GLOBAL MARKETS-U.S. stocks retreat on recession fears, oil falls

* U.S. stocks retreat after initial rescue plan euphoria

* Euro rises as global rescue plans boost risk appetite

* Crude pares gains as fears of a global recession bite (Adds close of European markets, updates pricings)

By Herbert Lash

NEW YORK, Oct 14 (Reuters) - Oil fell and U.S. stocks retreated from strong opening gains on Tuesday as fears of recession overcame the euphoria over Washington's bold plan to invest in banks, following government plans in Europe to bolster banks and defuse a global financial crisis.

Worries about the fallout from the credit crisis knocked the euro off an earlier one-week high, while the dollar, which had rallied broadly last week on a safety bid, pared losses against a basket of major currencies.

Gold also erased early gains and U.S. Treasuries trimmed steep losses at mid-morning when U.S. stocks turned negative and then traded mostly flat to modestly higher.

European shares closed higher, led by bank and oil stocks, but ended well off earlier highs after U.S. equities pared gains.

Wall Street on Monday had posted its biggest one-day gains since the Great Depression after recording its worst week ever.

"The most important thing to realize (after the) relief trade is that the economy is going to get worse before it gets better," said Josh Stiles, senior bond strategist at IDEAglobal. "We have a lot of bad data ahead so I think we are more likely to be carving out a multi-month range here."

Nine large American banks agreed to sell shares to the U.S. Treasury after the government launched a plan to inject $250 billion into beleaguered banks and guarantee their debt.

Funding for the bank stakes will come from the $700 billion rescue plan authorized by Congress two weeks ago, which initially had focused on the purchase of bad assets from banks to give them room to resume lending.

But expectations of a global recession undermined initial optimism over the new U.S. rescue plans. Worries over how consumer spending will hold up against declines in home values and stocks and tighter credit showed up in a profit miss by soft drink company PepsiCo , whose shares fell 9 percent.

Fear of cooling business spending was also seen in the semiconductor index <.SOXX>, which was off about 2.4 percent.

"We may be trying to establish the floor with the credit crisis, and that's why you had the euphoria in the last day and a half," said Alan Lancz, president of Alan B. Lancz & Associates Inc investment advisory firm in Toledo, Ohio. "Now people are starting to look at how much damage the credit crisis has done to the economy and earnings."

Before 1 p.m., the Dow Jones industrial average <.DJI> was up 40.06 points, or 0.43 percent, at 9,427.67. The Standard & Poor's 500 Index <.SPX> was up 5.11 points, or 0.51 percent, at 1,008.46. The Nasdaq Composite Index <.IXIC> was down 24.75 points, or 1.34 percent, at 1,819.50.

Shares of software maker Microsoft Corp declined more than 5 percent to $24.17. Computer maker Dell slide nearly 6 percent to $14.32.

European shares rallied for a second day after posting their biggest daily percentage rise on record.

The pan-European FTSEurofirst 300 index <.FTEU3> ended up 3.1 percent at 966.12 points, after earlier surging as much as 6.5 percent.

Shares in oil companies rose, with BP up 6.8 percent and Total adding 7.3 percent.

Among banking shares, Barclays surged 14.3 percent, UBS added 12 percent and Standard Chartered jumped 10.5 percent.

The concerted government efforts to ease clogged money markets had some effect. The interbank cost of borrowing dollar, euro and sterling funds from overnight to a year fell.

Commodity prices jumped and investors unwound panic trades made last week when fears swept financial markets that the world was heading into a prolonged global recession.

The benchmark 10-year U.S. Treasury note fell 36/32 in price to yield 4.02 percent. The 2-year U.S. Treasury note shed 14/32 in price to yield 1.82 percent.

The dollar fell against a basket of major currencies, with the U.S. Dollar Index <.DXY> down 0.27 percent at 81.308. Against the yen, the dollar rose 0.19 percent at 102.18.

The euro rose 0.54 percent at $1.3664, off a session peak of $1.3769.

U.S. light sweet crude oil rose slightly, up 28 cents to $81.47 a barrel after earlier hitting $84.83.

Gold prices retreated, then rose slightly. Spot gold prices rose $10.75 to $841.55 an ounce.

Japan's Nikkei stock index <.N225> gained more than 14 percent on Tuesday. Japanese markets were closed on Monday for a national holiday. MSCI's main world stock index <.MIWD00000PUS> was up 3.8 percent after plunging 20 percent last week. (Reporting by Ellis Mnyandu, Ellen Freilich and John Parry in New York and Joe Brock and Jan Harvey in London; Writing by Herbert Lash; Editing by Leslie Adler)