Europe extended a global slide in equities and oil on Tuesday while the low-yielding yen hit a three-week high against the dollar as investors grew concerned about the prospect for global economic recovery.

U.S. stocks suffered their worst one-day loss in two months on Monday, dropping the S&P 500 index <.SPX> back into negative territory for the year, after economically sensitive sectors such as financials, energy and materials fell broadly.

Data highlighted the fragile state of Europe's economy. French consumer spending fell unexpectedly last month, and a recovery stalled in the euro zone's dominant service sector with an unexpected fall in the region's services purchasing managers index.

Euro zone manufacturers fared better however, with that sector's PMI rising to its highest level since September.

Equity markets are poised to see another bout of selling ... with continued scepticism over this concept of green shoots of recovery dominating trader sentiment, said Matt Buckland, dealer at CMC Markets. MSCI world equity index fell 0.7 percent, hitting a one-month low. World stocks are up just 4 percent this year.

The FTSEurofirst 300 index <.FTEU3> was down 0.4 percent in volatile trade.

Defensive sectors, such as utilities <.SX6P> and health care <.SXDP>, were the major gainers in Europe, reflecting investor preference for gradually increasing equity exposure after being underweight for the past year or so.

Emerging stocks lost 2.3 percent.

U.S. crude oil fell 0.9 percent to $66.89 a barrel.

Optimism over the prospects of economic recovery have already been factored into equity and commodity markets, so now people are standing back and reassessing, Ben Westmore, commodities analyst at the National Australia Bank.

The September Bund future was steady on the day.

YEN RESURGENT

The low-yielding yen, which benefits from increased risk aversion, rose 0.8 percent to 95.22 per dollar, having hit a three-week high earlier.

The dollar <.DXY> fell 0.1 percent against a basket of major currencies ahead of the Federal Reserve's monetary policy decision after a two-day meeting on Wednesday.

Investors expect the Fed to keep interest rates near zero while they are split on whether the Fed will expand its existing $300 billion plan to purchase Treasuries.

At this early and fragile stage in what appears an improving backdrop, the Fed would not want to be blamed for giving false hope by being a cheerleader at this point, RBC Capital Markets said in a note to clients.

Seeing as they have run through about half their current allotment of ammunition for Treasury purchases, and at the current pace they would use it all up by around late August, this would certainly seem like a good opportunity to address their future intentions.

Moody's Investors Services said the United States' triple-A ratings could come under threat if Washington were unable to bring its public debt back to a downward trajectory and/or if the dollar were severely challenged as the main international reserve currency.

(Editing by Mike Peacock)

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