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The European Central Bank bought euro zone government bonds to stop a selloff, traders said. Equities rose on the move but then lost ground as the yield on Italian 10-year bonds continued to hover near 7 percent.

The yield spread of 10-year French government bonds over their German equivalents widened to a euro-era high on fears the debt crisis was starting to move to economies that were until recently thought to be more isolated from the problems.

"It is clear that they (Europe) have a severe liquidity crisis developing and it is becoming more and more clear that they are going into a severe recession," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"They have got to get their act together and resolve this issue or this recession is going to be worldwide."

Bank of Japan Governor Masaaki Shirakawa said the crisis was already affecting emerging nations and Japan in multiple ways, while the Bank of England forecast Britain was on the brink of a contraction.

S&P 500 futures fell 11.2 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures were off 83 points, and Nasdaq 100 futures lost 12 points.

U.S. equity investors have been closely watching European sovereign debt prices and the euro currency, currently barometers of risk aversion for the wider market. Trading has been volatile, with large intraday swings as sentiment oscillates with developments is Europe.

Still, U.S. stocks have shown resilience, clinging to the top end of their recent trading range at around 1,250 on the S&P 500. Traders watched for a break below 1,230 as a potential warning sign.

In U.S. company news, Dell Inc (DELL.O) missed quarterly revenue estimates, and the computer maker said full-year revenues could be hurt by an industrywide shortage of hard drives. The shares fell 1.8 percent to $15.35.

Shares of Abercrombie & Fitch Co (ANF.N) slumped 11 percent to $49.80 after the teen clothing retailer's quarterly profit missed estimates by a huge margin.

Target Corp (TGT.N) posted higher quarterly profit on higher food sales and as a 5 percent discount to cardholders drew shoppers. The shares rose 2.4 percent to $54.50.

October's consumer price index is expected to show prices were flat in the month. The data is due at 8:30 a.m. EST (1330 GMT). Industrial production is seen creeping up by 0.4 percent in October. That release is slated for 9:15 a.m. EST (14:15 GMT).

(Editing by Jeffrey Benkoe)

The memo, obtained by Reuters on Wednesday, was sent to Olympus employees the previous day by the firm's new president, Shuichi Takayama, who also vowed in the message to restore public trust in the once-proud maker of cameras and endoscopes.

Japan's securities watchdog, police and prosecutors are probing the 92-year-old company after Olympus admitted last week that it had hid investment losses for decades using funds from M&A deals. The U.S. Federal Bureau of Investigation and the U.K. Serious Fraud Office are also looking into the case.

A third-party panel appointed by Olympus to investigate the scandal is expected to report its findings in early December.

"We will wait for the third party panel to report, and we are preparing to take firm legal action, including criminal complaints, against any manager it finds responsible," Olympus President Takayama told its employees on November 15 in an internal e-mail, which was obtained by Reuters on Wednesday.

The email did not name specific executives.

Investors are speculating that several Olympus officials will bear the brunt of any punishment for the scandal, hoping that the company itself will avoid the ultimate market sanction, a delisting from the Tokyo stock exchange.

"As long as market participants think that Olympus will not be delisted, the stock will continue to rise. The market is buying back what they sold last week," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

Olympus' share price, which had lost as much as 80 percent of its value after the scandal broke last month, closed up more than 15 percent on Wednesday at 740 yen in heavy turnover. It was untraded with a glut of buy orders on Tuesday after rising its daily limit the day before.

In a sign regulators are getting serious after a slow start, Japan's Securities Exchange and Surveillance Commission (SESC) is considering recommending criminal charges against those involved in wrongdoing at Olympus, a source familiar with the matter has told Reuters.

The source said the SESC might also urge that Olympus be fined for false financial reports, a move that could allow the company to stay listed although that outcome is not assured.

The Bank of Japan also is trying to gather information from related financial firms about Olympus' past transactions, the central bank Governor Masaaki Shirakawa said.

"It is regrettable that doubts have arisen about the transparency and fairness of corporate management. It is vital that accurate information be disclosed promptly," Shirakawa said.

TRIO AT THE HEART OF SCANDAL

Olympus executives are likely to face questioning on a voluntary basis by Tokyo prosecutors as early as this week, the Nikkei business daily reported on Wednesday.

