* 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, hurt by weak manufacturing data from around the world, while investor euphoria over last week's deal on the European debt crisis ebbed.
U.S. stocks and an index 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 nearly three years as new orders tumbled.
Euro zone manufacturing also 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 euro extended its slide against the dollar after the Institute for Supply Management report on U.S. manufacturing. Crude oil prices slid on concerns the world economy was deteriorating more quickly than anticipated and safe-haven bonds rose.
The euro was last trading at $1.2579.
The ISM report marked the first time since July 2009 that the index has fallen below the 50 level that separates expansion from 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 fell 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 announced Friday to keep Spain and Italy from falling deeper into the debt and banking crisis.
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 later this week.
The Dow Jones industrial average was down 61.19 points, or 0.48 percent, at 12,818.90. The Standard & Poor's 500 Index was down 3.91 points, or 0.29 percent, at 1,358.25. The Nasdaq Composite Index was down 3.63 points, or 0.12 percent, at 2,931.42.
The pan-European FTSEurofirst 300 index pared gains but closed up 1.2 percent at a provisional 1,033.77. The gains came on top of Friday's 2.6 percent rise, which was its biggest one-day jump in seven months.
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.
U.S. Treasury debt prices rose on 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.
The benchmark 10-year U.S. Treasury note was up 22/32 in price to yield 1.5681 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.
The weak ISM reading sets the stage for a soft non-farm June payrolls report o n F riday and a new round of quantitative easing, or QE3, in the near future, said Joe Manimbo, a market analyst at Western Union Business Solutions in Washington.
"On the surface, it can increase the chance that we could see QE3 this year, so that can certainly cap the dollar's upside," Manimbo said.
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 $1.72 to $96.08 a barrel, while U.S. crude futures were down $2.20 at $82.76 a barrel.
Spot gold prices fell 41 cents to $1,597.70 an ounce.