A surprise rate cut in South Korea and a 50-basis point reduction in Brazil underscored the widespread nature of the current slowdown, but a lack of a major policy easing by the Bank of Japan suggested the pace of decline was not a concern.

Recent data showing slower growth in Europe, China and the United States and a poor start to the second quarter corporate earnings season had been encouraging hopes of a policy response.

"There is not much to expect from economic data, there is not much to expect from earnings, so the only thing markets hope for is more quantitative easing, more stimulus from Europe - more stimulus from everywhere," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said.

However, the minutes of last month's Federal Reserve meeting, published on Wednesday, showed the world's biggest economy would have to weaken further before its central bank took any more easing steps. The minutes did however show some officials felt more stimulus was justified.

The Fed minutes boosted the dollar against a basket of key currencies .DXY, to a two-year high of 83.61 in overnight trade before it settled around 83.49 in European trading. It also rose to a 19-month high against the Swiss franc.

The euro was pushed to a fresh two-year low of $1.2208 as a result and touched a five-week low against the safe-haven yen of 96.91 yen.

"It doesn't change my overall view that QE3 (a third monetary stimulus) is going to happen later this year or the beginning of next year. But in the short term this was a disappointment," Gijsels said.

EQUITY DISAPPOINTMENT

European shares followed Wall Street and Asia markets lower in response to the dampened prospects for any fresh stimulus measures, sending the MSCI world equity index .MIWD00000PUS down 0.4 percent at 306.91 points - its seventh day of losses.

The FTSE Eurofirst 300 index .FTEU3 of top European shares weakened 0.8 percent to 1,030.50 in early trade, having closed flat on Wednesday.

"Anyone who's expecting some sort of quantitative easing come September ahead of the (U.S. presidential) elections, I think are possibly talking their own book because at the end of the day, we're in an election year," said Brenda Kelly, market strategist at CMC Markets.

"I think we won't see anything until the end of the year. It will be a bit of consolidation effort over the next number of weeks as the bulls and bears fight it out," Kelly said.

The search for safety by investors pushed German government bond yields to new five-week lows, with 10-year debt down two basis points at 1.25 percent.

Analysts and traders expect a test soon of the 1.13 percent all-time low hit in June.

Debt investors were also watching the sale by Italy of 7.5 billion euros ($9.2 billion) of 12-month bills, which precedes a 5.25-billion euro longer-term bond sale on Friday, as yields on Italian and Spanish debt gradually ease.

CHINA DATA EYED

Markets are also going to be anxiously waiting for Friday's second quarter gross domestic product growth number from China which is expected to show one of the few growth engines in the world economy is faltering.

A Reuters poll showed economist expect China's growth to slowed to 7.6 percent in the second quarter, its worst performance since the 2008/09 financial crisis.

But analysts are hopeful the world's second-largest economy would have seen the worst between April and June, and that growth expect a pick up in the third quarter as Beijing loosens monetary policy and fast-forwards infrastructure spending.

Oil and base metals markets were softer ahead of the data because China is such a big source of demand, with the disappointment over hopes for Fed action also hurting prices.

Brent crude oil fell 65 cents to just under $100 barrel at $99.58 and U.S. crude was at $85.25, down 56 cents.

"All across risk assets, including oil, investors are seeing the global economic outlook as a glass half-empty," said Ben Le Brun, a markets analyst at OptionsXpress in Sydney. "There is a lot of caution ahead of the Chinese data."

Gold dropped for a fourth session out of the last six as investor switched into the stronger dollar.

Gold's fortunes this year have depended heavily on the Fed's attitude towards monetary easing with the greenback and bullion typically moving in opposite directions. Lately the dollar has trumped gold as the preferred safe-haven bet. ($1 = 0.8164 euros)

(Additional reporting by Tricia Wright in London and Florence Tan in Singapore.; Editing by Alastair Macdonald and Giles Elgood)

• A Permanent Economic Emergency