By Lionel Laurent
LONDON (Reuters) - European stocks and the euro fell on Tuesday after shares in Portugal's biggest listed bank hit a record low, while a plunge in German economic sentiment pushed up borrowing costs for some peripheral euro zone countries.
Global stock markets have recently been supported by dovish policy measures from major central banks and signs that economies are recovering, though worries persist over the pace of growth in Europe and the health of the region's banks.
U.S. Federal Reserve Chair Janet Yellen is due to testify to Congress on monetary policy later on Tuesday.
A surprise jump in British inflation in June sent sterling higher and gilts lower. The 1.9 percent reading was the highest since January, picking up from May's 1.5 percent, a 4-1/2-year low.
The pan-European FTSEurofirst 300 share index slipped 0.1 percent, with benchmark indexes in Frankfurt, Paris and London trading 0.1 to 0.5 percent lower after German economic morale sank to its lowest level since Jan. 2013. The weaker-than-expected ZEW survey also pushed the euro to a one-month low versus the dollar.
The banking sector was a sharp underperformer, with Portugal's Banco Espirito Santo (BES.LS) slumping 17.5 percent to a fresh record low. Traders blamed concerns over the bank's Angolan loan portfolio and the sale of a stake at a low price by the bank's founding family on Monday.
The MSCI All-Country World index traded flat, near record highs hit earlier this month.
"The key takeaway is that the banking sector globally continues to struggle despite time having been bought, and policy being tremendously supportive," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.
"The sector feels like a minefield."
Bond yields for Portugal and Greece were up 4 basis points and 3 basis points respectively, though Spanish and Italian yields were slightly lower.
German bund futures gained 0.2 percent and the U.S. dollar index rose against a basket of currencies including the euro and yen after ECB chief Mario Draghi said a stronger euro was a risk to the sustainability of the recovery.
Draghi said on Monday the European Central Bank's Governing Council was unanimous on the use of unconventional measures if inflation stayed too low.
"With the ECB signaling that it will continue to maintain an easing bias, with the possibility of quantitative easing in coming months, peripheral (bond) spreads probably have scope to come further in," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
The Bank of Japan maintained its stimulus program and stuck to a forecast that inflation will approach its 2 percent target next year, unfazed by recent data casting doubt on its scenario of an investment-led economic recovery.
"The BOJ have essentially backed off the idea of quantitative easing for now but are sending some cautious signals on growth," said Simon Derrick, head of currency strategy at BNY Mellon. "Everything is stable and we are heading slowly and jerkily back towards higher inflation."
U.S. and Asian stocks gained ground, with the Dow Jones Industrial average (.DJI) hitting an intraday record on Monday, helped by Citigroup's (C.N) better-than-expected earnings and more deals in the healthcare sector.
In Asia, Japan's Nikkei average rose 0.7 percent while South Korea's Kospi (.HS11) gained 1.0 percent. MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.2 percent.
The MSCI Emerging Market index, MSCI's benchmark emerging equity index, inched up to a 16-month high.
Asian stock markets showed little reaction to stronger-than-expected new loan and money supply data for China. Chinese banks gave 1.08 trillion yuan ($173.90 billion) of new loans in June, beating expectations of 915 billion.
The data, coming ahead of GDP and other numbers from China due on Wednesday, underscored the perception that the Chinese economy is stabilizing after a shaky start to the year but still needs more policy support to meet Beijing's growth target.
In the Middle East, Israel approved an Egyptian-proposed deal that would halt the week-old Gaza shelling war on Tuesday but the Palestinian territory's dominant Hamas Islamists said they had not been consulted by Cairo.
U.S. crude oil slipped to $100.45 and Brent crude futures edged down to $106.04.
(Reporting by Lionel Laurent; Additional reporting by Atul Prakash, Emelia Sithole-Matarise and Anirban Nag; Editing by Catherine Evans)