NEW YORK (Reuters) - U.S. stocks fell on Thursday after the U.S. Supreme Court upheld the Obama administration's healthcare overhaul law, while the euro hit a three-week low as divisions among European leaders at a meeting in Brussels further diminished hopes of urgent measures to tackle the region's debt crisis.
However, Wall Street shares and the euro staged a late bounce from session lows as traders reduced early bets on a disappointing outcome from the European Union summit, just in case the region's politicians deliver a positive surprise, traders said.
The high court upheld the centrepiece of President Barack Obama's healthcare reform law that requires most Americans to get insurance by 2014 or pay a fine. Republican leaders and other opponents who claim the law is too costly and an over-reach of government power vowed to repeal it.
U.S. healthcare sector stocks were generally weaker after the ruling, while stocks that stand to benefit from more government business rallied.
Financial shares took a beating after British bank Barclays plc paid record fines in a probe of its manipulation of interbank loan rates. A New York Times report saying U.S. bank JPMorgan's losses on recent botched trades could reach $9 billion (5.8 billion pounds) also hurt the banking sector.
Investors turned more cautious after data showed the U.S. economy is losing momentum, while Germany's unemployment rose in June, posing a risk for global growth.
Also weighing on investor sentiment was the issue of whether Obama and Congress will agree to extend tax cuts and unemployment benefits before year-end. Traders fear a failure to do so could tip the United States back into recession.
"There is an overhang from Europe and here on Capitol Hill. That's creating pessimism and pessimism brings low expectations," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
Analysts said that with the market so focused on the outcome of the European summit, trade in stocks and the euro would remain choppy, driven by headlines from the meeting.
European Union leaders will ask the bloc's top four officials to develop the building blocks they have identified so far into a detailed, time-bound roadmap to a genuine economic and monetary union, draft conclusions of the EU leaders' summit showed.
German Finance Minister Wolfgang Schaeuble denied a report that his country could be willing to move sooner than expected to accept shared liability of euro zone debt, reinforcing the notion there would be little progress toward a crisis solution at the meeting.
This propelled yields on 10-year Spanish bonds above 7 percent and 10-year Italian debt to 6.25 percent. These are seen as unsustainable borrowing costs for the euro zone's third- and fourth-biggest economies.
A report late Thursday said euro zone officials are discussing a plan for Spain and Italy to issue covered bonds to make their debt issues more attractive and to allow the euro zone's permanent bailout fund to bid at primary auctions of the two countries.
STOCKS, EURO PARE LOSSES
Wall Street's three major stock indexes closed lower but sharply above their session lows tied to weakness in banking and healthcare shares.
In light, choppy trading, the Dow Jones industrial average closed down 24.75 points, or 0.20 percent, at 12,602.26. The Standard & Poor's 500 Index ended down 2.81 points, or 0.21 percent, at 1,329.04. The Nasdaq Composite Index finished down 25.83 points, or 0.90 percent, at 2,849.49.
The S&P healthcare index ended down 0.3 percent, less than half its earlier decline. Morgan Stanley's healthcare payor index closed 0.8 percent higher, recovering from a drop of over 1 percent shortly after the high court narrowly upheld the landmark law that requires most Americans to buy healthcare insurance.
Shares of large health insurers fell, with Wellpoint 5.2 percent lower at $65.90, while Centene Corp and Molina Healthcare, which specialize in Medicaid programs for the poor, rose 2.3 percent and 8.6 percent to $30.59 and $23.16, respectively.
JPMorgan shares slid after the New York Times, citing people briefed on the situation, reported losses from a soured credit derivative trade could be as much as $9 billion after the U.S. bank said in May it had lost $2 billion on the trade. They ended down 90 cents, or 2.4 percent, at $35.88 after hitting 34.85 earlier.
The FTSEurofirst 300 index of top European company shares ended down 0.5 percent at 995.14. The STOXX European banking index closed down 2.36 percent.
Barclays stock shed 15.5 percent at 178.65 pence after the bank agreed to pay a $453 million fine for manipulating interest rates on the London interbank market.
In Tokyo, the Nikkei index finished up 1.65 percent.
MSCI's world equity index was down 0.18 percent to 303.05, bringing its quarter-to-date decline to close to 9.1 percent.
The euro was down 0.21 percent at $1.2444 after touching $1.2405, its lowest level in more than three weeks against the dollar.
"The fact that we're not lower than we are right now is partially because investors are still hesitant to put on any major positions on the off chance that we do get some kind of a surprise from Europe," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The dollar index was up 0.11 percent at 82.715 after touching its highest level in about 1-1/2 weeks.
The move to lower-risk investments fed bids for U.S. Treasuries and German Bunds. Benchmark 10-year Treasury notes were up 10/32 in price at 101-15/32 to yield 1.59 percent, down 3 basis points, while Bund futures were up 0.4 percent at 141.67.
Anxiety about slowing global growth and the outcome of the EU summit stoked selling in oil and other commodities.
Gold fell to its lowest since June 1. It last traded down 1.2 percent at $1,554.34 an ounce.
Brent crude futures in London settled down $2.14, or 2.29 percent at $91.36 a barrel, while U.S. oil futures closed down $2.52, or 3.14 percent, at $77.69 a barrel.
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