* 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 climbs after Fed minutes By Herbert Lash NEW YORK, Feb 20 Global equity markets fell on Wednesday after some Federal Reserve policy-makers said last month the central bank may have to stop or slow its bond-buying program before hiring picks up, while oil slid on the prospect of a boost in Saudi supply. 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. The dollar rallied to session highs against the euro and the yen as some policy-makers said the Fed's monthly purchase of $85 billion in bonds under measures known as "quantitative easing," or QE, may end before improvement in the labor market occurs. "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 have 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 19 percent to 14.68 in the biggest jump this year. MSCI's all-country world equity index rose to 359.37 points, its highest level since June 2008, before retreating to trade down 0.7 percent on the day at 355.45. 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 closed down 108.13 points, or 0.77 percent, at 13,927.54. The Standard & Poor's 500 Index fell 18.99 points, or 1.24 percent, at 1,511.95. The Nasdaq Composite Index slid 49.19 points, or 1.53 percent, at 3,164.41. Shares of Boeing Co rose 0.2 percent to $74.78. 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 17 percent to $4.18. OfficeMax shares shed 7 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. (1600 GMT), diving more than $2 per barrel over 20 minutes with several spikes in volume. "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. 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. 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 5/32 in price to yield 2.0104 percent. The dollar reversed gains against the yen late on Wednesday to trade little changed. The dollar was last at 93.54 yen . It had risen to a session peak of 94.02 yen on Reuters data after minutes from the Federal Reserve's last meeting suggested policymakers may have to slow or stop buying assets before seeing the pick-up in hiring. The euro fell 0.8 percent to $1.3278 EUR=, having dropped as low as $1.3273 on Reuters data, the lowest since Jan. 23. It slipped 0.7 percent to 124.41 yen EURJPY=.
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