A downbeat assessment of the U.S. recovery from the Federal Reserve weighed on global equities on Wednesday while European shares and the euro came under pressure from a threat to downgrade Spain's debt.

Yields on U.S. Treasuries climbed to seven-month highs in Asian trading, partly because of concern about the U.S. deficit, before later settling back.

A warning from Moody's on a possible downgrade of Spain's credit ratings served as a reminder to investors of the risks to the global recovery heading into 2011, pushing the euro sharply lower.

The FTSEurofirst 300 stock index <.FTEU3> was also down a third of a percent, albeit after a seven-session winning streak.

In putting Spain's AA1 ratings on review, Moody's cited concerns about its mounting debt and 2011 funding needs.

Robert Ryan, FX strategist at BNP Paribas in Singapore, said the threat of a downgrade was not really a surprise given Spain's 10-year yield spread was about 250 basis points over Bunds.

This just focuses attention back on Spain, he said, referring to the rolling euro zone debt crisis.

The euro was at a three-month low to the Swiss franc.

There is an unwillingness among investors to hold riskier euro zone bonds over the year-end, so they are selling and going into Swiss francs, said Carl Hammer, currency strategist at SEB in Stockholm.

Against the dollar, the euro was down half a percent at $1.3316. The dollar was up 0.4 percent against a basket of currencies <.DXY>.

Globally, however, sentiment was being hurt by the Federal Reserve saying on Tuesday that the U.S. recovery was still too slow to bring down stubbornly high unemployment. Investors were also booking profits from a long autumn rally before year-end.

At its last policy meeting of the year, the Fed offered only a cautious nod to improving prospects for the U.S. economy and reaffirmed its commitment to buy $600 billion in bonds to stimulate growth.

The very first line of the very first paragraph is justification for what it's doing -- it talks about a recovery that just isn't strong enough to bring down the unemployment rate, said Mike Lenhoff, chief strategist and head of research at Brewin Dolphin Securities.

MSCI's all-country world stock index <.MIWD00000PUS> was down 0.4 percent.

Other factors weighing on risk appetite included a Bank of Japan tankan survey showing Japanese manufacturers' business sentiment had worsened for the first time in nearly two years.

TREASURIES WOBBLE

U.S. Treasuries were flat, recovering from an earlier sell-off in Asian trading.

The yield on 10-year Treasuries rose in Asia to just above 3.5 percent, its highest level since mid-May, having climbed about 70 basis points so far this month. It was later yielding 3.461 percent.

The benchmark notes are on track for their worst month since April 2004.

Oil prices fell 75 cents to $87.53 a barrel after the Fed dampened expectations for a faster recovery.

Spot gold dipped to $1,390 an ounce, under some pressure from the firming dollar after opening little changed at just over $1,395.

(Additional reporting by Ronald Popeski, Brian Gorman and Jessica Mortimer, Editing by Sitaraman Shankar)

BNP Paribas