GLOBAL MARKETS-Dollar slumps, oil rebound proves fleeting

(Recasts throughout, updates to early afternoon U.S (Other OTC: UBGXF - news) . trading, changes prices, adds quotes)

* Oil gives up earlier gains, distillate build cited

* Reported Dow Chemical, DuPont merger plan boosts chemical names

* U.S. dollar falls, commodity currencies rebound

* Euro resumes rally

By Sam Forgione

NEW YORK, Dec (Shanghai: 600875.SS - news) 9 (Reuters) - Oil prices slipped on Wednesday, giving up gains after an early rebound on a drop in U.S. crude oil inventories, while the dollar fell, resuming last week's decline, as investors short the euro were once again forced to cover those positions.

Wall Street was lower, led by weaker technology shares, dropping the S&P to a three-week low. The prospect of a merger between chemical giants Dow Chemical (Hanover: DCH1.HA - news) and DuPont boosted those shares. Dow Chemical was last up 11 percent while DuPont was last up 12 percent.

The dollar was sharply lower in afternoon trading, as the severe selling that characterized last week's plunge against the euro after disappointment over European Central Bank policy moves appeared to have resumed. The euro rose to $1.0966 after hitting a high of $1.1030, a level not seen since early November; it was seen as something of a surprise ahead of the Dec. 15-16 Federal Reserve meeting on U.S. monetary policy.

"This is just an old-fashioned clean-out in a thin market that's jittery ahead of next week," said Greg Anderson, global head of FX strategy at BMO Capital Markets in New York.

"I think the dollar is going to bounce back, though, particularly if you have continued risk aversion in other markets, in equities and commodities."

U.S. crude was initially supported by data showing a surprise 1.9-million-barrel fall in U.S. inventories to 488 million barrels last week. But traders seemed more concerned about a build in distillates, including diesel, causing earlier gains to reverse.

Brent crude was last down 17 cents at $40.06 a barrel. U.S. crude was last down 27 cents at $37.23.

MSCI (NYSE: MSCI - news) 's all-country world equity index, which tracks shares in 45 nations, was last down 0.34 percent.

The Dow Jones industrial average was off 105.36 points, or 0.6 percent, at 17,462.64, the S&P 500 was down 20.63 points, or 1 percent, at 2,042.96 and the Nasdaq Composite had dropped 86.50 points, or 1.7 percent, at 5,011.75.

Europe's broad FTSEurofirst 300 index ended down 0.5 percent.

The U.S. dollar slumped as commodity-linked currencies reversed steep losses with the recovery in oil prices, while the euro and yen both hit one-month highs versus the dollar.

Coming into this week, speculators had amassed their largest short position in the euro since May, and the change in the market's tenor since the ECB failed to deliver the jolt that investors expected has kept the dollar soft and the euro stronger.

Analysts still expect the dollar to rise in the coming weeks. The dollar index, which tracks the greenback versus a basket of six currencies, was last down 1.1 percent.

U.S. Treasury debt yields fell. Benchmark 10-year Treasury notes were last up 2/32 in price to yield 2.21 percent, from a yield of 2.24 percent late Tuesday.

Gold (Other OTC: GDCWF - news) initially rose 0.2 percent, supported by dollar softness, but investors remained cautious ahead of the anticipated Fed rate rise next week. (Additional reporting by Tanya Agrawal, Gertrude Chavez-Dreyfuss and Dion Rabouin in New York and Clara Denina in London; Editing by James Dalgleish)