* Shares rebound, then slip on Israeli-Palestinian cease-fire news
* Dollar extends gain against yen after U.S. housing data
* Bond prices slip on housing starts data, fiscal cliff hopes
By Herbert Lash
NEW YORK, Nov 20 (Reuters) - World shares rebounded and oil prices fell on Tuesday on news of a possible Egyptian-brokered cease-fire in the Gaza conflict, but comments by Federal Reserve Chairman Ben Bernanke about the potential impact of the "fiscal cliff" sent U.S. shares lower.
World equity markets turned positive after a Hamas official said a cease-fire was expected to take effect later in the day, although Israel said there was still no deal.
Wall Street subsequently slipped back into negative territory, pulled lower by comments from Federal Reserve Chairman Ben Bernanke, who said the U.S. economy faced a series of "headwinds." He cited damage to the U.S. housing sector and mortgage markets and a sharp tightening in credit.
Growing speculation that euro zone finance ministers will agree to release aid to debt-laden Greece reduced demand for safe-haven assets, such as German bonds, and bolstered the appetite for European equities.
Investors also squared positions before the Thanksgiving holiday on Thursday and a long weekend.
"Investors right now are looking for signs coming out of Cairo that there might be a brokered truce over the Middle East," said Fred Dickson, chief market strategist at The Davidson Cos in Lake Oswego, Oregon.
"We're rolling into a holiday weekend, tomorrow's going to be a pre-holiday day, we're looking for the markets to slow down," he said.
Bernanke, in comments before the Economic Club of New York, said the Fed does not have the tools to offset the damage that would result if politicians fail to strike a deal to prevent a fiscal shortfall of some $600 billion.
"In the short run, we're hostage to the fiscal cliff. I think (Bernanke's) got to be really, really fearful that Washington doesn't get its act together and that creates stresses on the financial system," said Dan Veru, chief investment officer of Palisade Capital Management in Fort Lee, New Jersey.
U.S. stocks earlier had snapped their best two-day run in nearly four months, a rally that had pushed the benchmark S&P 500 index up more than 2 percent since Friday over optimism a deal could be reached to stave off looming U.S. tax hikes and spending cuts set to take effect early next year.
But doubt over a speedy resolution of the fiscal knot which threatens to push the economy back into recession kept investors on edge and weighed on U.S. equity prices early in the session.
Hewlett-Packard Co tumbled 11.9 percent to $11.72 after the company took an $8.8 billion charge related to its acquisition of software firm Autonomy, citing "serious accounting improprieties."
The computer and printer maker swung to a fourth-quarter loss and its shares were the biggest drag on the Dow and third-biggest on the S&P 500.
The Dow Jones industrial average was down 24.77 points, or 0.19 percent, at 12,771.19. The Standard & Poor's 500 Index was down 1.68 points, or 0.12 percent, at 1,385.21. The Nasdaq Composite Index was down 5.95 points, or 0.20 percent, at 2,910.12
European shares rose on news of an Israeli-Palestinian cease-fire after slipping earlier on Moody's announcement of a cut in France's credit rating.
While France's downgrade had been expected and was largely priced in, analysts said the previous session's big gains, when the FTSEurofirst 300 posted its biggest daily rise in 10 weeks, meant some were using it as a reason to take profits.
The index rose 0.27 percent to close at 1,094.46, while MSCI's all-country world equity index fell 0.02 percent at 323.70.
The Gaza conflict had supported crude oil prices over the past week and added to worries in the equity market about the U.S. "fiscal cliff" and the festering euro zone debt crisis.
"Yesterday's big rally was all about fears of a wider conflict stemming from Israel and Gaza, so when the truce was announced it's not surprising we've seen prices come right off," said Andy Lebow, vice president at Jefferies Bache in New York.
The dollar extended gains versus the yen after U.S. housing starts data suggested the housing market recovery was gathering steam, even though permits for future construction fell.
The dollar last traded at 81.71 yen, up 0.38 percent on the day. The euro rose as high as $1.2828 and last traded 0.03 percent higher at $1.2815, according to Reuters data.
Crude oil prices fell below $110 a barrel on news of the cease-fire, which would end a week of rocket attacks and air strikes between Palestinians and Israelis.
Brent crude fell $1.87 to settle at $109.83 per barrel. U.S. crude settled down $2.53 to $86.75 a barrel.
U.S. Treasury debt prices slipped for a second day as the housing data pointed to an improving market and as investors took more faith that lawmakers in Washington will reach a deal to avert a budget crisis.
Benchmark 10-year Treasuries were down 14/32 in price to yield 1.6591 percent.