GLOBAL-MARKETS-U.S. yields and dollar up on outlook on Fed tapering

* Gold down most since start of January

* S&P snaps 2-day decline; Dow Chemical (Berlin: DCH1.BE - news) surges on Loeb stake

* Chinese money market rates ease on central bank injection

* European stocks at 5-1/2-year high; world stocks flat

* Turkish lira at record low

By Barani Krishnan

NEW YORK (Frankfurt: HX6.F - news) , Jan 21 (Reuters) - U.S. Treasury prices edged down and the dollar rose on Tuesday while gold posted its largest decline since the start of the year on speculation the Federal Reserve will further pare its bond-buying stimulus at its policy meeting next week.

U.S. stocks mostly rose, with the S&P 500 snapping a two-session decline as the materials sector rallied, though the Dow fell on disappointing quarterly results by three of its components.

Global equities held steady after European stocks touched a 5-1/2-year high.

Treasuries yields rebounded from five-week lows as bond prices fell.

"I am confident that the Fed is going to its tapering approach," said Phillip Streible, senior commodities broker at brokerage RJ O'Brien. "There's been sustained improvement in the global economic recovery, and that should continue to dampen safe-haven asset demand."

A report in The Wall Street Journal said the Fed is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the U.S. central bank's expectations for solid economic growth this year.

The Fed's policy-setting committee will meet on Jan. 28-29.

"The view out there is there's going to be continued tapering on a gradual basis," said Mike Cullinane, head of Treasuries trading with D.A. Davidson in St. Petersburg, Florida. "Another $10 billion in tapering is a logical way to go."

The Fed last month trimmed its monthly purchase of Treasuries and mortgage-backed securities to $75 billion, down from $85 billion.

The spot price of gold slipped about 1 percent, the most since the year began, to below $1,242 an ounce. On Monday, gold hit its highest level since mid-December, at $1,259.85.

The Dow Jones industrial average settled down 44.12 points, or 0.27 percent, at 16,414.44. The Standard & Poor's 500 Index was up 5.10 points, or 0.28 percent, at 1,843.80. The Nasdaq Composite Index was up 28.18 points, or 0.67 percent, at 4,225.76.

Trading was volatile. The S&P fluctuated between positive and negative territory throughout the session, while the Dow moved between modest and solid losses and the Nasdaq swung between modest and strong gains.

"We still think economically sensitive stocks have room to run. ... Those have the potential to be long-term winners," said Jeff Mortimer, director of investment strategy for BNY Mellon Wealth Management in Boston.

Alcoa Inc (NYSE: AA - news) jumped almost 7 percent to $12.13 following an upgrade to "overweight" from JPMorgan. The firm also lifted its share price target on the aluminum company to $15 from $9.

Dow Chemical surged 6.6 percent to $45.93 on news that activist investor and hedge fund manager Daniel Loeb has taken a major stake in the company and is urging that it spin off its slow-growing petrochemical arm.

The Dow fell as insurer Travelers Cos Inc, Verizon Communications Inc and pharmaceuticals company Johnson & Johnson - all bellwethers for their sectors - tumbled following results.

The benchmark 10-year U.S. Treasury note was down 1/32 in price, with its yield at 2.8286 percent.

The 10-year yield was as high as 2.867 percent overnight after hitting 2.818 percent on Friday, which was its lowest level since Dec. 11, according to Reuters data.

Traders and analysts expect the yield to hold in a range between 2.75 percent to 3.00 percent heading into next week's Fed policy meeting.

World stocks were flat.

European stocks rose to a 5-1/2-year high after a move by China to inject money into financial markets eased concerns about a credit crunch that could hamper growth.

European shares also were boosted as results from Unilever (NYSE: UL - news) and Remy Cointreau SA sparked optimism.

Chinese money market rates fell after the country's central bank injected more than 255 billion yuan ($42 billion) into the financial system, easing concerns that another credit crunch was under way less than a month after a late December squeeze.

The key Euribor lending rate held steady as banks began reducing their reliance on European Central Bank funding as they turn again to the market. The ECB has pledged to intervene should the rise in bank-to-bank lending rates that underpin borrowing costs across the economy become "unwarranted."

German government bond futures fell 4 ticks.

The euro fell toward Monday's two-month troughs after the ZEW indicator of German economic sentiment for January unexpectedly fell to 61.7 after surging to 62.0 in December.

The dollar was broadly stronger, bouncing to 104.33 yen on the speculation of another Fed stimulus cut. The yen was also under pressure after Japan's central bank began a two-day policy meeting, where it is expected to keep its massive quantitative easing program unchanged.

Turkey's lira plunged to a record low against the dollar after the central bank left interest rates unchanged, defying some market expectations for a rise, given high inflation and the weak currency.

The lira has hit a string of record lows as a government corruption scandal undermines already fragile investor confidence. Turkey's huge current account deficit, which it relies on foreign investment to finance, means its economy is seen as highly vulnerable to the withdrawal of Fed stimulus.

Among commodities, Brent crude oil settled up 0.4 percent at $106.73 a barrel as the International Energy Agency raised its forecast for global oil demand this year, citing accelerating economic growth.