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In a repeat of a now-familiar pattern, traders capitalized on headlines emerging late in the trading day, this time to push the market lower. With long-term investors largely on the sideline due to Europe's uncertainty, the market remains susceptible to swift swings.

"The market has become overly sensitive to chatters and rumors out of Europe and to the headline news. This is exactly what happened yesterday and that just shows how unstable this market is," said Eric Marshall, director of research at Hodges Capital Management in Dallas.

France's President Nicholas Sarkozy said on Wednesday that talks to tackle the euro zone crisis were stuck as they struggled to increase the bailout fund's firepower, while a Wall Street Journal report said Europe's bailout fund could be used to provide collateral to back up bond issues by troubled countries. For details, see

On Tuesday, stocks rallied on late news suggesting euro zone leaders had a big package in place for rescuing indebted nations.

A weak economic outlook from the U.S. Federal Reserve was responsible for the initial move lower on Wednesday afternoon.

Technology stocks were the biggest losers after a rare earnings miss from tech heavyweight Apple.

Apple shares (AAPL.O) fell below $400 after the company's revenue and profits came in below estimates for the first time in years on Tuesday as it sold far fewer iPhones than expected. The CBOE Volatility Index VIX .VIX, Wall Street's so-called fear gauge, jumped 10.1 percent to 34.76, reflecting market jitters ahead of a summit of European Union leaders Sunday. Investors hope the meeting will produce a concrete plan to handle the region's debt crisis.

The Dow Jones industrial average .DJI was down 75.49 points, or 0.65 percent, at 11,501.56. The Standard & Poor's 500 Index .SPX was down 15.63 points, or 1.28 percent, at 1,209.75. The Nasdaq Composite Index .IXIC was down 54.41 points, or 2.05 percent, at 2,603.02.

On the upside, Intel Corp (INTC.O) hit a new 52-week high of $24.50 earlier after the chipmaker forecast quarterly revenue above expectations.

The stock closed up 3.6 percent at $24.24.

Travelers Cos Inc (TRV.N) advanced 5.7 percent to $54.39 after it said it will ramp up a share buyback dramatically.

Earlier, economic data showed U.S. consumer prices outside food and energy rose at their slowest pace in six months while groundbreaking on new homes rose at the fastest rate in 1-1/2 years. Stocks barely budged after the data.

Trading volume was at 7.8 billion shares on the New York Stock Exchange, NYSE Amex and Nasdaq, lower than the year's daily average so far of about 8 billion.

On the NYSE, decliners beat advancers by a ratio of about 3 to 1. On the Nasdaq, about four stocks fell for every one that rose.

(Reporting by Angela Moon, Editing by Chizu Nomiyama)

The unprecedented move, following a string of accounting scandals at U.S.-listed Chinese companies, is set to ratchet up tensions between the financial regulators of America and China.

The request, sources said, is seen as a direct response to the move by the U.S. regulators in the case of scandal-hit Longtop Financial Technologies Ltd, and to ensure that firms do not succumb to pressure to hand over documents to regulators outside of China.

Last month the U.S. Securities and Exchange Commission (SEC) asked an American court to enforce a subpoena it sent to Deloitte Touche Tohmatsu's China practice for documents from its audit of Longtop.

Two sources from the audit industry told Reuters that the Ministry of Finance and China Securities Regulatory Commission (CSRC) met last week with the so-called 'Big Four' audit firms -- KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte -- along with two smaller firms.

The firms were requested by the government to conduct an urgent review of all audits they had done on U.S.-listed Chinese firms in 2010 along with work on U.S. initial public offerings by Chinese companies.

They have been asked to report back by the end of this week with information on whether audit work papers or other client information were given to overseas regulators or any of their overseas practices.

One source, who can't be named due to the sensitive nature of the meeting, said the Chinese authorities emphasized to the firms their rules on confidentiality.

"We are being asked to give that message to foreign regulators that seek to get information from us," the source said.

The second source said that the information requested included all correspondence on U.S.-audit work between the firms' mainland Chinese offices and their counterparts in Hong Kong and Macau. Firms have also been asked to provide details of audits done by their Hong Kong offices on U.S.-listed Chinese companies, provided their main operations are on the mainland.

"Given what's happened in the States recently with the SEC ratcheting up the pressure, there was likely to be some sort of reaction and this is part of it, if not the total of it," said one industry expert who did not have direct knowledge of the meeting.

CAUGHT IN THE MIDDLE

The request is likely to heap more pressure on auditors caught in the middle of competing demands from the U.S. and Chinese regulators.

"I would guess they (auditors) are terrified," said Paul Gillis, a former partner for PWC and visiting professor of accounting at Peking University. "This is not a pleasant time for them and I think they would like to find a resolution to these problems as quickly as possible."

Gillis added that auditors may well have provided some information to the U.S. SEC in response to questions on listed Chinese companies, while the exchange of information with their overseas offices happens frequently.

"They (Chinese regulators) are going to learn, if the firms are honest about what they are doing, that they have shared a lot of information from China with foreigners," he said.

The CSRC and China's Ministry of Finance ministry had no immediate response when reached by phone. Reuters asked all of the 'Big Four' firms about the meeting. PWC, KPMG and Ernst & Young declined to comment while Deloitte did not immediately respond.

Gillis said it was unlikely the big audit firms will face major sanctions for disclosing that they passed on information to their overseas offices or foreign regulators but will likely be told such behavior will not be tolerated in future.

U.S. accountancy watchdog Public Company Accounting Oversight Board (PCAOB) has been negotiating with the Chinese authorities to be allowed to conduct inspections of mainland firms that audit Chinese companies listed in America.

However, the momentum of the talks appears to have been slowing in recent weeks, with no date yet set for the next round of discussions.

Earlier this month the PCAOB's chair James Doty said he could not wait indefinitely for an agreement and indicated they may consider taking alternative measures against audit firms that would not co-operate with inspectors.

(Additional reporting by Nanette Byrnes in NEW YORK and Don Durfee in BEIJING; Editing by Muralikumar Anantharaman)

Apple Inc's (AAPL.O) results fell short of estimates for the first time in years as it sold far fewer iPhones than expected. Shares fell 4.7 percent to $402.25 in premarket trading.

Stocks surged in late trading on Tuesday after Britain's Guardian newspaper reported France and Germany reached a deal to pump up the euro zone's rescue fund to more than 2 trillion euros. Two senior European Union officials dismissed the report.

The S&P 500 index has struggled to make progress as it approaches the top end of a two-month trading range at around 1,250.

Wayne Kaufman, chief market analyst at John Thomas Financial in New York, said the recent run-up in the market would likely mean that gains would be kept in check for now.

"The wide swinging day we had yesterday might cap the market for a little while," he said. "People are nervous about earnings in general regardless of Apple ... it's a mixed bag right now."

S&P 500 futures fell 1.3 points but were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 4 points, and Nasdaq 100 futures were off 15 points.

Helping futures pare early losses, housing starts surged in September at their fastest annual pace in 17 months, the government reported.

"Europe is still the biggest story in this market and the rumors yesterday of a large cash infusion are positive to the market on so many levels," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Tens of thousands of striking Greeks rallied outside parliament in one of the biggest protests since the crisis broke out nearly two years ago, as lawmakers debated a new wave of public sector pay cuts and layoffs demanded by lenders in exchange for more bailout funds.

Morgan Stanley (MS.N) swung to a $2.15 billion profit in the third quarter, reversing a year-earlier loss, helped by a large accounting gain, it said early Wednesday. The shares rose 1.6 percent to $16.90, but premarket trading was volatile.

(Editing by Jeffrey Benkoe)

Another report on Wednesday showed groundbreaking on new homes rose at the fastest rate in 1-1/2 years, though most of the gains came from the often volatile multi-family construction.

The Labor Department said its core Consumer Price Index edged up 0.1 percent, also held back by flat prices for new cars and a modest rise in rental-related costs.

Economists had expected core CPI to rise 0.2 percent last month. The index increased 0.2 percent in August.

Overall consumer prices increased 0.3 percent last month, as expected, after advancing 0.4 percent in August.

The moderate rise in consumer prices offered assurance that inflation pressures remained in check despite a sharp rise in wholesale prices last month.

"The housing data combined with CPI data shows that the economy, while it still is muddling along, is showing a little forward momentum that has not generally been anticipated by most analysts," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

The reports also suggested the Federal Reserve had some wiggle room for further monetary policy easing, should the economic recovery falter, even though the year-on-year change in core inflation has already reached 2 percent.

