By Herbert Lash

NEW YORK (Reuters) - U.S. stock gains eased on Wednesday and risk aversion rose, driving bond prices higher, after minutes from the Federal Reserve's last meeting showed policy-makers worried about a steep drop in economic activity.

Oil settled slightly up on the day -- above $49 a barrel -- but off earlier highs and the dollar firmed against the euro following the release of minutes from the Fed policy-makers' meeting on March 17-18.

The gloomier outlook dampened investors' enthusiasm over reports that U.S. life insurers may get more government help and that Japan was finalizing an even bigger spending package.

The Fed's weakened outlook, which foresaw the prospect of an even grimmer employment picture than previously expected, helped lift government debt and to a lesser extent the dollar.

"The assessment of the economy is very bad. This is clearly a big problem that they are worried about," Robert Brusca, chief economist at Fact and Opinion Economics in New York.

"The most discouraging thing is the wording they used to describe the domestic and overseas economies, which is very bad. I don't see any language here resembling the 'green shoots' used by Bernanke," Brusca said.

The tech-rich Nasdaq rose almost 2 percent as investors bet that such bellwethers as Microsoft (MSFT.O: Quote, Profile, Research) may be among the first sectors to see a recovery in demand.

Consumer shares also underpinned solid gains in the S&P 500 on hopes of a recovery in spending. Shares of Bed Bath & Beyond BBBY.N jumped 23 percent to $31.37, pushing retail stocks higher as sales were not as bad as feared.