* Dollar rallies as worries rise over Europe
* Wall St falters as European fiscal worries offsets data
* Oil falls toward $73 a barrel on weak demand outlook
* Bonds gain on fading stocks (Updates with U.S. markets, changes byline; dateline previously LONDON)
By Herbert Lash
NEW YORK, Jan 29 (Reuters) - The dollar rose to a 6-1/2-month high against the euro on Friday and U.S. stocks fell as concerns about the fiscal health of some smaller euro zone countries curbed investors' appetite for risk.
New that the U.S. economy grew at the fastest pace in more than six years in the fourth quarter also lifted the dollar, boosting views the United States was recovering faster than other developed countries.
Investors remained concerned about the fiscal health of certain euro zone countries, such as Greece, Spain and Portugal, helping push the euro below $1.39 for the first time since early July.For details see: [ID:nN29165408]
The batch of reassuring U.S. economic data and improving consumer sentiment initially lifted U.S. stocks and crude oil prices. But rising U.S. fuel stockpiles and expectations that members of the Organization of Petroleum Exporting Countries will boost exports helped pushed oil down toward $73 a barrel.
U.S. stocks indexes rose more than 1 percent in morning trade as the figures on gross domestic product and other data drove optimism about the economy, but worries about Europe drove the broader market to lose ground by midday.
"There's a lot of concerns going on as far as the sovereign debt is concerned in the lot of the nations, specifically in the euro zone," said David Lutz, managing director of trading at Stifel Nicolaus Capital Markets in Baltimore.
Before 1 p.m., the Dow Jones industrial average <.DJI> was up 21.84 points, or 0.22 percent, at 10,142.30. The Standard & Poor's 500 Index <.SPX> was down 0.18 points, or 0.02 percent, at 1,084.35. The Nasdaq Composite Index <.IXIC> was down 7.08 points, or 0.32 percent, at 2,171.92.
Investors sold off shares of such technology bellwethers as
Apple Inc
European shares notched their biggest one-day gain in three weeks, with banks recovering some ground lost on worries about Greece's deficit and on optimism over the U.S. economic data. [ID:nLDE60S1F5]
The FTSEurofirst 300 <.FTEU3> index of top European shares rose 1 percent to close at 1,011.89 points, its biggest one-day gain since Jan 4.
But the index fell 3.3 percent in January, its worst monthly performance since February 2009.
The U.S. economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter as businesses made less-aggressive cuts to inventories and stepped up spending. [ID:nN28246399]
The strong gross domestic product number was largely due to inventory rebuilding, which is now mostly over, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
"I don't think it changes the story, which is still likely to be a relatively subdued recovery by historical standards," Gault said.
The euro fell as low as $1.3863
The dollar was up against a basket of major currencies, with the U.S. Dollar Index <.DXY> up 0.66 percent at 79.422.
Against the yen, the dollar
Greek government bonds saw a bit of a reprieve from a sharp sell-off this week, despite uncertainty over whether the European Union would bail out the highly indebted country.
Some short covering ahead of the weekend helped ease the selling of Greek bonds, traders said.
The 10-year Greek yield
U.S. Treasuries pared earlier losses and rose as the rally in the U.S. stock market lost steam. [ID:nN2997985]
Benchmark 10-year Treasury notes
Crude oil prices also turned south after earlier gains from the batch of reassuring U.S. economic data and improving consumer sentiment.
U.S. light sweet crude oil
China's moves to rein in credit also raised concerns about the pace of economic growth and oil demand.
"The (GDP) number was being downplayed for days prior to release. No one expects a repeat next quarter and this number will only influence the current general skepticism marginally," said Mike Fitzpatrick, vice president at MF Global in New York.
Asia Pacific stocks outside Japan as measured by MSCI <.MIAPJ0000PUS> fell 2 percent to a two-month low, while Japan's Nikkei average <.N225> fell 2 percent to a six-week closing low. (Reporting by Ellis Mnyandu, Wanfeng Zhou, Richard Leong and Robert Gibbons in New York; Brian Gorman and Ian Chua in London; writing by Herbert Lash; Editing by Leslie Adler)