(Updated prices throughout at 2:59 p.m ET/ 1859 GMT)

By Sinéad Carew and Alun John

NEW YORK/LONDON, Aug 7(Reuters) - Wall Street equity

indexes lost ground after opening higher on Wednesday while a

bond auction pushed Treasury yields higher

and the dollar rose against the yen after cautious central

banker comments.

Oil prices rallied after data showed a bigger-than-expected

draw in U.S. crude stockpiles, even as worries about weak oil

demand in China persisted.

Earlier Bank of Japan Deputy Governor Shinichi Uchida said

the central bank will not raise interest rates when financial

markets are unstable, pushing the yen down.

But in equities, the Nikkei rose 1%, adding to

Tuesday's 10% rebound from Monday's sell-off. The Nikkei's 12.4%

sell-off on Monday started a global stock as investors went into

risk-off mode.

After opening higher on Wednesday Wall Street's benchmark

S&P 500 started losing ground in the late morning and fell

further following a weak auction of U.S. 10-year Treasuries.

While the S&P added 1% on Tuesday, Chad Oviatt, Director of

Investment Management at Huntington Private Bank pointed out

that it had ended the session well below its peak for the day.

"Today seems to be a continuation of the reactionary forces

in the market and we seem to be lacking conviction in that 'buy

the dip mentality'," said Oviatt. "It could be that investors

are sitting on the sidelines due to market volatility ... you

wait for stability before wading back in."

Wednesday's data, however, was upbeat as interest rates for

the most popular U.S. home loan plunged last week to their

lowest levels in 15 months, after the Federal Reserve said it

could start cutting rates in September. And the Mortgage Bankers

Association said refinancing applications hit a two-year high.

On Wall Street at 02:59 p.m. the Dow Jones Industrial

Average fell 211.80 points, or 0.54%, to 38,785.86, the

S&P 500 lost 26.89 points, or 0.51%, to 5,213.14 and the

Nasdaq Composite lost 120.72 points, or 0.74%, to

16,246.14.

MSCI's gauge of stocks across the globe

pared gains and last rose 0.88 points, or 0.11%, to 771.87 after

earlier hitting a session high of 783.83. Europe's STOXX 600

index had closed up 1.5%.

In currencies, the yen dropped after the BoJ comments on

hikes, which soothed investors' concerns about volatility in the

Japanese currency, which had soared against the dollar on Monday

on fears of a U.S. recession, causing a broader market rout.

Against the Japanese yen, the dollar strengthened

1.84% to 146.95. The euro was down 0.09% at $1.092.

The dollar index, which measures the greenback

against a basket of currencies including the yen and the euro,

gained 0.23% at 103.22.

In U.S. Treasuries, yields were volatile after the Treasury

Department's auction of $42 billion in 10-year notes.

The yield on benchmark U.S. 10-year notes rose

8.2 basis points to 3.97%, from 3.888% late on Tuesday.

The 2-year note yield, which typically moves in

step with interest rate expectations, rose 2.5 basis points to

4.0096%, from 3.985%. The 30-year bond yield rose

8.4 basis points to 4.2614%.

Oil prices climbed on concerns that an escalating Middle

East conflict could hurt oil production, even as worries about

weak crude demand persisted.

U.S. crude settled up 2.77% at $75.23 a barrel and

Brent rose to $78.33 per barrel, up 2.42% on the day.

In precious metals, spot gold lost steam and was last

down 0.16% at $2,385.63 an ounce. U.S. gold futures fell

0.04% to $2,388.20 an ounce.