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The Labor Department said on Tuesday the core Producer Price Index, which excludes food and energy costs, fell 0.6 percent -- the biggest drop since July 2006 -- after edging up 0.1 percent in September.

Economists polled by Reuters had expected core PPI to gain 0.1 percent in October.

The headline PPI index rose 0.4 percent last month, well below economists' expectations for a 0.8 percent increase, after gaining 0.4 percent in September.

Concerns that low inflation could spiral into a damaging phase of deflation prompted the Fed this month to ease monetary policy further, a step that will see it buy $600 billion worth of government bonds through the middle of 2011.

"There's been some questions about whether the Fed might ease off or not and bonds have fallen somewhat in the last few days. This data could go against this somewhat," said Sean Incremona, an economist at 4Cast in New York.

U.S. stock index futures briefly added to losses, while the dollar fell against the yen. U.S. Treasury debt prices extended gains.

Core PPI in October was depressed by a 4.3 percent drop in the price of light motor trucks, which was the largest since October 2006. Prices for passenger cars also fell 3.0 percent last month, the biggest decline since July 2006.

The fall in vehicle prices likely reflected the annual introduction of new models into the PPI.

In the 12 months to October, core producer prices rose 1.5 percent after increasing 1.6 percent the prior month.

Though sluggish demand is keeping inflation subdued, there are signs the economy is regaining some strength after losing momentum in the summer.

Wal-Mart Stores Inc (WMT.N), the world's largest retailer on Tuesday posted a higher quarterly profit and raised its full-year earnings forecast, but U.S. same-store sales declined in a sign of the pressure on consumers.

However, Chief Executive Officer Mike Duke said he expected the U.S. performance to improve in the fourth quarter.

Home improvement chain Home Depot Inc (HD.N) also reported results on Tuesday. While its earnings were higher than expected, it softened its full-year sales forecast to reflect the reticence of consumers to take on expensive renovation projects.

(Reporting by Lucia Mutikani, Additional reporting by Karen Brettell in New York, Editing by Andrea Ricci)

Sales at U.S. Wal-Mart stores open at least a year fell 1.3 percent, the sixth consecutive quarterly decline at the world's largest retailer.

Sales at Wal-Mart's U.S. discount stores have suffered from the company's missteps in terms of merchandise selection and promotion. In addition, high unemployment has forced Wal-Mart's lower-income customers to cut back on even some essential items or to search out lower prices at dollar stores.

Wal-Mart said profit in the third quarter ended October 31 was $3.44 billion, or 95 cents a share, compared with $3.15 billion, or 82 cents a share, a year earlier. The latest results included a tax benefit of 5 cents per share.

Net sales rose 2.6 percent to $101.2 billion.

Earnings per share, excluding the tax benefit, were in line with analysts' average forecast of 90 cents, according to Thomson Reuters I/B/E/S.

Wal-Mart said it now expects fiscal 2011 earnings per share of $4.08 to $4.12, up from a previous forecast of $3.95 to $4.05, reflecting the tax benefit and an expectation for a solid operational performance in its fourth quarter.

(Reporting by Michele Gershberg and Brad Dorfman; Editing by Lisa Von Ahn)

Investors eagerly awaited quarterly results from Wal-Mart Stores Inc (WMT.N), the world's biggest retailer.

A top U.S. Federal Reserve official defended the Fed's controversial bond-buying program on Tuesday, saying it could be years before a pullback from easy-money policies is warranted. "This exit could be years away," New York Federal Reserve President William Dudley said an interview on CNBC. A transcript of the interview was made public.

China's key stock index fell by 4 percent on Tuesday, driven by retail investors unnerved by rumors of more aggressive action from Chinese authorities to control inflation.

Official media reported China's National Development and Reform Commission, the country's top planning agency, was also preparing a series of actions to rein in food costs, while consumer prices have been rising at their fastest in more than two years.

European shares were down 1 percent in morning trade, led lower by mining companies, hit by concern over policy tightening in China and jitters over Ireland's debt crisis.

Investors were keeping a close eye on Ireland. Meeting in Brussels on Tuesday, euro zone finance ministers will try to find a way to ease Ireland's debt crisis, while the country continues to resist pressure to seek a state bailout by signaling that only its banks may need help.

The dollar touched a six-week high against the euro on Tuesday, supported by a rise in U.S. Treasury yields, but later retreated as officials from the Federal Reserve sounded a dovish tone and defended its easing policy.

Oil fell toward $84, weighed down by an expected rise in U.S. crude stockpiles, while the dollar touched a six-week high against the euro as investors cut exposure to commodities and risk.

Shares of Nordstrom (JWN.N) fell in extended trading on Monday following quarterly results.

German sports goods company Adidas AG (ADSGn.DE) plans to open more than 2,500 stores in smaller Chinese cities by 2015, banking on rising incomes to turnaround its fortunes there.

Economic data on Tuesday includes the producer price index for October, industrial production for October and the National Association of Home Builders survey for November, while apart from Wal-Mart, companies expected to report quarterly results include Abercrombie & Fitch (ANF.N) and Home Depot (HD.N).

U.S. stocks slipped on Monday as concerns the Federal Reserve may scale back its efforts to stimulate the economy muted optimism over takeover activity.

The Dow Jones industrial average .DJI edged up 9.39 points, or 0.08 percent, to 11,201.97. The Standard & Poor's 500 Index .SPX was off 1.46 points, or 0.12 percent, to 1,197.75. The Nasdaq Composite Index .IXIC slipped 4.39 points, or 0.17 percent, to 2,513.82.

(Reporting by Blaise Robinson; editing by David Hulmes)

Another sharp sell-off in Chinese stocks in late trade also unnerved some investors and led them to wonder if prices of riskier assets were turning lower for good.

The tepid mood in equity market spilled into Europe. Britain's FTSE 100 .FTSE fell 0.7 percent and France's CAC 40 .FCHI lost 0.8 percent.

The Shanghai Composite Index .SSEC slid 4.3 percent at one point as investors, worried China may further tighten monetary policy, sold blue-chip bank and energy shares. .SS

"The swings in China are radical in the last few days," said Jackson Wong, an investment manager at Tanrich Securities in Hong Kong. "People are still trying to figure out if this is the beginning of a downtrend."

The overall cautious tone kept the MSCI Asian stock index outside Japan down 0.1 percent, an insignificant move compared to its 16 percent jump since early September.

Japan's Nikkei .N225 initially bucked the downdraft and rose to five-month highs, but it too eventually succumbed to end down 0.3 percent. .T

Uncertainty over whether Ireland, faced with record borrowing costs, needs to be bailed out by its euro zone partners to pay its debts also did little for the market mood.

As it is, Ireland's woes have raised borrowing costs for other fiscally strapped euro zone nations such as Spain and Portugal. Euro zone officials are set to meet later to try to find a way to end Ireland's debt crisis.

The euro fell as far as $1.3560 at one point, but clawed back by late trade after dovish remarks from a Federal Reserve official nudged the dollar lower.

But the dollar stayed firm on the day and depressed prices of most commodities. Oil lost 0.8 percent to pull further away from last week's 25-month highs <O/R>.

Yet, some analysts thought the latest pull-back in prices had less to do with a reassesment of market risks, and more to do with investors wanting to take profits and cut stretched bets.

"The European markets could potentially cause contagion pressures to erupt if people start liquidating. But realistically the dynamic within Asia remains very strong," said Peter Redward, the head of emerging Asia research at Barclays in Singapore.

Underscoring Asia's sturdy economic growth, the South Korean central bank raised interest rates on Tuesday and hinted there could be more hikes to come.

That Asia is tightening policy is a world away from the United States, where a Fed official said on Tuesday an exit from the present super-loose policy may be "years away."

Dublin is under pressure from the European Central Bank and euro zone peers to take a quick decision on applying for aid amid signs that market contagion is spreading to fellow struggler Portugal and could suck in bigger states.

The Irish government, trying to protect a slim parliamentary majority, says it is talking to European partners about how to provide stability for its banks but denies that a state rescue is needed to stop its problems spilling into other countries.

"I would hope after the Ecofin meeting this afternoon and tomorrow there would be more logic introduced into this," Ireland's European affairs minister, Dick Roche, told BBC Radio.

"There is no reason why we should trigger an IMF or an EU-type bailout."

Luxembourg Prime Minister Jean Claude-Juncker, who chairs Tuesday's talks in Brussels, said Ireland was not even close to asking for a Greek-style bailout, which would involve tough austerity terms enforced by the European Commission and the IMF.

But the Irish opposition said moves were already under way.

Bank of Spain Governor Miguel Angel Fernandez Ordonez urged Dublin on Monday to do more to calm financial markets, telling reporters: "It's not up to me to make a decision on Ireland, it's Ireland that should take the decision at the right moment."

Ireland's public borrowing needs are funded until mid-2011, but its bond yields have soared in the past week and its state-guaranteed banks are largely shut out of inter-bank lending and reliant on the ECB for funds.

This has helped push up the borrowing costs of other countries on the 16-country euro zone's periphery, such as Spain and Portugal.

The Irish coalition government has been reluctant to apply for assistance, partly because it faces a by-election it can ill afford to lose on November 25 and also because it says it wants to preserve its sovereignty.

Dublin has hinted it may ask for funding to support its banks, which were driven into debt by the global financial crisis and a property market crash, rather than requesting a politically embarrassing state bailout.

"The cost of money as expressed in the bond market has been very high although it eased today. We have to discuss these matters with partners ... how best to underpin financial and banking stability within the euro area," Prime Minister Brian Cowen told the national broadcaster RTE on Monday.

If such high borrowing costs became the norm, it would be hard for banks "to function as engines of recovery," he said.

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