* Dollar fades after ISM services data
* U.S. stocks rebound from brief decline
* Oil prices lower after early spike
* Gold climbs on dimmed hopes for rate hike (Updates with U.S. market open, changes byline, dateline)
By Chuck Mikolajczak
NEW YORK, Sept 6 (Reuters) - The dollar slumped on Tuesday after data on the U.S. services sector fell well short of expectations, while a gauge of global equity markets managed to brush off a brief dip and hold near a one-year high.
The Institute for Supply Management said its index of non-manufacturing activity fell to 51.4, its lowest level since February 2010, from 55.5 the month before and well shy of the 55 estimate. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.
Stocks on Wall Street briefly turned negative in the wake of the data and MSCI’s index of world shares pared gains from an intraday high of 423.28, its highest level in a year, before rebounding.
The dollar, down 1 percent against a basket of major currencies, softened considerably, with the greenback on track for its biggest drop since late July.
The services sector report also tamped down expectations for a rate hike by the U.S. Federal Reserve in September, with the odds of a rate hike this month now at 18 percent, versus 21 percent on Friday, according to CME’s FedWatch tool. Expectations for December have also decreased to just above 50 percent.
Comments from several Fed officials in recent weeks had increased the probability for a rate hike this year, but expectations have declined since Friday’s weaker-than-anticipated U.S. payrolls report.
“When you pair that with data we got Friday, which was non-farm payrolls, disappointing some, what it does is it starts to kick back interest rate expectations past the September meeting and even lowering them in December too,” said John Doyle, director of markets at Tempus Inc in Washington.
“You’re seeing slightly softer data over the last couple of trading sessions equals less likelihood the Fed will raise rates at the meeting this month and with that comes a slightly weaker dollar.”
The Dow Jones industrial average rose 22.7 points, or 0.12 percent, to 18,514.66, the S&P 500 gained 3.19 points, or 0.15 percent, to 2,183.17 and the Nasdaq Composite added 18.89 points, or 0.36 percent, to 5,268.78.
Stocks in Europe also pulled back after the data, with the FTSEurofirst 300 closing down 0.4 percent, although MSCI’s index of world shares was last up 0.6 percent.
Financials, off 0.5 percent, which stand to benefit from an increase in rates, were among the worst performers of the 10 major U.S. sectors.
Benchmark 10-year U.S. Treasury yields sunk to a two-week low of 1.536, and were last yielding 1.5391 percent, up 17/32 in price.
The disappointing data helped lift spot gold more than 1 percent to $1,347.49 an ounce, after touching a high $1,347.60 an ounce, its highest level since Aug. 19.
But despite the weaker dollar and low expectations for a rate hike this month, oil prices were lower, with Brent off 1.5 percent at $46.90 and U.S. crude down slightly at $44.41 as hopes for quick action by producers to tackle a global supply glut faded.
Oil prices had jumped earlier after Saudi Arabia and Russia agreed on Monday to cooperate in world oil markets, saying they will not act immediately but could limit output in the future.
Additional reporting by Dion Rabouin; Editing by Nick Zieminski