GLOBAL MARKETS-World stock rally ebbs before stress tests

                                
 * MSCI world equity index flat, U.S. indexes falter
                                
 * US dollar recovers from one-month low to euro
                                
 * Fed's Bernanke sees markets in better shape
                                
 By Al Yoon
                                
 NEW YORK, May 5 (Reuters) - World stocks paused on Tuesday
after reaching their highest levels in nearly four months as
renewed concern over bank capital dampened enthusiasm that the
financial crisis and economic slowdown are abating.
                                
 The U.S. dollar rebounded from a one-month low versus the
euro, amid worries over the banking sector and investors booked
profits ahead of a European Central Bank meeting.
                                
 European and U.S. stocks were little changed as falling oil
prices hit energy shares and investors anticipated results from
regulatory tests of capital at U.S. banks. About 10 of the 19
largest U.S. banks being "stress tested" will be told they must
raise capital, according to a source familiar with the talks.
                                
 The tests aim to ensure bank stability should the recession
drag on, placing further pressure on their balance sheets laden
with consumer and commercial loans. But there are also signs
that the economy and financial markets have stabilized since
last fall should nurture a broader rally, and break momentum of
profit-taking moves such as today's, investors said.
                                
 A report on the U.S. service economy said an index of the
sector rose more than expected in April to 43.7 from 40.8,
closer to the 50 level that denotes equilibrium between
contraction and expansion. [ID:nN05546631].
                                
 "We've had a great run -- and I don't think the run is over
-- but it will take a while to undo some of the damage that has
been done over the past year or two," said Charles Lieberman,
chief investment officer at Advisors Capital Management LLC, in
Paramus, New Jersey. "We're in a convalescense period."
                                
 Federal Reserve Chairman Ben Bernanke on Tuesday said
markets were in "far better shape" today than last fall, helped
by the Treasury program to inject up to $700 billion in capital
to U.S. financial institutions and auto makers.
                                
 The Dow Jones industrial average <.DJI> fell 14.26 points,
or 0.17 percent, to 8,412.48. It earlier topped 8,458, for its
highest level since Jan. 13.
                                
 The Standard & Poor's 500 Index <.SPX> declined 4.46
points, or 0.49 percent, to 902.78, after Monday hitting its
highest point since Jan. 9. The Nasdaq Composite Index <.IXIC>
slipped 17.98 points, or 1.02 percent, to 1,745.58.
                                
 Chevron <CVX.N> shares pressured the Dow, falling 1.3
percent at $65.83, as oil futures <CLc1> fell below $54 a
barrel on falling energy demand.
                                
 U.S. crude oil <CLc1> fell 1.0 percent to $53.88 a barrel
-- from its highest price this year near $55 as falling demand
for energy and rising inventories offset feint signals of
recovery in other markets.
                                
 The KBW Bank index <.BKX> fell more than 1.0 percent, with
Wells Fargo & Co <WFC.N> down 4 percent to $23.29, while
Citigroup Inc <C.N> gained 5 percent to $3.36.
                                
 Outside the U.S., the benchmark MSCI world equity index
<.MIWD00000PUS> was little changed, but buoyed as one in three
companies reporting first-quarter financial data so far has
shown better-than-expected result, and recent data showed the
worst might be over for the global economy.
                                
 The FTSEurofirst 300 index <.FTEU3> rose 0.5 percent with
the banking sector one of the biggest risers, while emerging
stocks <.MSCIEF> rose one third of a percent. Germany's DAX
<.GDAXI> fell 1 percent.
                                
 A clutch of major U.S. companies report their Q1 results
this week. So far, 66 percent of 326 companies in the S&P 500
index have reported earnings above analyst expectations,
according to Thomson Reuters.
                                
 In aggregate, U.S. companies are reporting earnings that
are 10.4 percent above the estimates, which is above the
long-term average of around 1.6 percent.
                                
 In currencies, The euro <EUR=> fell 0.20 percent at $1.3375
from a previous session close of $1.3402. Against the Japanese
yen, the dollar <JPY=> declined 0.17 percent to 98.75 from a
previous session close of 98.920.
                                
 Investors sold euros after the currency hit a monthly high
near $1.3440 amid uncertainty about Thursday's ECB meeting and
results of stress tests on U.S. banks. Hopes that the world
economy has already endured the worst of the recession had
dried up safe-haven flows into the dollar.
                                
 U.S. government debt prices declined, after the services
sector report and ahead of a record sales of $71 billion in
Treasury debt this week.
                                
 Three-year Treasury notes declined 9/32, and their yields,
which move inversely to price, climbed to 1.42 percent from
1.39 percent late on Monday. Benchmark 10-year notes fell 6/32
for a yield of 3.18 percent, near a five-month high.
                                
 (Additional reporting by Richard Leong, Steven C. Johnson
and Leah Schnurr)