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(Reuters) - Stock markets retreated on Wednesday and a small bid for safety helped safe-haven U.S. Treasuries erase some losses as investors waited for progress in approving aid for Greece and in averting potential U.S. fiscal constraint in early 2013.

Strong earnings reported by technology bellwether Cisco Systems Inc. and two retail chains buoyed the U.S. stock market in early trading, but selling picked up later in the session.

"Again today, the market started off hoping for an optimistic tone out of Washington on the "fiscal cliff" issue, which spurred a move higher. But then, we got nothing and gains basically fizzled out. We are probably going to have many more days like this," said Randy Frederick, managing director of trading and derivatives at Charles Schwab's Center for Financial Research.

The Dow Jones industrial average was down 73.06 points, or 0.57 percent, at 12,683.12. The Standard & Poor's 500 Index was down 6.44 points, or 0.47 percent, at 1,368.09. The Nasdaq Composite Index was down 10.52 points, or 0.36 percent, at 2,873.37.

Some analysts said stocks retreated more on a lack of buying than on a new selling wave. They said investors were wary of the impact that tax hikes and severe spending cuts would have on the U.S. economy if President Barack Obama and Congress do not agree on a plan to avoid the so-called fiscal cliff. President Obama pressed for his proposal to have the wealthy pay more in taxes as a way to tame the federal deficit, taking a hard line in his opening bid before he begins fiscal talks with U.S. lawmakers later in the week.

"We should not hold the middle class hostage while we debate tax cuts for the wealthy," Obama said in his first press conference since winning re-election on November 6.

Brent oil prices rose more than 1 percent toward $110 a barrel on Wednesday, snapping a two-day slide as Israel launched a major offensive against Palestinian militants in Gaza, exacerbating concerns about Middle East tensions.
Hamas's military chief was killed when his car was hit by an Israeli air strike, the Palestinian Islamist group said, as multiple Israeli attacks rocked the Gaza Strip. An Israeli official said the attack on Hamas's top commander was not the end of the assault on the coastal territory and more strikes would follow.

"There are some ticking time bombs in the Middle East right now and the Israeli air strikes on Gaza have brought the tensions in the region back into focus for the oil market," said Todd Gross, founder of fund management company Hudson Capital Group LLC in New York.

Tensions are high in the region as the Syrian conflict drags into its twentieth month. Western sanctions targeting the Iranian nuclear program have also slashed oil exports from the country. Brent December crude jumped up $1.49 to $109.75 a barrel by 1:04 p.m. EST (1804 GMT), back above the 100-day moving average of $109.50 and having swung from $107.80 to $110.35. U.S. December crude was up 82 cents to $86.20 a barrel, just off the session high of $86.61.

Markets shrugged off news that U.S. retail sales fell in October for the first time in three months as Hurricane Sandy interrupted consumer spending momentum early in the fourth quarter.

Other data pointed to muted inflation, with wholesale prices falling in October for the first time since May, giving the U.S. Federal Reserve latitude to maintain its easy monetary policy stance it hopes will nurse the economy back to health.
Minutes from the Fed's October policy meeting will be released around 2:15 p.m. EST (1915 GMT) on Wednesday.

Ten-year Treasury notes, down 5/32 in price earlier, erased that loss and were unchanged on the day in early afternoon trade, yielding 1.60 percent. The yield on Tuesday touched 1.57 percent, which was the lowest in 10 weeks. Concerns in Europe as the International Monetary Fund and the European Union failed to agree on long-term budget goals for Greece also kept markets on edge, despite the growing likelihood the country would receive the aid payments due this year.

But in the foreign exchange markets, the euro was on track to post its largest daily rise in two weeks against the U.S. dollar on Wednesday, after five losing sessions, on expectations Greece might receive another round of financial aid soon.

The yen, on the other hand, fell sharply against the dollar and euro after Japanese Prime Minister Yoshihiko Noda said he was ready to dissolve the lower house of parliament later this week and hold a snap election next month.

The euro was also supported by comments from European Union Economic and Monetary Affairs Commissioner Olli Rehn who effectively endorsed Spain's austerity measures to cut its deficit in 2012 and 2013, although steps for 2014 fell short of what was expected by the group's finance ministers.

Against the yen, the dollar rose more than 1.0 percent to 80.18 yen. The euro climbed 1.4 percent to 102.18 yen and rose 0.3 percent against the dollar to 1.2741. The dollar index <.DXY> was flat at 81.086, having hit a two-month high of 81.241 on Tuesday.

"This morning's economic reports paint a picture of a slow and struggling U.S. recovery that will require continued stimulus from the Federal Reserve," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.

Investors are looking ahead to minutes from the Federal Reserve's October policy meeting, to be released on Wednesday afternoon, for clues on whether the central bank intends to buy more Treasuries once its "Operation Twist" stimulus program expires at the end of December.

The MSCI world equity index fell 0.55 percent to 320.25. Markets across Europe fell, but Asian markets recovered from seven-week lows.

In Europe investors were unable to shake off concerns about a rekindling of the debt crisis, sending the FTSEurofirst 300 index of top European shares down 1 percent to 1,088.43 points, erasing Tuesday's 0.4 percent rise.
London's FTSE 100 , Frankfurt's DAX and Paris's CAC-40 were lower.

The concerns over Greece, as well as lingering uncertainty over whether Spain will seek a bailout and the prospect of slow economic growth across the 17-member euro zone boosted demand at a German debt auction. Triple-A rated Germany sold 4.3 billion euros ($5.5 billion) of two-year bonds that paid no interest, meaning Berlin was able to borrow for free because investors prize the country's strong fiscal position and highly liquid debt market.

Italy's borrowing costs also fell at a 3.5 billion euro sale of new three-year government bonds, which completed its funding needs for the year. Traders continued to watch developments in Europe and the United States and were also wary about the ramifications of a political transition in China due to be announced on Thursday. The new government's attitude to supporting growth, which has been slowing all year, will be closely watched as China is the world's top consumer of many commodities.

Three-month copper on the London Metal Exchange was down 0.4 percent at $7,646 a tonne, while gold rose 0.27 percent to $1,724.51 an ounce, still below a 3-week peak of around $1,738 struck on Friday.