* Fed may seek to slow bond buying before hiring picks up * MSCI world share index slips after hitting 4-1/2-year high * Gold sinks 3 pct, biggest one-day drop in almost a year * VIX volatility index gains 17 pct after Fed minutes By Herbert Lash NEW YORK, Feb 20 (Reuters) - Global equity markets extended losses on Wednesday after minutes of the Federal Reserve's latest meeting showed it may stop or slow its bond-buying program before hiring picks up, while oil slid on the prospect of increased supply from Saudi Arabia.
Gold fell nearly 3 percent to a seven-month low in its biggest single-day drop in almost a year, and U.S. government debt prices pared earlier gains after the minutes from the Fed's meeting on Jan. 29-30 were released. In currency markets, the dollar rallied to session highs against the euro and the yen as the minutes hinted the Fed's purchase of $85 billion of bonds every month under measures known as "quantitative easing," or QE, may end sooner than expected.
"What Wall Street wants to hear is an absolute sign that the Fed will continue with QE for the indefinite future. When it says we may end it faster, that just raises the uncertainty and the market hates that," Todd Schoenberger, managing partner at LandColt Capital in New York, said.
"But realistically, we have a QE program at least through 2013, but we may need to reevaluate after that," he said.
Global equity markets fell earlier in the session as a mixed reading of U.S. housing data on Wednesday took the shine off this year's stock rally. An index of world shares hit a 4-1/2-year high before turning lower earlier.
Equity markets have surged over the last seven months as major central banks repeatedly delivered monetary support to weak economies. The injection of liquidity has been credited with driving investments in riskier assets.
But a more than 7 percent rise so far this year in the S&P 500, the U.S. benchmark, has given investors pause as to how much further the rally can go.
The CBOE Volatility Index, often called the fear gauge on Wall Street, rose 17 percent to 14.41.
MSCI's all-country world equity index rose to 359.37 points, its highest level since June 2008, before retreating to trade down 0.6 percent on the day at 355.89.
Before the Fed released its minutes, the FTSEurofirst 300 index index of top European shares closed down 0.26 percent to a 1,168.72. U.S. residential construction fell in January but a jump in permits for future home building to a 4-1/2-year high offered hope the housing market recovery remains on track.
The Dow Jones industrial average was down 85.51 points, or 0.61 percent, at 13,950.16. The Standard & Poor's 500 Index was down 14.86 points, or 0.97 percent, at 1,516.08. The Nasdaq Composite Index was down 38.59 points, or 1.20 percent, at 3,175.01. Shares of Boeing Co rose 0.44 percent to $74.98.
Boeing has found a way to fix battery problems on its grounded 787 Dreamliner jets, a source familiar with the U.S. company's plans told Reuters. In merger news, Office Depot Inc said it will acquire smaller rival OfficeMax Inc in a $1.2 billion stock deal. Office Depot shares plunged almost 20 percent to $4.02. OfficeMax shares shed 10 percent. The shares of both companies had spiked on Tuesday on reports of a deal.
European shares fell as surprise dividend cuts by British insurer RSA and Lufthansa and weak results from the likes of Accor, Europe's biggest hotelier, and miner BHP Billiton weighed on sentiment.
RSA was the biggest single declining stock after it cut its dividend by a fifth after weak investment returns, sending its shares down 14.9 percent. Lufthansa, Europe's biggest airline, shed 6.2 percent to close at 15.00 by withholding a dividend for the second time in three years. Crude oil fell sharply, along with along with a sell-off in precious metals and copper, on speculation a hedge fund was forced to liquidate substantial positions in commodities.
The exiting of long positions built up during the recent rally and the triggering of sell-stop orders accelerated oil's slide as the U.S. March crude contract approached expiration at the end of the session, brokers and traders said.
Oil entered into a steep decline just before 11 a.m. EST (1700 GMT), diving more than $2 per barrel over 20 minutes with several volumes spikes. "It's called long liquidation out of what had become a crowded trade," said Tim Evans, energy futures specialist at Citi Futures Perspective in New York.Oil prices fell with news on expectations of greater supply of crude.
Expectations of greater crude supply also weighed on prices.
Saudi Arabia, the world's top exporter of crude oil, expects to raise its output in the second quarter to satisfy higher demand from China and drive economic recovery elsewhere, oil industry sources said, but the exact rise in volume was unclear.
April Brent crude futures settled down $1.92 at $115.60 a barrel after posting their first gain in four sessions on Tuesday. U.S. crude fell $2.20 to settle at $94.46.
The contract expires later on Wednesday.
The benchmark 10-year U.S. Treasury note was up 2/32 in price to yield 2.0191 percent.
The dollar edged higher against the yen on the perception the data showed an overall improvement in the U.S. housing market.
The housing report's impact on the dollar-yen rate was a bit of a surprise as it has been driven by Japanese monetary policy despite major U.S. data over the past few months. The yen had gained on Tuesday on a potential rift between Japanese Prime Minister Shinzo Abe and Finance Minister Taro Aso over foreign bond purchases. Aso said he was not considering foreign bond buying, while Abe had indicated buying was an option.
The euro trimmed losses against the dollar to trade 0.8 percent lower at $1.3276. Against the yen, the dollar fell as low as 93.11 yen after Abe's remarks, before recovering to trade at 93.75 yen, up 0.2 percent on the day, helped largely by the U.S. housing data.
The decline in U.S. housing was due to the more volatile multi-family component, analysts said, while the single-family category rose to its highest since July 2008.
"Housing starts may have missed but they are still relatively high compared to where we are in the cycle," said Brian Kim, currency strategist, at RBS Securities in Stamford, Connecticut. "Overall, I would say, housing starts and building permits were generally constructive."