PARIS (AP) -- Positive U.S. economic data helped stabilize world stocks on Thursday after a sharp selloff in Japan put its main index in "Bear Market" territory, rattling investors.
Japan's Nikkei fell 6.4 percent to close at 12,445.38, a drop of 21 percent from its high in May. When an index falls by more than 20 percent from a high, it is commonly defined as a bear market.
Japanese media reports said overseas hedge funds may be dumping the country's equities after the Bank of Japan's decision earlier in the week to refrain from additional monetary easing measures.
European stocks initially fell in reaction to the losses in Japan and after the World Bank cut its forecast for global growth in 2013 to 2.2 percent from 2.4 percent.
But they recovered somewhat after U.S. Commerce Department figures showed retail sales rose 0.6 in May, the strongest showing in three months.
By late afternoon in Europe, Britain's FSTE 100 up 0.1 percent to 6,302 while Germany's DAX fell 0.7 percent to 8,068. France's CAC-40 was fractionally lower at 3,792.
Among notable losers was Royal Bank of Scotland, PLC, down 3.8 percent on the news CEO Stephen Hester will resign and the bank will cut 2,000 jobs.
"The World Bank is not alone among global forecasters in lowering its sights on growth, and there are no grounds yet for thinking the slashing of GDP projections is over," said Stephan Lewis of Monument Securities.
The Dow Jones Industrial index was fractionally positive, rising just above the 15,000 mark to 15,007, while the S&P 500 index rose 0.2 percent to 1,615.99
Market sentiment has worsened generally since the chief of the Federal Reserve, Ben Bernanke, said the central bank might pull back on its $85 billion-a-month bond-buying program — known as quantitative easing — if U.S. economic data, especially hiring, improves.
"Ever since talk of Fed tapering was first mentioned U.S. bond yields have edged higher and money has leaked out of emerging markets and emerging market currencies," said market analyst Michael Hewson of CMC Markets.
"Of course there is the other reason that for all of the stock market gains of recent months investors have finally woken up to the fact that current stock valuations are not supported by fundamentals in the current low-growth environment, and all the QE (quantitative easing) in the world can't address that particular issue."
Investors now expect some reduction in the Fed's monthly asset purchases sometime this year. Fed stimulus has been one of the main reasons why many assets, such as global stock markets and emerging markets, have rallied in recent months.
Analysts said markets will likely remain on edge until next week's Fed policy meeting for greater clarity on the timing and extent of any tapering.
"Mr Bernanke is riding a tiger he dare not dismount" for fear of disrupting the global recovery, said Lewis of Monument Securities.
Juichi Wako, equity market strategist at Nomura Securities Co. in Tokyo, said the drop on the Nikkei was due to a reversal of the money flow that had flooded Japan in recent months, partly on inflated hopes for "Abenomics," as Prime Minister Shinzo Abe's fiscal and monetary policies have been dubbed.
In April, the Bank of Japan announced a massive stimulus in an attempt to encourage economic growth and get inflation up to 2 percent. The euphoria drove the Nikkei up to five-year highs before enthusiasm waned.
Excitement is now ebbing, Wako said, and the yen is strengthening — a headwind for Japanese exporters.
The dollar weakened further against the yen, to 94.16 yen from 95.71 yen the day before.
Elsewhere in Asia, the Hang Seng index fell 2.2 percent to 20,887.04, while the Kospi in South Korea lost 1.4 percent to 1,882.73.
Mainland Chinese were pummeled as accumulating signs of a slowdown in growth in the world's No. 2 economy caused investors to retreat. The Shanghai Composite Index slid 2.8 percent to 2,148.36, its lowest close in six months.
In other markets, the euro dropped to $1.3286 from $1.3331 late Wednesday, while the benchmark crude oil contract was down 21 cents to $95.67 per barrel in electronic trading on the New York Mercantile Exchange.
AP Business Writers Pamela Sampson in Bangkok, Elaine Kurtenbach in Tokyo and Toby Sterling in Amsterdam contributed to this report. Researcher Fu Ting contributed from Shanghai.
Follow Kurtenbach on Twitter at www.twitter.com/ekurtenbach