Merck, Intel lift Dow overnight

The Dow Jones Industrial Average advanced overnight, boosted by shares of Merck and Intel, though disappointing manufacturing data kept a lid on gains.

Shares of Merck, last up 4.1 per cent, bolstered the Dow as one of the company's new cancer drugs showed promising results in an early study. Shares of Intel also advanced, last up 3.1 per cent, after a FBR Capital Markets upgrade.

However, the latest US manufacturing data showed a surprise contraction. The Institute for Supply Management's factory index dropped to 49 in May, the lowest reading in four years, from 50.7 in April.

"There's nothing here that indicates a recession, just that things are going to be perhaps a little bit softer," Scott Brown, chief economist at Raymond James in St Petersburg, Florida, told Reuters.

"The key question, particularly for the Fed, is what does the data imply for the future?" Brown said. "Are things going to be strong enough that they're going to pick up in the second half?"

Still, investors remain nervous that the US Federal Reserve might soon ease its bond-buying program, weighing on an equity market trading near record highs. In late afternoon trading in New York, the Dow Jones Industrial Average climbed 0.53 per cent, while the Standard & Poor's 500 Index eked out a 0.01 per cent gain. The Nasdaq Composite fell 0.44 per cent.

"We are at all-time highs and the data is not supporting the all-time highs. There is a realisation that unless things start to turn around we could be in for a little bit of a correction," Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York, told Reuters.

Meanwhile, Fed Atlanta President Dennis Lockhart told Bloomberg in an interview that a potential taper of the central bank's stimulus program would still allow for plenty of remaining support for the world's largest economy.

"There certainly seems to be an acute fixation on the timing of any adjustment to the asset purchase program and I guess I would just encourage everyone to not lose sight of the bigger picture," Fed Atlanta President Dennis Lockhart told Bloomberg in an interview. "Any adjustment is not a major policy shift. The high level of accommodation will stay in place."

Europe's benchmark Stoxx 600 Index closed with a 0.8 per cent drop from the previous close. France's CAC 40 fell 0.7 per cent, Germany's DAX shed 0.8 per cent, while the UK's FTSE 100 sank 0.9 per cent. The IMF cut its 2013 forecast for German growth to 0.3 per cent from a previous 0.6 per cent because of the continuing poor performance of its euro-zone partners.

The latest manufacturing data from the euro zone region showed output was better than estimated last month, as Markit Economics data showed it rose to 48.3 from 46.7 in April. Still a reading below 50 indicates contraction.