Weak May U.S. housing data undercut stocks and sent U.S. Treasuries up, while Europe grappled with a fresh tremor to its banking system after Fitch downgraded French bank BNP Paribas (BNPP.PA).

The downgrade hit Europe's banking stocks, leading to the end of a nine-day rally and pushed prices for gold higher on safe-haven flows.

The rally fueled by China's weekend announcement to emphasize a flexible currency rather than the de facto peg to the U.S. dollar appeared to have fully dissipated.

U.S. crude oil futures edged lower in choppy trading, curbed by a stronger greenback and lowered expectations about a demand boost in China brought by its move toward currency flexibility.

Sales of previously owned U.S. homes fell 2.2 percent month over month in May, well below expectations for a rise of 5.5 percent. Analysts said the data bodes ill for the months ahead, now that a key homeowner tax credit has expired.

Clearly there's a large supply of homes on the market. Prices are a little firmer than they were a year ago, but it's still a buyers market. The tax incentives are not a permanent fix for housing. We will need to see improved employment before we see a sustained recovery in housing. said Gary Thayer, chief strategist at Wells Fargo Advisors in St. Louis.

In mid-morning New York trade, the Dow Jones industrial average .DJI fell 7.56 points, or 0.07 percent, at 10,434.85. The Standard & Poor's 500 Index .SPX lost 2.36 points, or 0.21 percent, at 1,110.84.

Rising technology shares helped keep the Nasdaq Composite Index .IXIC up 5.12 points, or 0.22 percent, at 2,294.21.

MSCI's all-country world index .MIWD00000PUS fell 0.5 percent, looking set for its first loss since June 7. The benchmark has gained more than 7 percent since then.

European share, however, lost ground with the FTSEurofirst 300 .FTEU3 of leading shares down 0.4 percent to 1,050.70.

After Fitch's move on BNP Paribas sent its shares down 2.75 percent, the entire sector weakened, with the STOXX Europe 600 banks index .SX7P off 1.9 percent.

Now everybody thinks that BNP is one of the most solid banks, so the heat is more on SocGen and Credit Agricole, and the latter gave a grim update on its exposure to Greece today, said IG analyst Philippe De Vandiere.

Credit Agricole (CAGR.PA) warned of worse-than-expected losses at its Greek unit Emporiki and said it would take a big writedown.

Earlier, Japan's Nikkei .N225 closed down 1.2 percent, a day after bouncing to a one-month high.

CURRENCY MOVE

Investors reassessed the impact of China's plan for more currency flexibility and grew skeptical about how much Beijing would allow the yuan to rise.

People gave much more weight to the currency move than it deserved, said Koen De Leus, economist at KBC Securities.

The funding concerns in European banks led to a second day of losses for the euro against the U.S. dollar. The currency dropped 0.31 percent to $1.2268.

The euro barely reacted to the German Ifo business climate index, which hit a two-year peak in June, while the expectations index fell.

The dollar fell 0.45 percent at 90.59 versus the yen.

British Finance Minister George Osborne unveiled spending cuts and tax rises in the tightest budget in a generation. He cut growth forecasts only slightly but slashed borrowing projections more than expected.

The pound, however, erased earlier losses against the greenback to rise 0.28 percent to $1.4789.

In the credit markets, benchmark 10-year U.S. Treasuries rose 8/32 of a point in price, pushing the yield down to 3.219 percent.

Europe's 10-year Bund yield was down 5.9 bps at 2.691 percent.

U.S. light sweet crude oil rose 16 cents to $77.98 per barrel, while spot gold rose $9.10, or 0.74 percent, to $1240.70. Gold is off Monday's all-time high of $1,264.90.

(Additional reporting by Nick Olivari and Robert Gibbons in New York; George Matlock, Jeremy Gaunt, Naomi Tajitsu, and Atul Prakash in London; Umesh Desai in Hong Kong; editing by Jeffrey Benkoe)

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