Olympus President Takayama has blamed his predecessor, Tsuyoshi Kikukawa, who quit on October 26, along with former vice-president Hisashi Mori and internal auditor Hideo Yamada for the cover-up, and has said he would consider criminal complaints against them. Mori had been fired and Yamada has offered to resign.

The Nikkei said Kikukawa, Mori and Yamada had chosen the financial advisory firm for its controversial 2008 acquisition of U.K. medical devices maker Gyrus, a decision normally taken by the entire board of directors.

The trio also made the decision to increase payments to the advisory firm -- payments that were used to conceal huge losses on securities investments by Olympus, the daily said, citing persons familiar with the company.

Takayama, who took over last month, called on employees in the internal email to unite to overcome the corporate crisis and not be "deluded" by an online petition led by an ex-Olympus director to reinstate ousted CEO Michael Woodford.

The Briton was fired on October 14 and then publicly pressed the firm to come clean on mysterious M&A deals which include record acquisition advisory fees in history.

"I am confident that the actions of all of you, who are working for the sake of Olympus with a sense of mission, will revive trust in Olympus so that the brand will shine," the email said. "Now is not the time to be wracked with fear and doubt."

After weeks of denial, Olympus admitted last week it had found that funds related to its $2.2 billion purchase of Gyrus, which involved a huge advisory fee of $687 million, as well as payments totaling $773 million for three tiny domestic firms, were used to hide losses on securities investments stretching back to 1990.

Analysts say the future of Olympus' big and profitable medical equipment business may rest in an eventual buyout by a rival or a private equity fund and Fujifilm and Hoya, the second- and third-largest players in the endoscope business, are obvious potential bidders.

But Fujifilm President Shigetaka Komori told a news conference on Wednesday it was premature to comment given that there were so many uncertainties surrounding the affair.

Olympus' lenders met company executives on Wednesday but were not likely to demand changes in loan terms or take any abrupt steps that could hurt their own interests, banking sources told Reuters before the closed-door meeting at a Tokyo hotel.

(Additional reporting by Ashutosh Pandey in Bangalore, Taiga Uranaka, Edmund Klamann, Ritsuko Shimizu and Tim Kelly in Tokyo; Writing by Linda Sieg; Editing by Mark Bendeich and Miyoung Kim)

The political outlook remained unclear in struggling Italy and Greece as they attempt to push through severe austerity measures needed to get bail-out funds and win market confidence. Prime Minister designate Mario Monti was expected to unveil Italy's new government on Wednesday.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 2.1 percent, while Japan's Nikkei stock average .N225 slipped 0.9 percent on Wednesday. .T

The euro hit a five-week low against both the dollar and the yen, as euro zone jitters spurred risk aversion, and stood down 0.7 percent at $1.3437. Gold fell 1 percent to $1,763.39 an ounce as some sought to cover losses in riskier assets.

"Markets are clearly expecting a circuit breaker to alleviate pressure on periphery bond yields," said David Scutt, a trader at Arab Bank Australia in Sydney. "If no announcement is forthcoming in the days ahead, one suspects that situation could unravel fairly quickly."

European stocks were set to fall, with spreadbetters seeing London's FTSE 100 .FTSE opening down 0.6 percent, Frankfurt's DAX .GDAXI down 0.9 percent, and Paris' CAC-40 .FCHI 0.6 percent lower. .EU .L

Italian 10-year bond yields on Tuesday climbed back above 7 percent, a level of funding costs seen as unsustainable for the debt-ridden country, while Spanish 10-year bond yields rose to 6.3 percent.

The trend spread to France, where the premium over comparable German Bunds hit euro-era highs above 190 basis points. French banks are among the most exposed to Italy's 1.8 trillion euro ($2.4 trillion) public debt, holding $416 billion as of end-June, Bank for International Settlements data showed. Italian debts' premium over Bunds rose above 500 basis points.

Italy's five-year credit default swaps (CDS) -- a form of insurance against default -- scaled a new high of 600 basis points, with Italian banks and corporates the worst performers in the Markit iTraxx Europe CDS index on Tuesday.

Bearish sentiment spilled over to Asian credit markets, with risk aversion pushing the spreads on the iTraxx Asia ex-Japan investment grade index wider by 6 basis points.

ECB ROLE EYED

The uncertainty over fiscal reforms in highly indebted euro zone countries has sparked heavy selling of bonds issued by these countries, prompting financial institutions to slash their bond holdings for fear of posting huge losses as prices plunged.

Pressures for banks to beef up their capital base have only exacerbated the situation as banks' accelerated deleveraging has further eroded their appetite for government debt.

Borrowing difficulties have fueled concerns about fund raising in general, increasing strains in money markets.

Euro/dollar three-month cross currency basis swaps widened to -128.0 basis points at one point on Tuesday, the most since late 2008.

"This indicates funding issues, the market getting very nervous," said a trader for a European bank in Singapore.

With an absence of government debt buyers threatening to squeeze liquidity, "the ECB has no choice but to provide whatever liquidity the system needs and remain a very active part of the European financial market", said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.

Many analysts say the ECB could stem this negative spiral by buying large amounts of bonds, under similar quantitative easing measures implemented by the U.S. and British central banks.

But Germany is resolutely opposed to such moves and the ECB has repeatedly rebuffed calls to become the lender of the last resort, saying it is up to individual governments to put their fiscal houses in order.

As policymakers stand at odds in determining details of the roadmap to resolve the debt crisis, EU governments have until a summit on December 9 to offer a bolder and more convincing strategy, including visible financial backing.

The sovereign debt problems have slashed euro zone growth to a mere 0.2 percent in the third quarter, raising the risk of a recession.

The United States, however, where economists expect gross domestic product growth of 1.8 percent this year, has seen recent data suggesting its economy was likely to stay clear of a recession, with October retail sales beating forecasts.

"In the current environment, a 1-1/2 to 2 percent growth would be seen as a positive support for the market," Rabobank's Foster said. ($1 = 0.739 Euros)

(Additional reporting by Ian Chua in Sydney and Masayuki Kitano in Singapore; Editing by Alex Richardson)

Uncertainties surrounding the economy and the hard drive shortage means that Dell's fiscal 2012 revenue is tracking at the lower end of its growth forecast of 1 to 5 percent, the company said.

Investors fear a slowdown in PC manufacturing through 2012 after flooding in Thailand severely disrupted production of hard drives, a key component in computers.

"To the extent that we see higher (drive) prices we'll also see some offsets in other components and we're going to do everything we can to protect our customers. But maybe in some cases we do have to raise our prices," Chief Financial Officer Brian Gladden told Reuters in an interview.

The shortage of hard drives will force Dell to prioritize toward higher-value customers and products," Gladden said.

Dell also appears to not have benefited much from the disarray at bigger rival Hewlett Packard Co, which spent much of the last quarter considering whether to spin off its PC business.

The company lost market share during the third quarter to Asian rival Lenovo Group which vaulted past it to claim the No. 2 ranking in PCs behind market leader HP.

"The PC business will remain difficult over the next year," said Brian White, analyst with Ticonderoga Securities. He cited pressure from slowing public sector spending as various government agencies around the world take austerity measures over the next year.

Dell's public business generated revenue of 4.2 billion, which was down 2 percent from the 2010 third quarter due to weakness in the United States and Western Europe.

Desktop PC revenue slid 6 percent to $3.4 billion as Dell's sales to consumers fell 6 percent over the same period.

Chief Executive Michael Dell said the company was moving away from low-margin businesses.

"We're choosing not to participate in low value opportunities which have put short-term pressure on revenue growth but have been a real driver of our expanded margins and growing earnings," Dell told analysts on a conference call.

Gross margins slipped to 23.1 percent from 23.2 percent in the prior quarter, but rose from 20 percent a year earlier.

Dell said revenue in its fiscal third quarter was essentially flat at $15.36 billion, but slightly lower than the average analyst estimate of $15.65 billion according to Thomson Reuters I/B/E/S.

Analysts on average had projected a 1.6 percent climb in Dell's fiscal 2012 revenue to almost $62.5 billion.

Net earnings rose to $893 million, or 49 cents a share, from $822 million, or 42 cents a share, in the year-ago period.

Excluding items, Dell earned 54 cents a share, better than the average analyst estimate of 47 cents.

Dell's large enterprise business increased sales 8 percent in the quarter as corporations continued to upgrade aging hardware.

Shares of Dell slid 2 percent to $15.32 in extended trade, after closing at $15.63 on Nasdaq.