The euro dipped against the dollar and European shares fell on Wednesday as investors traded nervously ahead of a European Central Bank meeting and a U.S. jobs report.
Markets have been expecting ECB President Mario Draghi to unveil a bold plan to tackle to the euro zone's debt crisis at Thursday's meeting, but public disputes among policymakers over the extent of the measures have sowed doubt.
Data showing U.S. factory activity slowed in August has also renewed concerns over the health of the world's largest economy, and heightened the focus on Friday's payroll report which could persuade the Federal Reserve to ease policy.
"We might not get all the details about the ECB bond buying plan tomorrow, but we know it's coming, so it's priced in. Now the question is: how bad is the situation in the U.S. economy? We'll get a better idea on Friday with the payrolls," said David Thebault, head of quantitative sales trading at Global Equities.
The single currency was down 0.4 percent at $1.2510, off its high of $1.2629 seen on Tuesday and over a cent below Friday's two-month high of $1.26378.
"Some investors are wary that the euro's rally ahead of the ECB meeting will turn out to be, 'buy the rumour, sell the fact," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
Germany will provide a test of investor sentiment ahead of the ECB meeting when it sells 5 billion euros ($6.3 billion)of new 10-year bonds with a record low coupon of 1.5 percent later in the session.
German Bund futures were 30 ticks higher at 143.80 ahead of the sale with 10-year yields 2.5 basis points lower at 1.38 percent, having retraced around half of the rise seen during August.
Share markets were also moving lower across Europe due to caution ahead of the ECB meeting and on evidence the euro area was slipping back into recession.
The FTSE Eurofirst index <.FTEU3> of top European shares down 0.4 percent at 1080.30 points while the blue chip Euro STOXX 50 index <.STOXX50E> fell 0.5 percent to 2423.40 points after losing 1.1 percent on Monday.
EUROPE RECESSION LOOMS
The latest gloom on the euro zone came from the Markit composite Purchasing Manager's Index (PMI) for August, which posted a seventh month of contraction.
The index fell to 46.3, down from an initial estimate of 46.6 and below July's 46.5.
"The final August PMI came in only slightly below its earlier flash estimate, leaving the euro zone economy on course to fall back into technical recession in the third quarter," said Rob Dobson, senior economist at data compiler Markit.
A Reuters poll published last month predicted the bloc would contract 0.2 percent in the three months to September, but Dobson said the latest PMI suggests the downturn could be far worse with a contraction of 0.5-0.6 percent.
The PMI data adds to a growing picture that the global economy has slowed.
An HSBC survey of China's large services sector, also out on Wednesday, found it growing at the slowest pace in a year in August, even though firms hired more workers at higher wages [ID:nL4E8K51NX]
The price of iron ore and steel have fallen dramatically on signs of slowing activity but the slowdown has renewed hopes for central bank policy easing, supporting many other commodities.
Brent crude hovered in a tight range near $114 a barrel on Wednesday, while gold traded near a six month high at $1,691.64 an ounce .
But iron ore prices, which have dropped 36 percent since early July, were below $90 a tonne <.IO62-CNI=SI>, their weakest level since October 2009.
China steel futures hit an all-time low on the Shanghai Futures Exchange with further falls expected. ($1 = 0.7961 euros)
(Additional reporting by Anirban Nag and Blaise Robinson; Editing by Anna Willard)