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* ECB's Draghi says will monitor impact of rising euro
* Euro drops sharply versus dollar and yen
* U.S. and European shares fall
* Irish yields at multi-year lows
By Wanfeng Zhou
Feb 7 (Reuters) - Major stock markets edged lower on Thursday and the euro hit a near two-week low against the dollar after the European Central Bank's chief said policymakers will monitor the impact of a rising currency and cited downside risks to the bloc's economy.
On Wall Street, shares ended lower but were off earlier steep losses. Traders cited the less-upbeat comments on the economy from ECB President Mario Draghi in the market decline. U.S. stocks have been on an uptrend so far this year, with the S&P 500 up more than 5 percent.
U.S. Treasury prices rose as the retreat in stocks lifted safe-haven demand.
Irish government debt rallied, with yields falling to their lowest levels since early 2007 after Dublin reached a deal that will reduce its borrowing costs.
After the ECB's policy meeting, at which the main interest rate was left at 0.75 percent, Draghi told a press conference that the exchange rate was not a policy target but is important for growth and price stability.
He also said risks to the economy were on the downside and that economic weakness in the euro zone will likely prevail in coming months.
The Dow Jones industrial average ended down 42.47 points, or 0.30 percent, to 13,944.05. The Standard & Poor's 500 Index closed down 2.73 points, or 0.18 percent, to 1,509.39. The Nasdaq Composite Index dropped 3.34 points, or 0.11 percent, to 3,165.13.
"Whether (Draghi's comments) ignite renewed concerns about the euro debt struggles and Europe in general is yet to be seen, but the market is looking for any reason to take a profit," said Andre Bakhos, director of market analytics at LEK Securities in New York.
"It is just consolidating near multi-year highs, taking a respite, before we advance higher."
The pan-European FTSEurofirst slipped 0.3 percent to 1,148.28, while MSCI's all-country world equity index was down 0.5 percent at 353.80.
The euro was last at $1.3398, down 0.9 percent on the day , with the session low at $1.3369, the weakest since Jan. 25. Against the yen, the euro fell 1 percent to 125.34 yen , with the session low at 124.48 yen.
"Clearly (Draghi) does not want to see the euro go much higher," said Boris Schlossberg, managing director at BK Asset Management in New York. "There is massive pressure from the French. He is signaling displeasure that it ran up so much."
Before Thursday's declines, the euro had risen more than 2 percent against the greenback so far this year and over 10 percent against the yen.
The benchmark 10-year U.S. Treasury note was up 3/32, the yield at 1.953 percent.
The October 2020 Irish bond yield fell as low as 3.955 percent, the lowest in an equivalent Irish benchmark bond since early 2007, before the subprime crisis started, according to Reuters data.
Ireland struck a long-awaited deal on Thursday with the ECB to ease the burden of debts it took on to rescue its banking system in a way that will cut its budget deficit and borrowing needs and put it on track to end its reliance on EU-IMF loans this year.
Spanish bond yields fell after healthy demand at a sale of Spanish debt, though political uncertainty over a corruption scandal forced the country to pay more to borrow.
In commodities trading, Brent crude oil rose to a near five-month high above $117 a barrel after Iran rejected calls for direct talks with the United States, while U.S. crude prices fell on concerns about growing domestic stockpiles in the Midwest.
Brent finished 51 cents higher to settle at $117.24 a barrel, the highest close since mid-September.
U.S. crude dropped 79 cents to $95.83 a barrel. The Brent-WTI spread finished at $21.41 a barrel, the highest since mid-December.
Gold fell in a volatile session, trading in tandem with U.S. equities and industrial commodities after Draghi's comments stoked fears about the euro zone's economy. Spot gold lost 0.3 percent to $1,671.44 an ounce.