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US economy fears weigh on markets

Pan Pylas, AP Business Writer

LONDON (AP) -- More disappointing U.S. economic news hit markets Thursday, adding to the sense that the world's largest economy is waning.

A number of financial assets have been under pressure over the past few days amid growing evidence that the U.S. and Chinese economies, the world's two biggest, may not be as robust as some investors had thought at a time when many countries in Europe are in recession.

A manufacturing survey from the Philadelphia Federal Reserve reinforced the negativity surrounding the U.S. economy. Its main index fell to 1.3 points in April from 2.0 the previous month, in contrast to expectations for a doubling in the level.

"April is shaping up to be a rather soft month," said Jennifer Lee, an analyst at BMO Capital Markets.

Though the survey is not usually at the forefront of investor attention, it was enough to turn the tide in the markets — a sign of how fragile sentiment is at the moment. In Europe, most indexes gave up earlier gains while Wall Street was markedly lower.

In Europe, the FTSE 100 index of leading British shares dropped almost 0.1 percent to close at 6,243.67 while Germany's DAX fell 0.4 percent to 7,473.73. The CAC-40 in France ended flat at 3,599.36.

In the U.S., the Dow Jones industrial average was down 0.5 percent at 14,551 while the broader S&P 500 index fell the same rate to 1,543.96 despite solid earnings updates earlier from PepsiCo. and Verizon. After the market close, Microsoft, Google and IBM are due to report. So far, the first-quarter reporting season has done little to lift the gloom.

The euro recovered slightly, trading 0.3 percent higher at $1.3075. A day earlier, it took a battering when Jens Weidmann, the head of Germany's central bank, the Bundesbank, said the European Central Bank may consider interest rate cuts. In an interview with the Wall Street Journal, Weidmann said the ECB may "adjust rates" if the data merits it.

"The market reaction was more pronounced than usual due to the fact that while other ECB board members have gone on record as suggesting rates might need to be lower, at no time has Weidmann ever suggested he might also lean in that direction," said Michael Hewson, senior market analyst at CMC Markets.

"For that reason alone, this is an important development and could well signal a rate reduction in the next couple of months, and a possible softening of position on the part of Germany and the Bundesbank," he added.

Commodities have also suffered in the more cautious market environment, with the prices of gold and oil experiencing a rocky few days. Along with the euro, they steadied too, with the benchmark New York crude rate up 69 cents at $87.37 a barrel and an ounce of gold 0.8 percent higher at $1,394.30.

Earlier, Asian stocks dropped, with investors in Hong Kong still feeling cautious due to a bird flu outbreak in eastern China and the rapid rise of Chinese government debt. The Hang Seng shed 0.3 percent to 21,512.52. Elsewhere, Japan's Nikkei 225 index tumbled 1.2 percent to close at 13,220.07, while South Korea's Kospi dropped 1.2 percent to 1,900.06.