* Wall St mixed as bank shares drop
* Fed to let leverage exemption expire on March 31
* Dollar hits highest level in a week
* Oil prices rise 2% after steep Thursday fall (New throughout, updates prices, market activity and comments to close of U.S. markets)
By Lewis Krauskopf and Carolyn Cohn
NEW YORK/LONDON, March 19 (Reuters) - Benchmark U.S. Treasury yields edged back from the highest in more than a year on Friday, as investors digested the Federal Reserve's move not to extend a temporary pandemic regulatory break expiring this month, and oil prices rebounded from severe slides.
Wall Street's main stock indexes ended mixed as bank shares fell after the Fed said it would not extend a temporary capital buffer relief put in place to ease pandemic-driven stress in the funding market. pan-European STOXX 600 index .STOXX lost 0.76% after France imposed fresh regional lockdowns to curb the spread of the coronavirus. gauge of stocks across the globe .MIWD00000PUS shed 0.29%. Investors were seeking the next reasons to add risk following the passing of President Joe Biden's $1.9 trillion stimulus plan, broadening U.S. COVID-19 vaccinations and encouraging economic news.
"We have had such a strong period of news-flow and catalysts on the positive end that now that a lot of those have largely been put into the market, we are now a little bit more susceptible to negative news causing big drawdowns,” said Mark Hackett, chief of investment research at Nationwide.
On Wall Street, the Dow Jones Industrial Average .DJI fell 234.33 points, or 0.71%, to 32,627.97, the S&P 500 .SPX lost 2.36 points, or 0.06%, to 3,913.1 and the Nasdaq Composite .IXIC added 99.07 points, or 0.76%, to 13,215.24.
The S&P 500 banks index .SPXBK dropped 1.6%.
Markets have been consumed by the surge in U.S. bond yields, with investors still digesting the Fed's meeting earlier this week. The central bank said it expects higher economic growth and inflation in the United States this year, although it repeated its pledge to keep its target interest rate near zero. Treasury yields eased, while the shortest end of the market flirted with negative rate territory as it tried to absorb a flood of cash from massive fiscal stimulus. 10-year notes US10YT=RR last rose 1/32 in price to yield 1.7264%, from 1.729% late on Thursday, a session when the 10-year yield hit 1.754%, its highest since January 2020. The 30-year bond yield also retreated after reaching 2.518% on Thursday, its highest since August 2019.
"Ultimately, what we're seeing now is a great deal of tension between market prices that embed several rate hikes before the end of 2023 and the Fed's forecast that doesn't expect lift-off until 2024," said Ryan Swift, U.S. bond strategist at BCA Research in Montreal.
The dollar extended gains against major currencies and hit its highest level in over a week. dollar index =USD rose 0.135%, with the euro EUR= down 0.1% to $1.1903.
Oil prices gained after falling about 7% in the prior session, when a new wave of coronavirus infections across Europe dampened expectations of any imminent recovery in fuel demand. crude CLc1 settled up $1.42, or 2.4%, at $61.42 a barrel, while benchmark Brent LCOc1 settled at $64.53 a barrel, up $1.25, or about 2%.
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