* Global stocks damped as dollar rallies strongly
* Year end trading reduces risk taking
* Greece concern drags euro lower
(Adds U.S. trading, New York dateline)
By Jeremy Gaunt and Al Yoon
LONDON/NEW YORK, Dec 17 (Reuters) - The dollar jumped to its highest in more than three months against major currencies on Thursday as a U.S. economic report supported a slightly more optimistic outlook delivered by the Federal Reserve.
World stocks fell nearly 2 percent, with bank shares hurt as the Fed on Wednesday said some special programs to support the financial system were no longer needed and would expire by early next year. [ID:nN16114058]
The euro fell to over a 3-month low, also hurt by Standard & Poor's downgrade of Greece's rating by one notch, to BBB-plus from A-minus, late on Wednesday.
While the U.S. central bank left rates unchanged, prospects the Fed outlook will spark tighter U.S. monetary policy earlier than expected triggered an unwinding of short dollar positions ahead of the new year. Investors also pared riskier equity positions to protect profits at year end after a more than 70 percent rally for global equities since March.
The Fed gave no indication it would soon raise it target rate from near zero. But debate is intensifying for a move to curb the inflationary pressure of easy U.S. monetary policy, and close the gap with European rates -- a move that would boost the value of dollar-based assets.
"The markets have had a big recovery from their lows, and right now traders are looking to more or less nail down some profits," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut, who added that the stronger dollar is removing what had been a key driver of U.S. equity gains.
GREECE WORRIES
Standard & Poor's said austerity steps announced by Greek Prime Minister George Papandreou were unlikely to produce a "sustainable" reduction in the public debt burden, raising worries about the finances of the euro zone member.
"The problem for the euro is the mix of the (Fed) statement and the very strong concerns over Greece.... All the euro crosses have suffered," said Roberto Mialich, FX strategist at Unicredit in Milan.
In the United States, a report from the Federal Reserve Bank of Philadelphia showed an index of business activity in its region was at the highest since April 2005, underscoring the stronger outlook for U.S. growth. But initial jobless claims rose, adding to expectations that the recovery would be modest.
World stocks fell with MSCI's all-country index down 1.75 percent <.MIWD00000PUS> and its emerging market component off 2.04 percent <.MSCIEF>.
The Dow Jones Industrial Average <.DJI> dropped 99.15 points, or 0.95 percent, to 10,341.97. The Standard & Poor's 500 Index <.SPX> edged down 9.84 points, or 0.89 percent, to 1,099.34 and the Nasdaq Composite Index <.IXIC> slipped 21.97 points, or 1 percent, to 2,184.94.
In Europe, the FTSEurofirst 300 <.FTEU3> index declined
1.12 percent, having hit a one-month closing high on Wednesday.
Bank stocks including BNP Paribas
The dollar gained against a basket of major trading-partner
currencies, with the U.S. Dollar Index <.DXY> up 1.19 percent
at 77.912. The euro
Equities have had a robust year, especially since March, but are now becoming more volatile ahead of year-end and with large questions pending about 2010. The closure of key programs by the U.S. central banks raised questions on whether the economy was strong enough to stand on its own feet.
"Markets are still trying to find a trend and establish whether the improvement in the economy is due to stimulus packages," said Justin Urquhart Stewart, investment director at Seven Investment Management.
Earlier, Japan's Nikkei average <.N225> ended down 0.1 percent, slipping from seven-week highs as investors pocketed profits on a rally in big banks such as Mitsubishi UFJ Financial Group <8306.T>.
U.S. and German government bonds rallied as the downgrade of Greece's rating revived a bid for low-risk government debt.
Benchmark U.S. 10-year Treasury note yields declined 0.1
percentage point to 3.50 percent, while 10-year Bund yields
In energy and commodities prices, U.S. light sweet crude
oil
(Additional reporting by Brian Gorman, Jessica Mortimer and Rodrigo Campos; Editing by Andrew Hay) (To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Hub click on http://blogs.reuters.com/hedgehub)