*

U.S., European stocks fall

*

Dollar up broadly but weaker vs yen

*

10-year U.S. Treasury yield falls but holds above 4.5%

*

Energy sector only gainer among S&P 500 sectors

(Updates with close of European markets)

By Chuck Mikolajczak

NEW YORK, Dec 30 (Reuters) - Global stocks dropped for a

third straight session on Monday as the recent bout of elevated

U.S. Treasury yields prompted profit-taking at the end of a

strong year for equities.

On Wall Street, all three major U.S. indexes were broadly

lower but off earlier lows, with energy the only gainer

among the 11 major S&P 500 sectors.

The benchmark 10-year U.S. Treasury yield's recent push

above the 4.5% mark after the Federal Reserve on Dec. 18

signaled that it would take a slower interest rate-cut path has

fueled concerns about elevated stock market valuations.

"The bond market has somewhat taken its cue from what's

happening in the equities market," said Jim Barnes, director of

fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"Investors did some profit-taking in equities and maybe

re-deployed to fixed income. At this point, the bond market is

compelling given the recent rise in bond yields over the past

weeks."

The Dow Jones Industrial Average fell 286.59 points,

or 0.65%, to 42,712.11, the S&P 500 fell 41.52 points, or

0.70%, to 5,929.32, and the Nasdaq Composite fell 139.41

points, or 0.68%, to 19,587.23.

In a Sunday note, Julian Emanuel, senior managing director

leading equity, derivatives and quantitative strategy at

Evercore ISI in New York, said rising bond yields are the

biggest challenge to the current cyclical bull market, with key

levels for the 10-year yield at 4.5%, 4.75% and 5%.

U.S. stocks have rallied this year, with the S&P 500 up more

than 24%, buoyed by growth expectations surrounding artificial

intelligence, expected rate cuts from the Fed, and more

recently, the likelihood of deregulation policies from the

incoming Trump administration.

But the recent economic forecast from the Fed, along with

worries that Trump's policies such as tariffs may prove to be

inflationary, have sent yields higher, with the 10-year reaching

its highest level since May 2 at 4.641% last week.

U.S. yields were lower on Monday, however, and briefly

extended declines after data showed business activity in the

U.S. Midwest contracted more than expected in December.

Other data showed U.S. pending home sales rose more than

expected in November, in a fourth straight month of gains, as

buyers took advantage of better inventory despite elevated

mortgage rates.

MSCI's gauge of stocks across the globe

lost 5.05 points, or 0.59%, to 846.57, but is still up more than

16% on the year.

Trading volumes were muted ahead of the New Year holiday on

Wednesday. Stock markets in Germany, Italy and Switzerland are

also closed on Tuesday, while those in the UK and France have a

half-day trading session.

European stocks were also weaker due to elevated yields, with

the 10-year German bund yield holding near six-week

highs. The pan-European STOXX 600 index closed down

0.46%, its first decline after three straight sessions of

gains.

Bond investors may also be wary of increasing supply as U.S.

President-elect Donald Trump has promised tax cuts with little

in the way of details for restraining government spending.

The yield on benchmark U.S. 10-year notes fell 6.8

basis points to 4.551%.

Widening interest rate differentials have boosted the appeal of

the U.S. dollar. The dollar index, which measures the

greenback against other major currencies, is up 6.6% on the

year. On Monday, the index rose 0.1% to 108.09, with the euro

down 0.27% at $1.0399. The single currency is down nearly

6% on the year versus the greenback.

Against the yen, the dollar weakened 0.51% to 157.01 but

was still holding at levels which recently prompted an

intervention in the currency by Japanese officials.

U.S. crude advanced 0.67% to $71.07 a barrel, and Brent

rose to $74.40 per barrel, up 0.31% on the day.

To read Reuters Markets and Finance news, click on https://www.reuters.com/finance/markets

For the state of play of Asian stock markets please click on: