark 10-year Treasury notes <US10YT=RR> rose 8/32 in price, while yields declined to 3.11 percent from 3.14 percent late Thursday.
Core euro-zone government bonds struggled to make further headway after three consecutive sessions of gains drove futures to two-week highs. Losses were limited by stock weakness.
In commodities, U.S. light sweet crude oil <CLc1> rose $2.08, or 2.7 percent, to $78.59 per barrel, and spot gold prices <XAU=> rose $12.00, or 0.96 percent, to $1,256.00 an ounce.