Data revealed Europe's economic troubles caused a sharp slowdown in German factory activity, although an improvement in China's manufacturing sector supported oil and copper prices.

US data showed manufacturing expanded at its slowest pace since late 2010, hobbled by weak overseas demand for American goods, though a rise in domestic orders helped cushion the blow.

"The data is not all that negative, not all that positive. There are some slight signs that the manufacturing sector is leveling off," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

He said economic numbers were being overshadowed by concerns about Spain and its slow slide towards needing a bailout. "That will be the center of focus," Cardillo said.

Spanish bond yields rose further, climbing above 7.6 percent on the benchmark 10-year, and a successful sale of short-term debt offered little support.

Rating agency Moody's on Monday changed its outlook for Germany to negative, in part, on the potential cost to Berlin if Spain needs more financial help. Moody's also cut the outlook for the Netherlands and Luxembourg to negative from stable.

A cautious outlook from the world's largest package delivery company UPS weighed further on US equities.

The Dow Jones industrial average lost 26.57 points, or 0.21 percent, to 12,694.89. The S&P 500 Index dipped 1.99 points, or 0.15 percent, to 1,348.53. The Nasdaq Composite shed 1.31 points, or 0.05 percent, to 2,888.84. The S&P fell 0.9 percent on Monday.

The MSCI world equity index fell 0.25 percent after it lost 1.7 percent on Monday. The FTSEurofirst 300 index of top European shares was also flat a day after a 2.4 percent drop.

The euro edged down versus the US dollar, marking its fifth day of declines for a total drop of about 1.5 percent. On Monday it hit a 25-month low of $1.2067.

US Treasuries yields rose before the first of $99 billion in new debt sales planned for this week. Benchmark 10-year note yields rose to 1.43 percent on Tuesday, up from a record low of 1.3977 on Monday.

CHINA SUPPORT

A survey of factory activity in China pointed to improving conditions and easing fears of a sharp slowdown in the world's second-largest economy.

Commodity markets took their lead from the signs of improvement in China's giant manufacturing sector.

Three-month copper on the London Metal Exchange added 0.4 percent after earlier having risen more than 1 percent. Brent crude gained 41 cents to $103.67 a barrel and US crude gained 45 cents to trade at $88.59.