Stocks fell on Wednesday as thin trading volumes discouraged investors from resuming last week's rally while oil prices eased after Iran's threat to close the Gulf was written off as rhetoric.

A strong sale of short-term Italian debt brought some relief to European markets, giving a temporary boost to the euro. Investors remained cautious, however, before a much bigger sale of longer-term bonds by Italy on Thursday.

Key U.S. stock indexes fell, including a 1 percent decline by Nasdaq, as investors awaited the beginning of 2012 to make any big bets. The broad S&P 500 index erased its 2011 gains after just turning positive during last week's rally.

The Dow Jones industrial average <.DJI> lost 80.26 points, or 0.65 percent, at 12,211.09. The Standard & Poor's 500 Index <.SPX> was down 10.03 points, or 0.79 percent, at 1,255.40. The Nasdaq Composite Index <.IXIC> fell 24.63 points, or 0.94 percent, at 2,600.57.

Wall Street's decline weighed on European stocks, which erased earlier gains. The FTSEurofirst 300 <.FTEU3> index of top European shares fell 0.33 percent, after rising as much as 0.63 percent earlier.

The MSCI All-Country World index <.MIWD00000PUS> lost 0.83 percent, increasing losses in the year-to-date to 10 percent.

U.S. crude oil prices fell 1.15 percent to $100.17 a barrel. They had gained more than a dollar in the previous session following a threat by Iran to stop oil shipments through the Strait of Hormuz if Western countries impose new sanctions on its exports.

Tehran faces the prospect of further sanctions from the European Union by the end of January over its nuclear ambitions. Washington said it saw an element of bluster in the threat to close the Gulf.

The threat by Iran to close the Strait of Hormuz supported the oil market yesterday, but the effect is fading today as it will probably be empty threats as they cannot stop the flow for a longer period due to the amount of U.S. hardware in the area, said Thorbjoern bak Jensen, oil analyst with Global Risk Management.

ITALY GETS BOOST

The euro briefly rose against the dollar after Italian short-term debt costs halved at an auction, helped by a new government austerity package and cheap liquidity from the European Central Bank.

The euro edged up to a session high of $1.3080 after the Italian auction but later reversed those gains to fall to 1.2955, 0.86 percent lower on the day but still above the $1.2945 hit earlier in the month, its weakest since January.

Italy faces the more difficult task of selling long-term debt on Thursday, when it will need greater commitment from international investors to place 8.5 billion euros of debt with maturities of up to 10 years.

Tomorrow's auction is more important and will give more insight into general sentiment. Today was a warm-up, said Neil Mellor, currency strategist at Bank of New York Mellon.

(Additional reporting by Edward Krudy; Editing by Kenneth Barry)

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