* S&P back in the negative with Dow and Nasdaq
* Yen tumbles as sources say BOJ considering more easing
* Euro, shares dip after mixed European data
* Sterling at trade-weighted five-year high
NEW YORK, Dec 2 (Reuters) - U.S. stocks edged lower on Monday as new data pointing to economic recovery failed to extend an eight-week market rally, and the yen tumbled on news the Bank of Japan was considering expanding its stimulus. Treasuries sold off, causing their yields to rise, after the Institute for Supply Management said the U.S. manufacturing sector expanded last month at its fastest pace since April 2011, outstripping forecasts. Construction spending also exceeded expectations, pushing oil prices to 2-1/2 month highs as investors bet on a spike in energy usage from the resulting higher economic activity. Gold fell to a 5-month low due to fewer reasons to hold the precious metal as a hedge to economic weakening. The mood on Wall Street was cautious after less-than-encouraging holiday season sales. The S&P 500 seesawed between negative and positive territory, while the Dow and the tech-heavy Nasdaq fell back after a brief rise. "We're not expecting a severe pullback, but we're not jumping into the market with both feet, given how far we've come, and that there are no real catalysts," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Alabama. Around 2:30 p.m., the Dow Jones industrial average was down 41.09 points, or 0.26 percent, at 16,045.32. The Standard & Poor's 500 Index was down 0.60 points, or 0.03 percent, at 1,805.21. The Nasdaq Composite Index was down 9.10 points, or 0.22 percent, at 4,050.78. Bond prices fell in what will be a data-heavy week that will culminate in Friday's November U.S. jobs report. More strong data will boost expectations for the Federal Reserve to reduce its bond-buying stimulus. The benchmark 10-year U.S. Treasury note was down 15/32, its yield at 2.7951 percent. The 30-year Treasury bond fell 1 percent, adding to earlier losses. "It's all defense into Friday's number," said Tom Tucci, head of Treasuries trading at CIBC in New York.
MORE BOJ EASING? The yen hit a more-than-six-month low versus the dollar and weakened toward a five-year trough against the euro after sources told Reuters that the Bank of Japan was looking to go beyond its $70 billion-a-month bond-buying operation. The dollar rose as high as 103.03 yen, the strongest since May 23, according to Reuters data, and was last up 0.6 percent at 102.98 yen. In Japan, the central bank's options include major purchases of stock market-linked funds or other assets riskier than Japanese government bonds, according to officials briefed on the process. "There's no sense that further stimulus is imminent," said one of the officials, adding that the Bank of Japan's inflation target is still a long way off. "There's no harm in thinking about options." Markets are figuring on further stimulus from the BOJ sometime next year on concerns that the economy and inflation will lose some momentum.
OIL RISES 2 PCT, GOLD GOES REVERSE Brent crude oil rose nearly 2 percent to above $111 a barrel, while U.S. crude more than 1 percent to $93.94.
Gold fell nearly 2 percent to below $1,230 an ounce, undermined by concerns that a stronger U.S. economy will lead the Fed to reduce its stimulus. Gold has lost around a quarter of its value so far this year, on course for its first annual loss in 13 years. The euro rose 0.3 percent to 139.49 yen. Against the dollar, the euro shed 0.3 percent to $1.3543 , retreating from Friday's one-month high of $1.3621. Sterling hit a five-year high against the dollar on signs the British economy was outpacing its European neighbors.
U.S. OUTLOOK BRIGHTENS The U.S. economic outlook brightened after a gauge for factory activity hit a 2-1/2-year high in November and construction spending increased solidly in October. The Institute for Supply Management said its index of national factory activity rose to 57.3 last month -- the highest reading since April 2011. The index was at 56.4 in October. November was the sixth consecutive month of faster growth in the goods-producing sector since a contraction in May. A separate report from the Commerce Department showed construction spending increased 0.8 percent to the highest level since May 2009. Economists polled by Reuters had expected an increase of 0.4 percent. Financial data firm Markit, meanwhile, said its manufacturing index hit a 10-month high in November.
Even so, heavy discounting took a toll on U.S. retail sales during the Thanksgiving weekend as shoppers spent almost 3 percent less than they did a year earlier, according to an industry group. Sterling surged to a five-year high after data showed UK manufacturing grew at its strongest rate in almost three years, adding to recent talk that the Bank of England may not be able to hold off from raising interest rates next year. Britain's FTSE 100 was down 0.6 percent. Milan's main index fell 1 percent and Madrid dropped 0.8 percent, contributing to a 0.3 percent drop in the FTSEurofirst 300 index. MSCI's gauge of world stock markets slipped 0.2 percent.