Yields on U.S. Treasuries climbed to seven-month highs in Asia on Wednesday and the dollar rebounded as upbeat retail sales data added to evidence that America's economy is gathering steam.

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

Earlier on Wednesday, a Bank of Japan tankan survey showed Japanese manufacturers' business sentiment had worsened for the first time in nearly two years, while Standard and Poor's cut its outlook on Belgian debt on Tuesday, flagging a new risk for markets as the euro zone's debt crisis continues to fester.

Stocks in Asia slid after the Federal Reserve said the U.S. recovery was still too slow to bring down stubbornly high unemployment, and as investors continued to book profits from a long autumn rally before closing their books for year-end.

European shares <.FTEU3> were expected to follow Asia lower after gains in seven straight sessions.

Energy and resource stocks were under particular pressure as oil prices retreated and as investors switched out of big Australian miners which have outperformed in recent sessions.

At its last policy meeting of the year on Tuesday, 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, despite fears of some economists that it could over time trigger an inflationary shock.

The U.S. Fed's statement strengthened the likelihood the U.S. would continue its quantitative measure. Combined with a good set of retail data, sentiment is still good, said Hong Soon-pyo, a market analyst at Daishin Securities

Japan's Nikkei <.N225> ended down 0.07 percent, while the MSCI ex-Japan index of Asian stocks slid 1 percent, pressured by a late-day selloff in U.S. markets overnight after the Fed's assessment of the economy proved to be more sober than many traders would have liked. <.N>

South Korean shares <.KS11> managed to buck the downdraft, rising 0.4 percent to a fresh 37-month closing high, led by shipyards and oil refiners.

TREASURY YIELDS EXTEND CLIMB

U.S. Treasury prices extended their recent losses as the Fed showed no signs of curtailing its economic stimulus measures.

The yield on 10-year Treasuries rose to just above 3.5 percent, its highest level since mid-May, having climbed about 70 basis points so far this month. It later slipped back to around 3.45 percent, down 2 basis points on the day.

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

I still think the situation with the labor market and prices has not changed in the United States, so recent moves in the Treasury market are a bit overdone, said Junko Ikeda of Sumitomo Trust Bank Asset Management.

Treasuries look attractive from the prospect of the widening short- and long-term yield spreads.

The U.S. dollar index <.DXY> against a basket of other major currencies rose 0.44 percent, having climbed off a three-week low plumbed on Tuesday.

The euro slipped to $1.3314 after the Moody's warning on Spain from around $1.3340 before the news, testing support at $1.3280-1.3325. Failure to hold that level could open the way for the single currency to test its November lower at $1.2969.

Oil prices fell 70 cents to $87.58 a barrel after the Fed dampened expectations for a faster recovery, which is seen as critical to reigniting oil demand in the world's largest energy user.

Spot gold dipped to $1,389.10 an ounce, under some pressure from the firming dollar after opening little changed at just over $1,395.

(Editing by Kim Coghill)

Japan Federal reserve