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The latest evidence of a slowdown came in the Federal Reserve's Beige Book, which gives an anecdotal report on the economy. It reinforced Fed chief Ben Bernanke's bearish assessment on growth delivered late on Tuesday.

The market's mood soured when Bernanke gave no hint that the central bank would offer a third round of stimulus to an economy losing steam. The Beige Book said costlier food and energy prices as well as supply disruptions stemming from Japan's earthquake were taking a toll.

Stocks are still up for the year, but the market's recent slide has taken a big bite out of those gains.

The Dow, which on May 2nd was up 10.6 percent for the year when it hit its 2011 closing high, is now up just 4.1 percent.

The S&P 500, which had climbed as much as 8.2 percent for the year at its 2011 closing high on May 2nd, is now up just 1.7 percent. And the Nasdaq, which on May 2nd was up 8 percent for the year when it set its 2011 closing high, is now up only 0.9 percent.

Stocks have come under pressure recently due to a slew of weak economic data, especially in the labor market.

"Investors are re-pricing the slowdown after Bernanke crystallized it," said Jason L. Ware, senior equity research and trading analyst at Albion Financial Group in Salt Lake City, Utah.

On top of that, "the market was hoping for an indication that there may be another round of stimulus but clearly, that's not what they got."

The Fed's $600 billion second round of stimulus, expected to end this month, has been a catalyst for the stock market's advance.

Many of the day's biggest decliners were U.S.-traded Chinese companies after Interactive Brokers Group banned clients from borrowing money to buy some Chinese stocks.

New York-listed shares of Renren Inc fell 13.6 percent to $10.51 and Baidu lost 3.3 percent to $120.67.

Mortgage insurers' shares also fell after MGIC Investment Corp reported disappointing monthly operating statistics.

Shares of MGIC Investment, the biggest mortgage insurer to Fannie Mae and Freddie Mac, fell 20.2 percent to $5.80.

The Dow Jones industrial average dropped 21.87 points, or 0.18 percent, to 12,048.94. The Standard & Poor's 500 Index lost 5.38 points, or 0.42 percent, to 1,279.56. The Nasdaq Composite Index fell 26.18 points, or 0.97 percent, to 2,675.38.

"I think 1,250 is a key level (on the S&P) and, if we get there, likely to provide support for the market, barring any further erosion in the underlying economic data," Ware said.

SHARPER SLIDE FORECAST

Credit Suisse's U.S. equity strategist Doug Cliggott said on Wednesday the S&P 500 could fall roughly 10 percent from its current level, partly due to the approaching end of the Federal Reserve's bond-buying program.

"We would think an index between 1,170 and 1,200 would be a realistic estimate of where we might be headed," Cliggott said at the Reuters Investment Outlook Summit in New York.

His comments followed a bearish tone struck on Tuesday by Citigroup strategist Tobias Levkovich. He said major U.S. stock indexes could fall as much as 10 percent from their May highs. A 10 percent fall is typically described as a market correction.

There were also signs of weakness from corporate America. Communications networking equipment provider Ciena Corp forecast third-quarter revenue below expectations, driving down its stock and others in the sector.

Ciena tumbled 16.2 percent to $20.29, while JDS Uniphase Corp dropped 5.5 percent to $17.40.

Limiting losses, the energy sector rose after talks at the oil cartel OPEC in Vienna broke down without an agreement on a production hike. The S&P 500 energy index rose 0.4 percent, with Exxon Mobil up 1 percent at $80.76.

U.S. crude oil futures rose nearly 2 percent to settle above $100 a barrel.

About 7.45 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, slightly below the daily average of 7.6 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,217 to 784, while on the Nasdaq, decliners beat advancers by 1,920 to 679.

(Reporting by Angela Moon; Editing by Jan Paschal)

"We were unable to reach an agreement -- this is one of the worst meetings we have ever had," said Ali al-Naimi, oil minister for Saudi Arabia, OPEC's biggest producer.

The failure to do a deal is a blow for consumer countries hoping the Organization of the Petroleum Exporting Countries would take action to stem fuel inflation.

"We have noted with disappointment that OPEC members today were unable to agree on the need to make more oil available to the market," said the International Energy Agency.

The United States had put pressure on Saudi to deliver a credible deal to cap crude prices and underpin faltering economic growth.

Brent crude rose more than $1 a barrel to above $118.

Naimi said OPEC's four Gulf Arab countries proposed the 12-member group increase output by 1.5 million barrels a day to 30.3 million barrels a day, including Iraq which is not bound by an OPEC quota.

Seven -- Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran -- were opposed, he said, wanting to keep production unchanged.

POLITICS INTERVENE

Analysts said that while there opposing views on whether markets required more crude, the backdrop to the disagreement revolved around political tensions in the Middle East and North Africa and differences over how to respond to consumer demands.

"One factor is a diverging market view. Another is politics," said analyst Samuel Ciszuk at IHS. "At times of heated politics/ideological debate, Saudi struggled to dominate as much as it could have given its size vis-a-vis others in OPEC.

Gulf Arab producer Qatar has given support to Libyan rebels fighting the government of Libya's Muammar Gaddafi. And Saudi Arabia has angered Shi'ite Iran by using force to support the Sunni Bahraini government in suppressing a Shi'ite rebellion.

Easily OPEC's biggest producer, Saudi Arabia normally gets its way.

But this time those in OPEC politically opposed to the United States -- led by Iran and Venezuela -- found enough support to block Riyadh.

"Saudi is the cartel member most interested in earning political "points' with consuming countries, and maintaining its image as a reliable supplier of last resort," said Katherine Spector at CIBC World Markets.

"Venezuela and Iran likely feel they have less to gain politically by increasing quotas as a symbolic gesture."

UNILATERAL SAUDIS

Despite an Iranian proposal to convene again in three months in Iran, OPEC is not scheduled to meet again until December 14.

The only country with significant spare capacity, Saudi will now raise output unilaterally.

Earlier in the week a Gulf official said Saudi was already raising output by at least 500,000 bpd in June to 9.5-9.7 million bpd.

Saudi output was last as high in the middle of 2008 after oil prices set a record $147 a barrel, shortly before recession sent prices crashing.

Forecasts suggest more oil is required to stop oil prices rising again.

OPEC's Vienna secretariat sees demand in the second half of the year 1.7 million bpd higher than current cartel output.

European shares were also expected to fall, extending their losing streak to a sixth straight session, tracking weakness in Asia and on Wall Street. Financial spreadbetters expected Britain's FTSE 100 .FTSE and Germany's DAX .GDAXI to fall as much as 0.5 percent and France's CAC 40 .FCHI to open down as much as 0.6 percent.

Bernanke acknowledged an economic slowdown in the United States, but offered no suggestion of further stimulus to support growth, souring sentiment across equity markets and toward the dollar as investors expect U.S. interest rates to remain low for a longer period of time.

The dollar slipped to a one-month low under 80 yen as the Japanese currency was bought back broadly amid heightened risk-aversion reflecting the falls in Asian share prices.

The Nikkei average .N225 ended about 0.1 percent higher, with gains in financials helping to temper weakness in other sectors.

MSCI's index of Asia-Pacific stocks .MIAPJ0000PUS outside Japan fell 0.7 percent and looked set for its fifth straight losing session. Consumer discretionary and resources shares continued to see the heaviest selling on fears of cooling demand.

"When you see the weaker U.S. dollar, people do get concerned about the global growth story," said Justin Gallagher, head of sales trading at RBS Australia in Melbourne.

Lorraine Tan, director of Asia equity research at S&P in Singapore, said the markets were in a "major semi-lull."

"We don't expect much in the near term without fresh developments," she said. "There is concern over what's going to be happening with global growth. Double-dip (recession) worries will come back."