The Fed keeps a close eye on core inflation as it tries to guide the overall inflation to 2 percent or a little under. The 12-month change in overall inflation hit 3.9 percent, the highest since September 2008.

The U.S. central bank is searching for more ways to boost growth and lower an unemployment rate that has stubbornly remained above 9 percent. It has already cut overnight lending rates to near zero and pumped $2.3 trillion into the economy.

For now, the pressure for monetary stimulus has lessened amid signs the economy fared much better in the third quarter.

HOUSE STARTS JUMP

That positive tone on the economy was reinforced by a separate report from the Commerce Department showing housing starts increased 15.0 percent to a seasonally-adjusted annual rate of 658,000 units, well above economists' expectations for a 590,000-unit rate. However, almost all the gains were in the volatile multifamily segment.

The housing sector remains far from recovery. Another report showed applications for U.S. home mortgages tumbled 14.9 percent last week as demand for both refinancing and purchases fizzled.

U.S. stock index futures pared losses on Wednesday after the data. U.S. Treasury debt prices extended losses, while the dollar fell against the euro.

Core consumer prices last month were restrained by new motor vehicle costs, which were unchanged for a third straight month. This likely reflects a normalization in supplies after the March earthquake in Japan disrupted production.

Prices for used cars and trucks fell 0.6 percent after months of gains. Apparel prices dropped 1.1 percent, the largest decline since September 1998.

Shelter costs edged up 0.1 percent, the smallest rise since April, as owners' equivalent rent edged up 0.1 percent after rising 0.2 percent in August.

The Bureau of Labor Statistics uses owners equivalent rent to measure the amount homeowners would pay to rent or would earn from renting their property.

A 2.9 percent increase in the price of gasoline pushed overall consumer prices last month. Gasoline had risen 1.9 percent in August. Food prices gained 0.4 percent after increasing 0.5 percent in August.

(Reporting by Lucia Mutikani and Jason Lange; Editing by Neil Stempleman)

The fresh blow from Moody's Investors Service came just a day after the agency warned France its triple-A rating could be at risk.

"If the euro zone can't figure a way to handle the situation, you are going to see Spanish yields continue to go up, and they are going to have a problem to fund themselves , " said Jessica Hoversen, currency and fixed income analyst at MF Global in New York.

Investors are counting down to a summit of EU leaders this weekend that was originally hailed as a watershed event.

News of the ratings cut snuffed out a sharp rally in shares and the euro that had been sparked by a report suggesting an agreement to strengthen the euro zone's rescue fund.

However, a senior euro zone source poured cold water on the report by Britain's Guardian newspaper that suggested Germany and France had agreed to leverage the fund to over 2 trillion euros as part of a "comprehensive plan".

Moody's cut Spain's bond rating to A1, from Aa2, the third of the major agencies to act in recent weeks and taking it a notch below the ratings of Standard & Poor's and Fitch.

Moody's reasoning made worrying reading for those hoping for a speedy resolution to country's troubles.

"Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored," the agency said.

In the meantime, Spain's large sovereign borrowing needs, heavily indebted banking system and challenging growth outlook left it vulnerable to further downgrades, a judgment that would encompass all too many of EU members.

PLAYING DOWN BREAKTHROUGH

Germany policymakers have been doing their best to play down the chances of a ground-breaking deal anytime soon.

German Chancellor Angela Merkel on Tuesday warned that leaders would not solve the debt crisis at a single meeting.

"These sovereign debts have been built up over decades and therefore one cannot resolve them with one summit but it will take difficult, long-term work. Nonetheless, I do think we will also be able to take relevant, important decisions," she said.

Markets have been on edge for fear European leaders would not agree on a plan to address the crisis, which has already forced Greece, Ireland and Portugal to seek bailouts and has driven up borrowing costs in Italy and Spain.

Greek unions began a 48-hour general strike on Wednesday, the biggest protest in years, as parliament prepares to vote on sweeping new austerity measures designed to stave off default.

France saw its borrowing costs jump on Tuesday after Moody's warned it may slap a negative outlook on the country's Aaa rating in the next three months if slower growth and the costs of helping to bail out banks stretch its budget too much.

Economy Minister Francois Baroin insisted the rating was not at risk but acknowledged that the 1.75 percent growth forecast on which the government had based its 2012 budget was over-optimistic and would have to be revised down.

