U.S. stocks look lower, Europe flattens out

Wall Street headed for a lower open Tuesday, following solid gains in Asia but a fading rally in Europe.

Some pullback in stocks was to be expected as investors cash in profits from Monday's big gains. Still, market anxiety appears to have lessened considerably compared with the previous two weeks, when fears about tightening world credit battered stocks around the globe.

The FTSE 100 index of leading British shares was up only 0.17% in early afternoon trading. Germany's DAX was down 0.23%.

France's CAC-40 index of leading shares rose more strongly after the French government said it would inject a total of euro10.5 billion ($14 billion) into the country's six largest banks by year-end to help counter the effects of the global financial crisis. The CAC was up 1.59%.

Overnight, Japan's benchmark Nikkei 225 index gained a strong 3.3% following the 413.20 point, or 4.7%, jump in the Dow Jones index Monday to 9,265.43.

"A strong finish on Wall Street last night as the previously frozen credit markets continue to thaw following recent government intervention has lifted sentiment in many Asian markets," said Matt Buckland, a dealer at CMC Markets.

Stock markets have been buoyed this week by the fall in interbank lending rates in light of the flurry of government efforts to put money into banks, and by coordinated interest rate reductions and massive short-term credits to banks by central banks.

"Calmer markets are the definition of the 'success' of the enormous measures announced," said Stephen Jen, global head of currency research at Morgan Stanley.

Overnight, the Hong Kong interbank offered rate, also known as Hibor, for three-month loans continued to slide, falling from 3.66% to 3.35. Hibor's decline follows Monday's 0.36% drop in the equivalent three-month dollar loans to 4.06%.

Abnormally high interbank lending rates have been a sign of distress in credit markets and been the catalyst for the crisis in the financial markets over recent weeks. High interbank rates can choke off credit to businesses and individuals, hurting the economy.

Even if Libor rates continue to decline, analysts say stock markets will not be out of the woods given the sharp economic slowdown likely to occur over the coming months, which will become more and more evident as companies report their latest earnings.

"Markets remain fickle and no one is going to want to risk being caught on the wrong side of any quick sell-off and the potential for another reversion still cannot be ruled out," said CMC's Buckland.

Hopes are also growing that lawmakers in the U.S. will unveil a new stimulus package to limit the extent of the recession. Federal Reserve Chairman Ben Bernanke said Monday that additional steps might help ease the country's economic weakness.

In Asia, Japan's Nikkei rose 300.66 points, or 3.34%, to close at 9,306.25, a third consecutive day of gains.

While shares in most other countries moved higher, several key stock measures sold off early gains to close in the red. Hong Kong's Hang Seng Index lost 1.84%, Shanghai's benchmark fell 0.8% and South Korea's index shed about 1%.

Hong Kong's benchmark was dragged down after conglomerate Citic Pacific warned that it could faces losses of more than HK$15.5 billion (nearly $2 billion) after a top executive made unauthorized bets against the U.S. dollar.

In Australia, the main index gained 3.9% after the country's central bank chief said he believed coordinated global action to tackle the financial crisis had helped to avert a worldwide catastrophe. Resource giant Rio Tinto helped lead the way, soaring more than 12%.

"In all we're in a better place and conditions are better than two weeks ago," said Khiem Do, a Hong Kong-based fund manager who helps oversee about $8 billion of Asian equities at Baring Asset Management.

"The measures have pacified investor panic as far as the banking system is concerned. You have monetary easing in a number of countries. And you have a market that was oversold and started to offer very attractive valuations."

On oil markets, crude oil prices dipped 70 cents to $73.55 a barrel Tuesday on profit taking after Monday's gains on expectations that OPEC will try to halt a three-month slide in prices by cutting production quotas at least 1 million barrels a day.

The dollar fell 0.6% against the yen to 101.23 yen. The euro weakened 0.8% to $1.3233.