* Federal Reserve starts meeting, eyes on possible tapering signal
* U.S., European share prices fall; bond yields slip
* Dollar ends flat vs euro, yen in choppy trading
* Gold, oil fall after recent push
NEW YORK, Dec 17 (Reuters) - Stock prices dipped and the dollar ended little changed on Tuesday as the U.S. Federal Reserve began a two-day policy meeting, with investors awaiting possible signals on when it plans to start winding down its massive stimulus program. The debate over when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months amid worries it could trigger a turbulent reaction from investors who have become all too used to the support. "The most recent data has pulled forward expectations on when tapering could start," said Hayes Miller, who helps oversee about $57 billion as head of asset allocation in North America at Baring Asset Management in Boston. "We think the Fed will err on the side of caution, but everyone is taking a wait-and-see attitude." A majority of economists polled by Reuters expects the Fed to wait until March before it starts to scale back its $85-billion-a-month bond-buying program. But recent encouraging data from the United States, China and the eurozone have raised the chances of a move in January - or even this week.
"I put the probability of a tapering in December at 20 percent, January at 40 percent, and March at 80 percent," said Thomas di Galoma, co-head of fixed-income rates at ED&F Man Capital in New York. The Federal Open Market Committee, the central bank's policy setting group, will release a policy statement at 2 p.m. (1900 GMT) on Wednesday, followed by a press conference with Fed Chairman Ben Bernanke a half hour later. On Tuesday, a better-than-expected report on U.S. home builder confidence and data suggesting low but stable price growth supported the view economic conditions are adequate for the central bank to taper. The likely passage of a U.S. budget deal later this week will remove an earlier hurdle the Fed had cited when it refrained from tapering in September. The MSCI world equity index, which tracks shares in 45 nations, was down 0.22 percent at 393.32, giving back some of Monday's 0.6 percent gain. On Wall Street, the Dow Jones industrial average closed down 9.31 points, or 0.06 percent, at 15,875.26. The Standard & Poor's 500 Index was down 5.54 points, or 0.31 percent, at 1,781.00. The Nasdaq Composite Index was down 5.84 points, or 0.14 percent, at 4,023.68. Europe's broad FTSEurofirst 300 index closed 0.8 percent lower at 1,248.30. As the countdown to Wednesday's Fed decision continued, the VIX index, Wall Street's fear gauge, pared gains to 16.25 after hitting a two-month high earlier in the session.
FED FOCUS Traders were also opting for caution in currency and bond markets. While a move to start trimming stimulus would be a symbolic signal from the Fed, its cautious approach has managed to convince markets that rate rises remain distant. Prompted by some safe-haven bids, U.S. 10-year Treasury yields, the benchmark for global borrowing costs, dipped 3 basis points to 2.843 percent, while 10-year German Bund yields were little changed at 1.824 percent.
"If the outcome of the December FOMC meeting falls in line with our expectation, we would most likely take the low probability we placed on tapering at the December meeting and shift it into January," Morgan Stanley economists wrote in research note on Tuesday. If the Fed does decide to shrink its asset purchases on Wednesday, benchmark U.S. yields will likely retest the two-year high of 3 percent seen in early September. They had fallen to 2.5 percent in part due to the Fed's surprise move not to taper later that month. Many analysts have been expecting the dollar to rise as the prospect of tapering strengthens. On Tuesday, the greenback twisted in tight trading ranges against major currencies. The euro edged up 0.06 percent against the dollar at $1.3769. The single currency bounced in and out of positive territory after Germany's ZEW business sentiment came in well above expectations and euro zone inflation came in stable.
The greenback slipped 0.3 percent against the Japanese yen at 102.67 yen in late New York trading. Among commodities, Brent crude settled down 97 cents, or 0.89 percent, at $108.44 a barrel as bets on a stronger dollar due to less Fed stimulus weighed. U.S. crude futures ended down 26 cents, or 0.27 percent, at $97.22. They wiped out initial gains tied to expectations of data showing declines in U.S. crude inventories later this week. Gold fell 0.76 percent to $1,230.40 an ounce, following back-to-back days of gains.