GLOBAL MARKETS-Yields, sterling fall on ECB outlook; U.S. stocks dip

* BoE (Shenzhen: 000725.SZ - news) in no rush to raise rates; sterling hits 1-month low

vs dollar

* Sources say ECB preparing rate cut, other measures next

month

* Lower rate outlook fails to lift European shares

* U.S. shares dip after record, defensives climb

(Adds close of European stock markets)

By Chuck Mikolajczak

NEW YORK (Frankfurt: HX6.F - news) , May 14 (Reuters) - Benchmark government bond

yields in the U.S. and Germany dropped on Wednesday after

sources told Reuters a European Central Bank rate cut next month

is "more or less a done deal," while U.S. stocks retreated

slightly from recent record highs.

Euro zone sources said the ECB plans a package of policy

options, including measures aimed at boosting lending to small-

and mid-sized firms.

The ECB's dovishness has helped hold down yields on German

and U.S. debt, though the expectation is that stronger U.S.

growth will result in a boost to those yields over time.

Ten-year Bund yields hit a one-year low of 1.37 percent

while the 10-year Treasury note's yield

fell to 2.53 percent, the lowest since October. UK yields also

fell after the Bank of England said it was in no hurry to raise

rates.

"It reinforces the notion that from a global perspective

monetary policy is committed to lower (rates) for longer," said

Ian Lyngen, a senior government bond strategist at CRT Capital

in Stamford, Connecticut.

Bonds rallied even as U.S. wholesale prices increased 0.6

percent in April, the most in 1-1/2 years, in a sign inflation

pressures may be creeping up.

The S&P 500 edged lower after setting its most recent record

closing high. Defensive sectors such as utilities and

telecoms were the best performers.

Oil continued its climb on fighting in Ukraine. U.S. crude

oil rose 81 cents to $102.52 a barrel, while Brent crude

gained $1 to $110.24.

Sterling fell to a one-month low against the dollar after

the BoE said it was in no rush to raise rates and that Britain's

economic recovery is still in its early stages.

Sterling backed off a 16-month high against the euro. The

euro was up 0.4 percent against sterling at 81.70 pence

.

Sterling was down 0.2 percent against the dollar at $1.6784

, while UK gilt yields fell to as low as 2.58 percent

.

MSCI (NYSE: MSCI - news) 's all-country world index edged up 0.1

percent at 418.01 after reaching 418.24, its highest since

November 2007.

The Dow Jones industrial average fell 56.58 points or

0.34 percent, to 16,658.86, the S&P 500 lost 3.19 points

or 0.17 percent, to 1,894.26 and the Nasdaq Composite

dropped 7.56 points or 0.18 percent, to 4,122.60.

The FTSEurofirst 300 index of leading European

shares closed virtually flat, down 0.37 point at 13689.38

points, close to Tuesday's six-year high. The index has risen

6.5 percent from lows in March.

(Additional reporting by Blaise Robinson in Paris and Karen

Brettell in New York; Editing by Susan Fenton and Meredith (Frankfurt: MEZ.F - news)

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