By Nigel Stephenson
LONDON (Reuters) - The prospect of the European Central Bank eventually winding down its bond-buying stimulus programme rattled investors on Wednesday, dragging stocks lower in Europe and Asia and pushing up government bond yields.
Wall Street stocks looked set to open flat to slightly lower, having fallen on Tuesday on expectations of a Federal Reserve interest rate rise in coming months and concerns over Britain's exit from the European Union.
Sterling, meanwhile, hit a three-decade low against the dollar, trading below $1.27 for the first time since 1985, and a five-year low versus the euro on worries Britain could be heading for a "hard Brexit" that would see it leave the European Union's single market when it quits the bloc, possibly in early 2019.
Oil prices rose strongly. Benchmark Brent crude gained 1.8 percent to $51.80 a barrel on a report that U.S. inventories dropped for a fifth week in a low.
However, the chief driver for the market malaise was a Bloomberg report on Tuesday that the ECB would probably wind down its 80 billion euro ($90 billion) monthly bond purchases before ending its quantitative easing programme.
This would mean a taper, following the Fed's earlier pattern, rather than a sudden ending.
ECB media officer Michael Steen later tweeted that the central bank's decision-making body had not discussed reducing the pace of its monthly bond buying.
The report comes as investors are wondering whether the central bank asset-buying stimulus programmes that have buoyed markets across the globe are reaching their limits.
ECB President Mario Draghi confounded the expectations of many in markets when he said after the bank's last meeting that policymakers had not discussed extending its scheme.
"I am surprised at the reaction, but it's just this notion that the ECB may be discussing tapering one day that has upset the market," said ING rates strategist Benjamin Schroeder. "If you kick off a QE programme you have to think from the start about how you will exit it."
European stocks fell. The pan-European STOXX index fell nearly 1 percent, having risen 0.8 percent on Tuesday.
Shares in Deutsche Bank, which like other euro zone lenders has had its profitability questioned by the ECB's ultra-low interest rates, initially rose but were last down 0.1 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.4 percent. Japan's Nikkei closed up 0.5 percent, aided by a weaker yen.
German 10-year government bond yields rose 6 basis points to minus 0.03 percent. Ten-year yields in Italy and Spain, where borrowing costs have been anchored by ECB bond purchases, soared 10 bps at one point before pulling back slightly.
The dollar retreated from Tuesday highs hit after Chicago Fed President Charles Evans said he would be "fine" with raising interest rates by year-end if economic data stayed firm.
Traders are pricing in a 63 percent chance of a rate hike in December, according to the CME Group's FedWatch tool.
DOLLAR DOWN
The dollar fell 0.1 percent against a basket of currencies. The euro was up 0.2 percent at $1.1220 but the yen was down 0.3 percent at 103.13 per dollar.
"We do not think the ECB is anywhere close to tapering its asset purchase programme, but in the near term momentum is towards euro upside," said Nomura currency strategist Yujiro Goto.
Sterling was flat at $1.2726, having fallen as far as $1.2683. Prime Minister Theresa May said on Sunday the formal process to take Britain out of the EU would begin next March, adding on Tuesday there would be "bumps in the road".
($1 = 0.8906 euros)
(Additional reporting by Nichola Saminther in Singapore, Sujata Rao, Anirban Nag and Dhara Ranasinghe in London; Editing by Jeremy Gaunt and Susan Thomas)
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