Financial markets did a quick about-face from the previous session's patterns on Tuesday with stocks falling, the dollar recovering some losses and gold dropping back a bit from record highs.

Investors were generally taking profits from Monday's stock rally, which saw U.S. blue chips gain 1.3 percent and European shares 2 percent.

There was also some concern about the banking sector.

A German newspaper reported that the majority owners of WestLB were threatening not to support the stricken German landesbank's requirement for more capital.

Rating agency Standard & Poor's also said on Monday it found most banks in a global study were weakly capitalized, with Citigroup , UBS and Mizuho Financial Group <8411.T> more than two-thirds below the average.

MSCI's all-country word stock index <.MIWD00000PUS> was down 0.6 percent after gaining 1.7 percent on Monday. The volatile Chinese market <.SSEC> was down nearly 3.5 percent.

Market analysts said there was little surprise that some profit taking was taking place. But they remained relatively bullish about the future.

China is down after a strong run, said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin. But we're still in a cyclical bull market.

The FTSEurofirst 300 <.FTEU3> index of top European shares was down 0.7 percent. Earlier, Japan's Nikkei <.225> hit its lowest close in four months, down 1 percent on the day.

Japan's current concerns are focused on worries financial firms will tap the market for equity financing and on a stronger yen hurting the shares of exporters.

Many global stock investors are being cautious heading into the year-end, wanting to lock in profits after a very good run in 2009 while also worrying about the true state of the world economy.

Some concerns about the U.S. economy were at least temporarily eased on Monday when data showed sales of previously owned U.S. homes had risen to their highest level in more than 2-1/2 years.

DOLLAR FIRMS

The dollar was broadly higher after a bit of a battering on Monday while the euro fell on the German media report about WestLB.

The U.S. currency was up 0.4 percent against a basket of competitors <.DXY>. It remains down 7 percent for the year, reflecting low U.S. yields on offer.

The euro was down 0.4 percent at $1.4905 and the dollar slipped about the same to 88.65 yen.

Gold slipped on the stronger dollar and was selling at around $1,164 an ounce, about $9 off an all-time peak hit on Monday.

Euro zone government bonds rose, with Bund futures reaching their highest level since early October.

(Additional reporting by Brian Gorman; editing by Chris Pizzey)

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