Traders increased bets on how much the Fed will cut rates to bolster US growth following Chairman Jerome Powell's dovish testimony to Congress on Wednesday.
The automotive sector felt much of the pressure with large-cap vehicle parts suppliers Valeo and Continental tumbling more than 2% following a slew of warnings by small-cap auto and industrial suppliers AAGG.DE .
MSCI's broadest index of world stocks.MIWD00000PUS climbed 0.27%, with U.S. equities touching record highs following the release of prepared remarks for Powell's testimony before U.S. House of Representatives Financial Services Committee.
However, worries about corporate health as the earnings season kicks off and the possible opening of a new front in the trade row between Washington and the European Union saw gains quickly evaporate.
USA producer prices are due on Friday. President Donald Trump on ordered an investigation into the tax, a step that could lead to the United States imposing new tariffs or other trade restrictions.
The STOXX 600 has recouped its May losses stemming from a sudden escalation in US-China trade tensions, gaining around 6 per cent since then, largely on expectations that major central banks will adopt a looser monetary policy.
Yet the gloom seemed confined to Europe for now. US futures ticked higher.
In a single day stateside, the S&P 500 breached the 3,000 level for the first time, however, pared good points to close 0.5% higher at 2,993.07.
Some questioned how much momentum there was behind the latest rally.
"With wage pressure not delivering a powerful effect on inflation, we should still see day two of Fed Chair Powell's testimony keep the rate cut expectations in place for the July 30-31st meeting". Yet, this only worked to diminish bets of a 50bps rate cut from the Fed at this month's interest rate decision. He still thought the Fed would cut by 25 basis points this month - the first USA cut since the financial crisis - but whether it would keep going was much less clear. Minutes from the central bank's last meeting further cemented expectations for a cut in borrowing costs.
The rate cut prospects also weighed on the dollar.
The dollar index against a basket of six major currencies was down 0.25 per cent at 96.873 and extended losses from Wednesday, when it fell back from a three-week peak of 97.588 in the wake of Powell's comments.
The dollar fell 0.2 per cent against the Japanese yen to 108.66 in early morning trading, while the euro rose 0.3 per cent against the dollar to $1.1244. It was still some distance from a six-month trough of 106.780 set on June 25.
Spot gold XAU= added 0.6% to $1,405.84 an ounce.
In China, consumer price index surged 2.7% year-on-year in June.
In commodities, USA crude oil futures extended the previous day's large gains to touch $60.67 per barrel, their highest since May 23. Brent crude futures gained 64 cents to $US64.80.
London's FTSE edged up 0.2 per cent and Paris also rose after better-than-expected French industrial data.
TOKYO, July 10 (Reuters) - The dollar edged toward a three-week high against a basket of major currencies on Wednesday, as an unwinding of bets on deep USA interest rate cuts pushed Treasury yields higher.