Stocks down on Fed official's rate hike call; sterling up

NEW YORK (Reuters) - U.S. stocks fell on Thursday after a top Federal Reserve official said interest rates should rise by early 2015, while the pound gained on speculation that UK rates were set to go higher, even as the Bank of England took only mild steps on Thursday to tighten lending.

The euro was down to $1.3612 against the dollar after the president of the St. Louis Fed, James Bullard, said in televised comments that raising rates by the end of the first quarter in 2015 would be appropriate, based on his forecast that U.S. growth will register 3 percent for the next four quarters.

"I think Bullard caught most people off guard as the Fed meeting was just last week and there was no explicit reading anyone took from there of a Q1 rate hike," said Adam Sarhan, chief executive at New York's Sarhan Capital.

"It's very possible that he's on his own or he might have one other Fed official or a minority within the Fed who thinks we should raise rates sooner rather than later," Sarhan said.

Bullard, a non-voting member of the Fed's policy-setting committee, said in an interview with Fox Business Network that the U.S. jobless rate will fall below 6 percent later this year. Inflation looked likely to rise back to 2 percent, putting the economy closer to normal than most realize, he said. [ID:nU5N0MO017]

The Dow Jones industrial average <.DJI> fell 37.51 points, or 0.22 percent, to 16,830.00, the S&P 500 <.SPX> lost 4.68 points, or 0.24 percent, to 1,954.85, and the Nasdaq Composite <.IXIC> dropped 12.00 points, or 0.23 percent, to 4,367.75

Financial stocks were among the sharpest decliners after a securities fraud lawsuit filed by the New York state attorney general against British bank Barclays . The British bank is accused of giving an unfair edge in the United States to high-frequency trading clients even as it claimed to be protecting other customers from such traders. [ID:nL2N0P61T3]

U.S.-listed shares of Barclays fell 6.6 percent to $14.68.

U.S. government bond prices rose, with yields on the benchmark 10-year Treasuries note hitting a three-week low at 2.5286 percent. [US/]

Sterling rose 0.25 percent to $1.7025 as the steps announced by the Bank of England to cool the UK housing market failed to dampen expectations that the central bank was set to raise rates.

The FTSEurofirst 300 index <.FTEU3> of top European stocks finished down 0.1 percent at 1,370.38 points, dragged down by the comments by the Fed's Bullard and by the lawsuit against Barclays.

In commodities, the spot price of gold fell 0.3 percent to $1,315.09 an ounce.

In oil, Brent crude was down 0.7 percent at $113.27 a barrel while U.S. crude ended 0.8 percent lower at $105.70 after a bearish turn in the latest U.S. economic data and easing concerns of a supply disruption from the conflict in Iraq. [O/R]

(Additional reporting by Patrick Graham and Jemima Kelly in London; Editing by Leslie Adler and Meredith Mazzilli)

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