The euro briefly rose to a one-month high of $1.4696 as the dollar floundered, but later slipped back to $1.4658, off around 0.1 percent.

Fears of a Greek debt default were expected to limit further advances for the single currency.

Greece needs substantial fresh aid from the euro zone to avoid the currency bloc's first state insolvency, a German newspaper reported on Tuesday, citing German Finance Minister Wolfgang Schaeuble.

"We are facing the real risk of the first uncoordinated state insolvency within the euro zone," die Welt newspaper quoted Schaeuble as writing in a letter to, amongst others, European Central Bank President Jean-Claude Trichet.

The paper said Schaeuble argued for a new bailout of Greece with a "substantial" expansion of European aid and with private creditor involvement

The euro also rose against the yen on Japanese institutional demand.

OIL EXTENDS SLIDE

Brent crude fell 0.4 percent to $116.34a barrel, after gaining $2.30 on Tuesday. Investors are trying to assess whether OPEC will raise production targets.

Gold slipped to $1,540 but analysts see plenty of room for its continued rise as investors retreat from riskier assets.

Gold is still well below a lifetime high around $1,575 touched in early May, but with the U.S. dollar under pressure, equities markets falling and the debt crisis in Europe far from over, bullion continues to be one of the chief beneficiaries of the latest bout of market volatility.

Tan said gold would be supported by fundamentals and sentiment over the weak U.S. dollar.

"We think it will stay relatively firm," she said.

U.S. stocks fell for a fifth day on Tuesday after Bernanke's comments. The Dow Jones industrial average .DJI fell nearly 0.2 percent, while the Standard & Poor's 500 Index .SPX slipped 0.1 percent. .N

(Reporting by Ian Chua in Sydney, Miranda Maxwell in Melbourne and Antoni Slodkowski in Tokyo; Editing by Kim Coghill)

A growing number of Republican lawmakers think a technical debt default might be a price worth paying if it gets the White House to accept deep spending cuts. This idea, once confined to the party's fringe, is seeping into the mainstream, Reuters reported on Tuesday.

"How can the U.S. be allowed to default?" said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally."

Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world's safest and most liquid investments. It held $39.8 billion in U.S. Treasuries as of March, according to U.S. data.

The Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year. The Treasury Department has said it will run out of borrowing room by August 2.

If Washington cannot make interest payments on its debt, the Obama administration has warned of "catastrophic" consequences that could push the still-fragile economy back into recession.

"It has dire implications for the economy at a time when the macro data is softening," said Ben Westmore, a commodities economist at National Australia Bank.

"It's just a horrible idea," he said.

'WOULDN'T HAPPEN'

The Republicans' theory is that bondholders would accept a brief delay in interest payments -- maybe a couple of days -- if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations later on.

But interviews with government officials and investors show they consider a default such a grim -- and remote -- possibility that it was nearly impossible to imagine.

"It just wouldn't happen," said Barry Evans, who oversees $83 billion in fixed income assets at Manulife Asset Management. "They would pay their Treasury bills first instead of other bills. It's as simple as that."

As for China, Washington's largest foreign creditor with $1.14 trillion in Treasuries as of March, a default could fray already strained political and economic ties.

Yuan Gangming, a researcher with the government think tank Chinese Academy of Social Sciences, smelled some political wrangling behind the U.S. debt debate as the 2012 presidential election draws nearer and said Republicans "want to make things difficult for Obama."

But with time running short before Treasury exhausts its borrowing room, Yuan said default was a real risk.

"The possibility is quite high to see a default of the U.S. debt, which would harm many countries in the world, and China in particular," he said.

(Reporting by Kevin Lim and Jong Woo Cheon in Singapore, Suvashree Dey Choudhury in Mumbai, Aileen Wang in Beijing, Abhijit Neogy in Delhi and Umesh Desai in Hong Kong; Editing by Dean Yates)