* Surprise contraction in U.S. factory sector hits markets
* Euro slides as euphoria ebbs over last week's debt crisis deal
* Weak European and Asian data also weigh on market sentiment
By Herbert Lash
NEW YORK, July 2 (Reuters) - Stocks retreated and the euro slipped on Monday as investor euphoria over Friday's deal on the European debt crisis ebbed and weak economic data from around the world weighed on the outlook for global growth.
U.S. stocks and a measure of global equity markets turned lower after a report on U.S. manufacturing showed the sector unexpectedly contracted in June for the first time in three years as new orders tumbled.
The Institute for Supply Management said its index of U.S. factory activity fell to 49.7 from 53.5 in May, missing expectations of 52.0, according to a Reuters poll of economists. A reading below 50 indicates contraction.
"This is clearly very, very troubling," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.
"It indicates that at least in the month of June, the manufacturing sector of the economy contracted and there is meaningful evidence of, at a minimum, disinflation," he said.
The euro extended its slide against the dollar after the ISM report.
The euro was pushed lower after Finland and the Netherlands opposed a plan for the euro zone's permanent bailout fund to buy government bonds in the secondary market, casting doubt on the deal to keep Spain and Italy from falling deeper into the debt and banking crisis.
The euro fell and was last trading at $1.2591.
U.S. shares had opened slightly higher and most European stock markets were up on relief some progress was made last week on the festering debt crisis and on hopes the European Central Bank would cut interest rates.
Yields on Italian and Spanish 10-year government debt slipped, but their funding costs remain high in historical terms.
"The optimism will fade as the week unfolds, and if yields in Italy and Spain increase, there will be further pressure on euro/dollar," said Lutz Karpowitz, FX strategist at Commerzbank in London.
The Dow Jones industrial average was down 0.42 percent at 12,826.13. The Standard & Poor's 500 Index was down 0.27 percent at 1,358.50. The Nasdaq Composite Index was down 0.08 percent at 2,932.65.
The pan-European FTSEurofirst 300 index pared gains but was still up 1.0 percent at 1,031.85 points. The gains came on top of Friday's 2.6 percent rise, which was its biggest one-day jump in seven months.
U.S. Treasury debt prices rose on Monday due to safe-haven buying as weak Asian data spurred worries over the pace of global growth, although gains were tempered after last week's agreement to give euro zone rescue funds more flexibility.
Euro zone manufacturing took another hefty blow in June while China and Japan, Asia's biggest exporters, were hit by crumbling orders from abroad, intensifying worries that the global economy is deteriorating.
The benchmark 10-year U.S. Treasury note was up 17/32 in price to yield 1.5851 percent.
The ECB is expected to cut its main refinancing rate by 25 basis points to 0.75 percent on Thursday, with expectations that the deposit rate it pays banks to park cash overnight may be cut to zero.
U.S. crude futures extended losses in volatile trading after the weak ISM reading. But news that Iranian lawmakers have a draft bill proposing a blockade of the Strait of Hormuz helped limit losses.
Brent crude futures fell $1.44 to $96.36 a barrel, while U.S. crude futures were down $1.57 at $83.39 a barrel.
Spot gold prices fell $3.54 to $1,594.60 an ounce.