LONDON - World stock markets fell Thursday after the U.S. Federal Reserve cautioned about the wider economic impact of rising unemployment. Investors awaited interest rate decisions in Europe later in the day.

The Fed indicated Wednesday that it would keep its benchmark interest rate at near zero per cent "for an extended period" even though it conceded that economic activity had picked up.

The Fed warned household spending would remain "constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit."

Similar statements are expected from the European Central Bank and the Bank of England later when they announce their latest interest rate decisions later. Both banks are expected to keep borrowing costs on hold for some time.

The Bank of England, however, may expand the amount of money it pumps into the British economy, which unexpectedly stayed in recession in the third quarter.

As a result, analysts said the FTSE 100 index of leading British shares could be in for a more volatile day than its counterparts in Europe.

"With numbers in the range of 25 to 75 billion pounds ($41 billion to $124 billion) being thrown around, regardless of what is announced it should prove volatile for the markets," said Brian Dolan, an analyst at Forex.com.

Ahead of the Bank of England decision expected at 1200 GMT, the FTSE was down 40.80 points, or 0.8 per cent, at 5,067.09. Meanwhile, Germany's DAX was 34.53 points, or 0.6 per cent, lower to 5,409.70 while the CAC-40 in France was 21.03 points, or 0.6 per cent, lower at 3,649.30. The ECB decision is due at 1245 GMT.

Once the central banks have left the stage, investors will start to turn their attention to Friday's crucial U.S. nonfarm payrolls report for October. The jobs data often set the stock market tone for a week or two.

At the moment, analysts expect payrolls to have fallen by around 175,000 during the month, while the unemployment rate is expected to tick up further to, or just below, 10 per cent.

"Of course, the U.S. nonfarm payrolls...will likely prove instrumental in defining where the major indices end the week," said Cameron Peacock, a market analyst at IG Markets.

Many analysts think that the markets are at a crucial juncture and that stocks, which have rallied for most of the year, could be facing a year-end slide. Over the last couple of months, most of the dips have proved to be short-lived.

However, the markets have been very volatile over the last couple of weeks, with many traders wondering whether current stock valuations are justified by the wider economic fundamentals, especially if the global economic recovery peters out as pent-up demand and restocking fizzle out.

Wall Street was set for a fairly subdued opening with Dow futures down 18 points, or 0.2 per cent, at 9,767 and the broader Standard & Poor's 500 futures 2.4 points, or 0.2 per cent, lower at 1,044.60.

Earlier, Japanese shares helped lead Asian stocks lower, with the Nikkei 225 stock average falling 126.87 points, or 1.3 per cent, to 9,717.44.

South Korea's market pulled back 1.8 per cent to 1,552.24, while Hong Kong's Hang Seng was down 0.6 per cent at 21,479.08. Markets in Indonesia, Singapore and Australia also slid but Chinese shares bucked the downward trend to gain modestly.

Oil prices fell back below $80 a barrel amid the economic uncertainty, with benchmark crude for December delivery down 49 cents to $79.91 a barrel.

Gold, meanwhile, rose $1, or about 0.1 per cent, to $1,088.40 an ounce.

The dollar slipped 0.6 per cent to 90.21 yen while the euro fell 0.2 per cent to $1.4845.

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Associated Press Writer Alex Kennedy in Singapore contributed to this report.