GLOBAL MARKETS-Year end, dollar surge dents world stocks

                                
   * Global stocks damped as dollar rallies strongly
                                
 * Year end trading reduces risk taking
                                
 * Greece concern drags euro lower
                                
 (Adds U.S. trading, New York dateline)
                                
 By Jeremy Gaunt and Al Yoon
                                
 LONDON/NEW YORK, Dec 17 (Reuters) - The dollar jumped to
its highest in more than three months against major currencies
on Thursday as a U.S. economic report supported a slightly more
optimistic outlook delivered by the Federal Reserve.
                                
 World stocks fell nearly 2 percent, with bank shares hurt
as the Fed on Wednesday said some special programs to support
the financial system were no longer needed and would expire by
early next year. [ID:nN16114058]
                                
 The euro fell to over a 3-month low, also hurt by Standard
& Poor's downgrade of Greece's rating by one notch, to BBB-plus
from A-minus, late on Wednesday.
                                
 While the U.S. central bank left rates unchanged, prospects
the Fed outlook will spark tighter U.S. monetary policy earlier
than expected triggered an unwinding of short dollar positions
ahead of the new year. Investors also pared riskier equity
positions to protect profits at year end after a more than 70
percent rally for global equities since March.
                                
 The Fed gave no indication it would soon raise it target
rate from near zero. But debate is intensifying for a move to
curb the inflationary pressure of easy U.S. monetary policy,
and close the gap with European rates -- a move that would
boost the value of dollar-based assets.
                                
 "The markets have had a big recovery from their lows, and
right now traders are looking to more or less nail down some
profits," said Steve Goldman, market strategist at Weeden & Co
in Greenwich, Connecticut, who added that the stronger dollar
is removing what had been a key driver of U.S. equity gains.
                                
 GREECE WORRIES
                                
 Standard & Poor's said austerity steps announced by Greek
Prime Minister George Papandreou were unlikely to produce a
"sustainable" reduction in the public debt burden, raising
worries about the finances of the euro zone member.
                                
 "The problem for the euro is the mix of the (Fed) statement
and the very strong concerns over Greece.... All the euro
crosses have suffered," said Roberto Mialich, FX strategist at
Unicredit in Milan.
                                
 In the United States, a report from the Federal Reserve
Bank of Philadelphia showed an index of business activity in
its region was at the highest since April 2005, underscoring
the stronger outlook for U.S. growth. But initial jobless
claims rose, adding to expectations that the recovery would be
modest.
                                
 World stocks fell with MSCI's all-country index down 1.75
percent <.MIWD00000PUS> and its emerging market component off
2.04 percent <.MSCIEF>.
                                
 The Dow Jones Industrial Average <.DJI> dropped 99.15
points, or 0.95 percent, to 10,341.97. The Standard & Poor's
500 Index <.SPX> edged down 9.84 points, or 0.89 percent, to
1,099.34 and the Nasdaq Composite Index <.IXIC> slipped 21.97
points, or 1 percent, to 2,184.94.
                                
 In Europe, the FTSEurofirst 300 <.FTEU3> index declined
1.12 percent, having hit a one-month closing high on Wednesday.
Bank stocks including BNP Paribas <BNPP.PA>, Banco Santander
<SAN.MC>, Barclays <BARC.L> and HSBC <HSBA.L> led losers.
                                
 The dollar gained against a basket of major trading-partner
currencies, with the U.S. Dollar Index <.DXY> up 1.19 percent
at 77.912. The euro <EUR=> fell 1.56 percent to $1.4309. To the
yen, the dollar <JPY=> was up 0.55 percent to 90.27 yen.
                                
 Equities have had a robust year, especially since March,
but are now becoming more volatile ahead of year-end and with
large questions pending about 2010. The closure of key programs
by the U.S. central banks raised questions on whether the
economy was strong enough to stand on its own feet.
                                
 "Markets are still trying to find a trend and establish
whether the improvement in the economy is due to stimulus
packages," said Justin Urquhart Stewart, investment director at
Seven Investment Management.
                                
 Earlier, Japan's Nikkei average <.N225> ended down 0.1
percent, slipping from seven-week highs as investors pocketed
profits on a rally in big banks such as Mitsubishi UFJ
Financial Group <8306.T>.
                                
 U.S. and German government bonds rallied as the downgrade
of Greece's rating revived a bid for low-risk government debt.
                                
 Benchmark U.S. 10-year Treasury note yields declined 0.1
percentage point to 3.50 percent, while 10-year Bund yields
<EU10YT=RR> slipped 0.08 point to 3.14 percent.
                                
 In energy and commodities prices, U.S. light sweet crude
oil <CLc1> fell 1.61 percent to $71.49 per barrel and spot gold
prices <XAU=> fell 2.93 percent to $1104.20.
                                
 (Additional reporting by Brian Gorman, Jessica Mortimer and
Rodrigo Campos; Editing by Andrew Hay)
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