European stocks fell yesterday and Wall Street looked set for a weak start as worries about the financial system and earnings weighed on investors while the dollar hugged record lows against the euro and bonds firmed. Investors were particularly focusing on U.S. homes sales and consumer confidence data due later in the day.

Weaker-than-expected German business confidence did little to improve the mood in Europe. The Ifo economic research institute said first signs of a braking in German economic growth were being detected.

European stocks fell, dragged down in part by a Financial Times report saying BP?s chief executive had warned that third-quarter revenues would be ?dreadful?. The banking sector was also under pressure, with Deutsche Bank down 1.3 percent. Sources told Reuters on Monday that profit at Germany?s biggest bank could be hit by up to 1.7 billion euros ($2.4 billion) due to loans that have dwindled in value as a result of the credit market crisis. The bank has declined to comment. ?Banks are going to suffer (from the credit crisis), there is no doubt about that,? said Edmund Shing, strategist at BNP Paribas.

The FTSEurofirst 300 index of top European shares was down 1.2 percent.

<B>Dollar Bonds</B>

Earlier, Japan?s Nikkei average gained 0.6 percent or 89.12 points at 16,401.73, while the broader TOPIX index put on 0.95 percent to 1,566.83. The market was closed on Monday. Asian stocks outside Japan, however, remained in record territory.

The dollar steadied above the previous day?s 15-year troughs against a basket of currencies as investors awaited the U.S. data. The trade-weighted index against six major currencies was steady at 78.547, off a 15-year low of 78.310 hit on Monday. The index hit the all-time low of 78.190 in 1992, a level analysts said would provide a test of whether the dollar decline deepens or pauses.

The euro was steady at $1.4091 after striking a record high of $1.4130 the previous session, according to Reuters data. Euro zone government bonds were higher in line with firming U.S. Treasuries. The December Bund future was up 38 ticks on the day at 112.74 compared with the settlement close of 112.36. The two-year Schatz yield was down 4.4 basis points at 4.013 percent. The 10-year Bund yield was down 3.7 basis points at 4.322 percent.