By Angela Moon
NEW YORK (Reuters) - Global equity markets fell on Wednesday on mixed corporate results and concerns that new scrutiny of euro zone banks could prove costly for its weaker members, while the U.S. dollar and the Japanese yen held small gains sparked by worries over Chinese monetary policy.
The dollar edged up from near two-year lows against the euro and an 8-1/2-month trough versus a major currency basket as investors sought the greenback's safety following a spike in China's short-term money market interest rates.
The yen was also in demand, with the dollar down 0.7 percent at 97.40 yen and the euro 0.9 percent weaker at 134.09 yen.
Wall Street opened lower following four straight days of record highs for the S&P 500. Mixed results from major U.S. companies, including equipment maker Caterpillar Inc, which sank nearly 6 percent in early trade, pulled stocks lower.
"With Caterpillar cutting its outlook for the year and concerns over China slowing against a backdrop of a market at a record, some people just decided to ring the cash register and take some profits," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.
He said the selling was "orderly" and indicates more a pause than nervousness on the part of investors.
European stocks recorded their sharpest falls in two weeks as the details of a new, year-long test of euro zone lenders by the bloc's central bank amplified anxiety about China and the recent rapid run-up in world equity markets.
The ECB wants to unearth any risks hidden in the banking system before supervision comes under its roof as part of a three-pronged "banking union" plan designed to avoid a repeat of the euro zone debt crisis.
The pan-European FTSEurofirst 300 fell 0.7 as Italian, Spanish and Portuguese markets, as well as banking stocks, all dropped.
Jan von Gerich, chief developed market strategist for Nordea, said that if done properly, the review should help the euro zone, but in the short term it could revive questions about its weaker members if public money is needed for bank repairs.
"The most interesting part will be what it says about Italy. Its banks haven't gone through the same kind of scrutiny as the ones in Spain or those in Greece, Ireland or Portugal - the smaller countries, too, whether Slovenia will need a bailout for example," he added.
MSCI's world equity index, which tracks shares in 45 countries, fell 0.7 percent.
On Wall Street, the Dow Jones industrial average was down 86.51 points, or 0.56 percent, at 15,381.15. The Standard & Poor's 500 Index was down 13.43 points, or 0.77 percent, at 1,741.24. The Nasdaq Composite Index was down 39.68 points, or 1.01 percent, at 3,889.88.
Concerns about soft U.S. jobs data for September, which appeared to rule out a cut in U.S monetary stimulus before next year and caused a plunge in the dollar, took a back seat as Chinese money market rates climbed to levels not seen since July. The People's Bank of China failed for a second day to inject cash.
Rising liquidity needs for Chinese corporate tax payment deadlines and worries about bad banking debt appeared partly responsible for the jump in short-term rates, analysts said.
The rate spike was short-lived but caused a market panic nevertheless, causing a scramble for safe-haven dollars and yen.
"The weight of a weak U.S. non-farm (payroll data released on Tuesday) is surpassed by rising risk aversion on concerns over China's money market. Profit-taking takes hold," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
U.S. Treasuries yields fell to the lowest in three months after Tuesday's weaker-than-expected jobs data reinforced expectations that the Federal Reserve is unlikely to reduce the size of its bond purchase program in the near term.
Buying overnight helped yields fall further, with no large data releases scheduled on Wednesday. Benchmark 10-year Treasuries were up 8/32, the yield at 2.4836 percent.
In commodities trading, U.S. crude fell below $97 a barrel to its lowest since July, outpacing a smaller drop in Brent futures, pressured by ample supplies and expectations of a further inventory buildup in the United States, the world's top consumer.
U.S. crude fell $1.88 to $96.42 after earlier reaching $96.32, its lowest since July 1. Brent crude fell $1.39 to $108.58 a barrel after hitting a session high of $110.06.
(Additional reporting by Rodrigo Campos, Karen Brettell and Gertrude Chavez-Dreyfuss in New York and Alex Lawler in London; Editing by Dan Grebler)