Obama Plan Cheer Fades As Market Nerves Return

The euro fell 0.7 percent on the day to $1.3041, while the dollar rose half a percent against a basket of currencies to 85.000.

World shares fell on Thursday, while the low-yielding dollar and yen rose as hopes for the approval of a $825 billion U.S. stimulus package failed to galvanise European investors.

European shares faltered after gains in U.S. and Asian stocks overnight, snapping a three-day winning streak, dragged down by the banking and commodity sectors.

Government bonds slid, taking U.S. benchmark yields to a six-week peak after the Federal Reserve shied away for now from buying Treasuries as part of its aggressive policy easing to relieve credit market strains.

It stood pat on interest rates -- keeping borrowing costs at between 0-0.25 percent and said they could stay unusually low for some time.

President Barack Obama's $825 billion stimulus package cleared its first congressional hurdle in Congress but analysts said the package still had a potentially bumpy road ahead.

"The package is an encouraging sign, but in itself it does not solve anything," said Justin Urquhart Stewart, director at Seven Investment Management.

Europe's FTSEurofirst 300 Index fell 1.6 percent, while world stocks as measured by MSCI's all-country index fell 0.6 percent.

In currency markets, the dollar and yen rose reflecting deep wariness over risk despite the Obama package clearing its first hurdle.

The euro fell 0.7 percent on the day to $1.3041, while the dollar rose half a percent against a basket of currencies to 85.000.

Yen strength pulled the euro down 1 percent to 117.40 yen, while the dollar eased 0.4 percent to 90.03 yen.

"We are seeing a reduction of risk appetite which benefits the dollar and yen for its perceived safe-haven credentials," said Christian Lawrence, currency strategist at RBC Capital Markets in London.

New Zealand's dollar fell as low as $0.5130, the lowest since December 2002 according to Reuters data, after its central bank slashed interest rates by 150 basis points to a record low of 3.5 percent to boost an economy deep in recession.

European government bonds fell, while the yield on benchmark U.S. 10-year Treasuries hit a 6-week high after the Federal Reserve shied away from buying longer-dated debt for now.

March Bund futures were 32 ticks lower at 122.74, with 10-year cash yields 2.7 basis points higher at 3.261 percent.

U.S. 10-year Treasuries dipped in Asian trade with the yield reaching a peak of 2.700 percent.