German ban adds to world share volatility

US stocks dropped, along with the euro, after Germany said it would ban a specific type of short selling on 10 big financial firms in a bid to limit speculative activity.

Among the most active stocks on Wall Street were Wells Fargo, Bank of America and Goldman Sachs.

In late trading, the Dow Jones Industrial Average fell 0.88 per cent, the Standard & Poor's 500 Index declined 1.26 per cent and the Nasdaq Composite dropped 1.44 per cent.

Germany's BaFin financial-services regulator said it would introduce a temporary ban on naked short-selling and naked credit-default swaps of euro-area government bonds starting at midnight.

"It tends to suggest desperation on the part of the German officials," Michael Malpede, analyst at Easy Forex in Chicago, told Reuters.

The ban would also apply to naked short selling in shares of 10 banks and insurers that would last until March 31, 2011, BaFin said. The announcement was made after the close of European markets.

"You cannot imagine what broke loose here after Bafin's announcement," Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, told Bloomberg.

"This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so - if they find any possibilities left at all now."

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street's 'fear gauge', soared 7.88 per cent to 33.27.

New rules to curb US stock trading when markets plunge uncontrollably as they did earlier this month would kick in as early as mid-June for the largest US stocks, two sources familiar with regulators' plans said, according to Bloomberg News.

A circuit breaker or a mechanism to halt trading across markets and in a single stock has emerged as one of the key solutions to better protect investors.

The Stoxx Europe 600 Index 1.3 per cent to 251.3.

The U.K.'s FTSE 100 rose 0.85 per cent, France's CAC 40 gained 2.08 per cent and Germany's DAX rose 1.47 per cent.

Among the most actives were British Land, Anglo American, Rio Tinto and Man Group.

The European Union said it transferred 14.5 billion euros (US$18 billion) to Greece, allowing the nation to repay 8.5 billion euros of bonds due tomorrow. The payment is the first instalment of a 750 billion-euro assistance package aiming at stopping the weakest euro nations from defaulting.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 1.1 per cent to 87.10.

The euro tumbled against the US dollar after news broke of Germany's plan to ban naked short-selling.

The euro fell as much as 1.9 per cent to US$1.2162, the lowest level since April 17, 2006, before trading at US$1.2208 at 3.15pm in New York. It fell 1.6 per cent to 112.79 yen, the lowest level since May 6, from 114.77. The dollar traded at 92.44 yen from 92.59.

US Treasuries rose, led by 30-year bonds, as an unexpected decline in producer prices reinforced expectations the Federal Reserve would keep borrowing costs at a record low.

The US producer price index fell 0.1 per cent last month, the US Labor Department said in Washington. An increase of 0.1 per cent was forecast in a Bloomberg News survey. Core prices, which exclude food and fuel, gained 0.2 per cent.

US inflation has slowed this year, helping Fed policy makers justify their pledge to keep the benchmark interest rate near zero for an "extended period" to boost the economy.

The 30-year bond yield dropped 8 basis points, or 0.08 percentage point, to 4.28 per cent at 1.56 pm in New York, according to BGCantor Market Data. The yield on the 10-year note decreased 8 basis points to 3.40 per cent.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, gained 0.62 per cent to 254.76.

Gold fell as demand for safe-haven assets eased amid some optimism about a European rescue to resolve the region's debt crisis.

"The fact that Greece has actually received some of the aid package has probably taken some heat out of the market, but we still have to see if the aid is a cure, or just a temporary sticking plaster (bandage)," Societe Generale analyst David Wilson told Reuters.

Spot gold was at US$1,217.95 an ounce at noon EDT, against US$1,223.00 late in New York on Monday. US gold futures for June delivery on the COMEX division of the New York Mercantile Exchange fell US$10.10 to US$1,218.00 an ounce.

US oil futures rose as concerns about Europe's debt crisis eased.

"Yesterday's sell-off was overdone thanks to options expiry. Some no doubt think this market is oversold," Stephen Schork, president at the Schork Group, told Reuters.

US crude for June delivery rose US$1 or 1.43 per cent to US$71.08 a barrel, after settling at a five-month low of US$70.08 on Monday.

London Brent crude for July rose 45 cents to US$75.55 a barrel.

US copper futures rose.

Copper for July delivery gained 9.90 cents, or 3.4 per cent, to US$3.0310 per pound on the New York Mercantile Exchange's COMEX division.