GLOBAL MARKETS-World stocks take a breather, eye US stress tests

                                
 * MSCI world equity index flat, U.S. indexes falter
                                
 * US dollar recovers from one-month low to euro
                                
 * U.S. 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 banks' 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 on Thursday.
                                
 European shares were mixed and U.S. stocks dipped as
falling oil prices hit energy shares and investors anticipated
results from regulator capital tests at U.S. banks. About 10 of
the 19 largest U.S. banks being "stress tested" will likely be
told they must raise capital, according to a source familiar
with the talks.
                                
 Most banks undergoing the test will likely report results
to shareholders on Friday, Jamie Dimon, chief executive officer
of JPMorgan Chase & Co., said at a news conference.
                                
 The tests aim to ensure bank stability should the recession
drag on, placing further pressure on their balance sheets laden
with risky consumer and commercial loans. But there are also
signs that the economy and financial markets have stabilized
since last fall could fuel 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 convalescence 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.
                                
 But Robert Shiller, the Yale University economist who
predicted the bubble in residential real estate, told Reuters a
housing market bottom would probably be elusive until 2010.
                                
 The Dow Jones industrial average <.DJI> fell 16.09 points,
or 0.19 percent, to 8,410.65. It earlier topped 8,458, for its
highest intraday level since Jan. 13.
                                
 The Standard & Poor's 500 Index <.SPX> declined 3.44
points, or 0.38 percent, to 903.80, after Monday hitting its
highest point since Jan. 9. The Nasdaq Composite Index <.IXIC>
slipped 9.44 points, or 0.54 percent, to 1,754.12.
                                
 Chevron <CVX.N> shares pressured the Dow, falling 1.4
percent at $65.75, as oil futures <CLc1> fell below $54 a
barrel on falling energy demand.
                                
 U.S. crude oil <CLc1> fell about 1.0 percent to $53.84 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 1.6 percent, with Wells
Fargo & Co <WFC.N> down 4.04 percent to $23.27, while Citigroup
Inc <C.N> gained 3.44 percent to $3.31.
                                
 Outside the U.S., the benchmark MSCI world equity index
<.MIWD00000PUS> edged up 0.17 percent amid recent economic data
suggesting the worse may be over for the global economy, and as
one in three companies reporting first-quarter financial data
so far has shown better-than-expected results.
                                
 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 1.0 percent.
                                
 Looking at first quarter financial results published to
date, 66 percent of 326 companies in the S&P 500 index have
reported earnings above analyst expectations, according to
Thomson Reuters. U.S. companies in aggregate are reporting
earnings 10.4 percent above estimates, which is above the
long-term average of around 1.6 percent.
                                
 In currencies, The euro <EUR=> fell 0.6 percent at $1.3317
from a previous session close of $1.3402. Against the Japanese
yen, the dollar <JPY=> was little changed at 98.97.
                                
 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 U.S.
services sector report eased demand for Treasuries as a
safe-haven investment, and as the Treasury began auctions of a
record $71 billion in debt this week.
                                
 Three-year Treasury notes declined 3/32, and their yields,
which move inversely to price, climbed to 1.4 percent from 1.39
percent late on Monday. Benchmark 10-year notes fell 3/32 for a
yield of 3.17 percent, its highest since Nov. 24.
                                
 (Additional reporting by Richard Leong, Wanfeng Zhou and
Leah Schnurr)