(Updates prices, adds comment, details)
* Spain signals distress over rising borrowing costs
* G7 agrees to work together to deal with debt crisis
* U.S. services sector rises modestly in May
By Wanfeng Zhou
NEW YORK, June 5 (Reuters) - The euro fell and German bond prices gained on Tuesday as the euro zone debt crisis showed signs of escalating after Spain said it was being shut out of credit markets.
The treasury minister of Spain, the euro zone's fourth biggest economy, said high borrowing costs meant credit markets were closing to his country, and he made an appeal to the European Union to help Madrid recapitalize its debt-laden banks.
Finance ministers from the Group of Seven major economies discussed progress toward financial and fiscal union in Europe after an emergency call but made no joint statement.
World stocks managed to edge higher, with U.S. shares bolstered by data showing the U.S. services sector grew at a slightly faster pace in May as new orders improved.
In Europe, shares advanced in a nervous, choppy session as investors bought beaten-down shares on hopes for global central bank policy action to revive the economic recovery.
"None of these meetings have produced anything meaningful, and with debt burdens piling up across the globe, I remain highly doubtful that anything substantive will be implemented, and anything that falls short of fiscal union in Europe will allow the crisis to proliferate," said Christopher Vecchio, currency analyst at DailyFX in New York.
The MSCI world equity index rose 0.4 percent to 291.93 points.
U.S. stocks were little changed at midday. The Dow Jones industrial average was down 2.80 points, or 0.02 percent, at 12,098.66. The Standard & Poor's 500 Index was up 1.89 points, or 0.15 percent, at 1,280.07. The Nasdaq Composite Index was up 2.54 points, or 0.09 percent, at 2,762.55.
"Europe's obviously a concern, but we've been selling off for weeks on that," said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. "A slightly better-than-expected services number, which makes up the majority of the U.S. economy, is a sigh of relief in the face of a lot of bearishness."
The euro zone's blue-chip Euro STOXX 50 index closed up 0.4 percent, with volumes thinned by a second day of UK public holidays.
After Tuesday's G7 finance ministers conference call, investors are waiting for a European Central Bank policy meeting on Wednesday, Federal Reserve Chairman Ben Bernanke's testimony to the U.S. Congress on Thursday, and the Greek elections and G20 meeting in Mexico which are both on the weekend of June 17.
Funding options are narrowing for companies across the globe, as issuers are shut out of markets due to risk aversion for weaker credits and demand for spread that is sending costs soaring.
EURO ZONE IN DECLINE
The euro, which early in the day hit a one-week high of $1.2542, fell 0.5 percent to $1.2436, hit by disappointment that the G7 released no statement following the meeting.
"Their lips are sealed, which tells us that they are either working on something big or failed to reach an agreement," said Kathy Lien, director of currency research at GFT in Jersey City, New Jersey. "Spain has become as much of a problem as Greece, and for this reason policymakers can't leave things as they currently are for much longer."
The risk premium investors demand to hold Spanish 10-year debt rather than safe-haven German bonds hit a euro-era high of 548 basis points on Friday on concerns that Spain will eventually be forced to seek a Greek-style bailout.
Spain will test the market on Thursday by issuing between 1 billion euros ($1.24 billion) and 2 billion euros in medium- and long-term bonds at auction.
Adding to the bearish sentiment, all of the euro zone's major economies are now in various states of decline, according to business surveys that heaped more pressure on Europe's leaders to stop the region becoming the center of a new global crisis.
The dollar rose 0.4 percent against the yen, to 78.62 yen , hitting a session high after Japan's finance minister, Jun Azumi, said a strong yen is damaging Japan's economy.
Brent crude prices fell 9 cents to $98.76 a barrel, after they briefly hit a 16-month low of $95.63 on Monday. U.S. crude lost 2 cents to $83.96.
Spot gold eased to $1,615 an ounce.
The benchmark 10-year U.S. Treasury note was down 5/32 in price with the yield at 1.5407 percent. (Additional reporting by Rodrigo Campos in New York, Shankar Ramakrishnan from IFR and Richard Hubbard in London; Editing by Leslie Adler)