"The triple-A is not in danger because we will be even ahead of schedule on passing deficit reduction measures," Baroin said on France 2 television.

"We will do everything to avoid being downgraded."

(Additional reporting by bureaus in New York, Paris, London, Frankfurt and Brussels; Writing by Wayne Cole, editing by Mark Bendeich)

A rise in U.S. stocks and a report that Europe will strengthen the region's rescue fund helped improve sentiment, with spreads over a key Asian credit default swaps index narrowing several basis points.

But bearish technicals remained in place to suggest investors were still wary about buying riskier assets.

"It's a familiar pattern these days, to sell stocks whenever there's bad news from Europe and buy them back whenever there's good news, but investors are getting tired of it," said Kenichi Hirano, operating officer at Tachibana Securities, adding that this was one reason for recent thin trade.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rose 0.5 percent.

The technology sector .MIAPJIT00PUS was the exception, bucking the trend and falling 0.3 percent, due to disappointing earnings results from the world's largest technology company, Apple Inc (AAPL.O), which affect Asian suppliers, said HSBC's head of global equity strategy Garry Evans.

Apple shares lost more than 5 percent to below $400 in extended trade after the company reported a rare miss in quarterly results after sales of its flagship iPhone fell short of Wall Street expectations.

The Nikkei stock average .N225 rose 0.55 percent but Apple's results helped cap the upside. .T

European debt woes continued to undermine investor sentiment as they remained cautious about the degree of progress policymakers would offer at a summit on Sunday.

German Chancellor Angela Merkel said Sunday's meeting would be an important step, but warned one summit would not be enough to resolve the crisis, while the EU's trade chief said the euro zone could unravel unless tough action was taken.

RESCUE FUND

A report on Tuesday in Britain's Guardian newspaper that France and Germany had agreed to boost the firepower of a euro zone financial rescue fund to 2 trillion euros was later denied by a senior euro zone source, who told Reuters there had been no mention of such a deal.

"Stocks are moving entirely on European politics. The question is can Europe really come up with something, a positive surprise for the market?" HSBC's Evans said of the October 23 meeting, adding that Wednesday's rise was mainly driven by laggard buyers who missed the rally last week.

Evans said the key issues were how big a cut to Greece's debt was agreed, a major recapitalization for European banks and a big increase to the bailout facility, and if the markets felt the outcome fell short of their expectations stocks could re-test the lows marked earlier this month.

Moody's, one of the big three ratings agencies, on Tuesday cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stresses.

The latest step followed Moody's warning on Monday over risks for France to maintaining its top credit rating.

BANK EARNINGS

U.S. banks' earnings underscored the damage inflicted by the global financial turmoil, with Goldman Sachs Group Inc (GS.N) posting its second quarterly loss as a public company on Tuesday as its investment portfolio lost billions of dollars in value.

Bank of America Corp (BAC.N) posted a third-quarter profit on accounting gains, but its main businesses struggled as income from lending and investment banking fell.

In Asian credit markets, spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, narrowed by about 8 basis points, reflecting a rise in equities.

"The market feels a little better following the late rally in equities. But right now, it's all about headline watching from Europe. We are also watching the last of the Wall Street bank earnings today with Morgan Stanley's results due later," said a Singapore based trader with an Asian bank.

Other gauges of risk appetite, such as cross-yen currency pairs, showed sentiment remained cautious.

The euro and the Australian dollar failed to break this week's highs against the yen and have fallen back to levels of a week ago.

The euro inched up 0.2 percent from earlier lows against the dollar hit after Moody's cut Spain's sovereign rating.

Gold, traditionally a safe-haven asset, slumped 1 percent in the last two sessions, reviving an inverse correlation to the dollar. Gold recovered from earlier losses and was up 0.25 percent on Wednesday, as the dollar index, which measures its performance against six major currencies .DXY, slipped.

A double top on charts, based on the two recent highs formed in late August and early September, prompted technical analysts to turn bearish on gold's near-term outlook.

Oil prices fell, with Brent crude down 0.2 percent to $110.93 a barrel, while U.S. crude futures fell 0.3 percent to $88.02. <O/R>

(Additional reporting by Lisa Twaronite in Tokyo, Umesh Desai in Hong Kong; Editing by Alex Richardson)