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Stocks slip after ECB reins in bond buying hopes
Stocks, euro slip after ECB's Draghi reins in bond-buying hopes in run-up to crucial EU summit
By The Associated Press

LONDON (AP) ' Stock markets and the euro headed lower Thursday after the president of the European Central Bank reined in hopes that it would take a more hands-on role in dealing with the debt crisis that has crippled the 17-country eurozone.

Mario Draghi suggested he had no intention of increasing bond purchases after the bank delivered on market expectations to reduce its main interest rate by a quarter percentage point to 1 percent.

Draghi said he was surprised by some interpretations of his comments last week that "additional steps" would be taken if the 17 countries that use the euro agreed to closer budget controls. Germany and France have proposed a plan on closer fiscal unity that will dominate debate at the EU summit of leaders, which starts later Thursday.

"This will disappoint the markets that had hoped the ECB would follow a summit announcement of the 'fiscal compact' with the ECB acting as lender of last resort," said Neil MacKinnon, global macro strategist from VTB Capital.

Stocks have rallied over the past few days on hopes that if European governments can agree to tighter spending oversight, the ECB would step up its support for the bond markets. It currently buys bonds in the markets, but only reluctantly, and in small quantities.

Following Draghi's comments, stocks turned negative.

In Europe, Germany's DAX fell 1.2 percent to 5,920 while the CAC-40 in France fell 1 percent to 3,144. The FTSE 100 index of leading British shares was down 0.3 percent at 5,532.

The euro was also trading lower by 0.5 percent at $1.3327. It had traded an equivalent rate higher early in Draghi's statement after he said the bank would expand its liquidity operations to the banks.

Wall Street was also poised to open lower ' Dow futures were down 0.4 percent at 12,161 while the broader Standard & Poor's 500 futures fell 0.7 percent to 1,255.

Hopes that Europe was finally readying a decisive plan to deal with its crippling debt crisis had helped stocks rise over the past couple of weeks, as well as pushing the borrowing rates of countries like Italy down to more manageable levels.

The ten-year yield on Italy's bonds is currently trading around the 6 percent mark, down on the 7 percent level that it traded at as recently as last week. Borrowing rates of over 7 percent are considered unsustainable and eventually caused Greece, Ireland and Portugal to seek financial bailouts.

The French-German proposal to enshrine tougher budget rules in European treaties is being met with resistance by the European Council, an institution that defines the priorities of the entire 27-nation EU. Its president, Herman Van Rompuy, favors a simpler route ' amending existing rules that apply to the 17 euro countries to avoid the trickier step of requiring every country to approve the new treaty.

The potential for disagreement at the summit weighed on Asian stocks earlier as it had done in Europe and the U.S. on Wednesday.

Japan's Nikkei 225 fell 0.7 percent to 8,664.58, dragged down by weaker-than-expected machinery orders. South Korea's Kospi lost 0.4 percent to 1,912.39 and Hong Kong's Hang Seng shed 0.7 percent to 19,107.81.

But mainland Chinese shares rose, with the benchmark Shanghai Composite Index gaining 0.1 percent to 2,329.82 after losing more than 1 percent earlier in the day to approach an intraday low for the year. The Shenzhen Composite Index gained 0.1 percent to 970.95.


Pamela Sampson in Bangkok contributed to this report.

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