NEW YORK SHARES

Four Damascus-based bankers told Reuters that new banknotes printed in Russia were circulating in trial amounts in the capital and Aleppo, the first such step since a popular revolt against President Bashar al-Assad began in 2011.

The four bankers said the new notes were being used not just to replace worn out currency but to ensure that salaries and other government expenses were paid, a step economists say could increase inflation and worsen the economic crisis.

The United Nations says Assad's forces have killed at least 10,000 people in a crackdown, and the government says more than 2,600 members of its security forces have died.

The four bankers, along with one business leader in touch with officials, said the new money had been printed in Russia, although they were not able to give the name of the firm that printed it. Two of the bankers said they had spoken to officials recently returned from Moscow where the issue was discussed.

"(The Russians) sent sample new banknotes that were approved and the first order has been delivered. I understand some new banknotes have been injected into the market," said one of the bankers. All requested anonymity.

Two other senior bankers in Damascus said they had heard from officials that a first order of an undisclosed amount of new currency had arrived in Syria from Russia, although they were unable to confirm whether it had entered circulation.

Outgoing Finance Minister Mohammad al-Jleilati said last week that Syria had discussed printing banknotes with Russian officials during economic talks at the end of May in Moscow. He said such a deal was "almost done", without going into details.

However, the central bank later denied through state media that any new currency had been circulated.

Goznak, the state firm that operates Russia's mint and has exclusive rights to secure printing technology, regularly prints money for other countries. It declined to comment.

"LAST RESORT"

Russia is one of Syria's major political backers and a close trading and economic partner. There are no sanctions in place that would bar a Russian firm from printing money for Syria.

Syrian money was previously printed in Austria by Oesterreichische Banknoten- und Sicherheitsdruck GmbH, a subsidiary of the Austrian central bank. That order was suspended last year because of European Union sanctions, an Austrian central bank spokesman said.

One of the four bankers described the decision to use newly printed money from Russia to pay the deficit as a "last resort" after several months of consideration.

Syria's deficit has swollen because of declining government revenues and loss of oil exports hit by sanctions. The government is loathe to impose unpopular measures to fight the deficit, like cutting subsidies or raising taxes.

"The deficit is there and it is already increasing and increasing quickly. And to finance it they have decided to print currency," said the senior businessman, who is familiar with the subject and in touch with monetary officials.

Bankers say a priority has been to continue salary payments for over 2 million state employees among a workforce of 4.5 million in a country of more than 21 million people.

"You cannot allow the public sector to collapse," said one of the bankers."

"People are getting their wages and there are no complaints if they are paid at the end of every month. If we reach a stage where they are not paid there will be a crisis."

Syria's $27 billion 2012 budget was the biggest in its history, taking many by surprise. Bankers say the spending surge was motivated by a desire to create more state jobs and maintain subsidies to help ward off wider discontent.

The private sector has suffered large scale layoffs, but workers in the public sector have kept their jobs and had steady wages despite a salary freeze.

Financing the spending has proven difficult. The central bank has exceeded borrowing limits from public banks, and private banks are reluctant to buy government bonds, one of the bankers said.

Inflation is already running at 30 percent, although the central bank considers it manageable.

Authorities have spent state funds on subsidies to keep the prices for household utilities and petrol unchanged, and have announced planned price controls on basic commodities. However, electricity prices for big industries have risen by 60 percent and the price of subsidised diesel fuel has also risen.

The authorities plan to inject only a small amount of new currency to prevent runaway inflation, said one of the bankers.

"But there is a limit to how much fresh money could be injected into the economy in such highly uncertain times. Reckless printing of money as a way of buying short term reprieve could be economic suicide," the banker added.

(Additional reporting by Fredrik Dahl in Vienna; Editing by Oliver Holmes and Peter Graff)

Investors snapped up safe-haven assets such as gold and government debt. Oil prices eased after initially rising on U.S. government data that showed U.S. crude edged down 191,000 barrels last week for a second straight week of declines.

Shares of JPMorgan rose above $35 (22.5 pounds) at one point, the biggest contributor to gains in the benchmark S&P 500 early in the session. JPMorgan's stock trimmed its gains to trade up 1.6 percent at $34.30, as no damning news came out of Chief Executive Jamie Dimon's testimony before Congress on the firm's multibillion-dollar trading loss.

Investors are expected to remain skittish ahead of a Greek vote on Sunday and on fears that Spain's financing problems may spread to Italy. The question of whether Greece will remain in the euro zone after the election and the potential impact of Europe's woes on global growth took a toll on sentiment.

"I would expect a fair amount of market volatility one way or the other," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

"But I don't think the result of the election is going to be anywhere close to a resolution of the issues facing Greece or the issues facing European countries in general," he said.

U.S. stocks traded near break-even for most of the session before falling late in the day. European stocks closed down while shares of emerging markets rose and an index of global stocks edged higher, helped by earlier gains in Asia.

The Dow Jones industrial average closed down 77.42 points, or 0.62 percent, at 12,496.38. The Standard & Poor's 500 Index fell 9.30 points, or 0.70 percent, at 1,314.88. The Nasdaq Composite Index slid 24.46 points, or 0.86 percent, at 2,818.61.

In Europe, the FTSEurofirst 300 index of top regional companies closed down 0.3 percent at 990.18.

MSCI's all-country world equity index fell 0.1 percent to 301.08.

Wall Street opened lower after a report showed demand for building materials sagged and falling gasoline prices crimped receipts at service stations in May, dragging retail sales down 0.2 percent, the Commerce Department said.

April retail sales were revised to show a 0.2 percent drop instead of the previously reported 0.1 percent gain. Excluding the surge in auto sales, sales fell 0.4 percent, the biggest decline in two years.

The U.S. Labour Department said its producer price index dropped 1.0 percent in May as energy costs slumped 4.3 percent.

Oil prices initially rebounded after a report from the U.S. Energy Information Administration that crude inventories slipped last week less than forecast, while gasoline and distillate stocks fell, offsetting expectations of a build. But U.S. crude later fell and settled lower.

Brent crude settled down 1 cent at $97.13 a barrel, and U.S. crude settled down 70 cents at $82.62 a barrel.

U.S. Treasuries prices erased early losses and turned higher Prices as the weak data raised expectations the Federal Reserve may embark on more bond purchases to support the economy, a move that would underpin private demand for government debt.

The benchmark 10-year U.S. Treasury note rose 17/32 in price to yield 1.6063 percent.

Yields on 10-year German bonds fell to 1.495 percent.

"Many now believe that the point of no return is getting nearer with the peripheral (European) economies in a somewhat irreversible dynamic, with their economies depressed and their access to capital markets shrinking," said Lee McDarby at Investec Corporate Treasury.

The dollar fell against the yen, while the U.S. dollar index was down 0.4 percent at 82.423, and the euro was up 0.5 percent at $1.2574.

Spot gold prices were up $8.20 to $1,617.60 an ounce. U.S. COMEX gold futures for August delivery settled up $5.60 at $1,619.40 an ounce.