The downgrade on Spain sapped the euro's efforts to regain ground on news of an aid package that emerged from a meeting between German officials and the head of the International Monetary Fund in Berlin on Wednesday.

On Tuesday S&P had slashed its ratings on Greece to junk status and downgraded Portugal.

"The hesitant and haphazard reaction of euro zone policy makers to Greece's predicament underscores the dangers of contagion," Marco Annunziata, chief economist at UniCredit Group wrote clients.

"The euro zone has taken over six months to react and is allowing uncertainty to persist nearly to the eve of the May redemptions - this does not bode well for their ability to react quickly should a second flashpoint burst," he noted, referring to Greek debt payments coming due next month.

Investors responded to the Spain downgrade by pumping cash into the traditional safety of gold.

The euro fell to a one-year low of $1.3112, before trading down 0.24 percent at $1.3131.

The US dollar index, a measure of the greenback against a basket of major trading-partner currencies, rose 0.62 percent. Bund futures rose after the Spain downgrade - one notch to AA from AA-plus - while the Spanish/German 10-year bond yield spread edged out to 119 bps from 116 bps.

European share prices fell for a second straight session as the Spain downgrade came at the tail end of the trading day, with banks leading the fall. S&P said it was concerned about a more protracted period of sluggish growth than previously expected.

The 10-year Greek/German government bond yield spread narrowed to 879 basis points after earlier peaking at more than 1,000 basis points.

At one point the Greek government's two-year debt yield surged to 38 percent.

In early afternoon trade, the Dow Jones Industrial Average was up 47.53 points, or 0.43 percent, at 11,039.52. The Standard & Poor's 500 Index was up 6.56 points, or 0.55 percent, at 1,190.27. The Nasdaq Composite Index was down 2.49 points, or 0.10 percent, at 2,468.98.

Earnings season stayed in high gear, with Dow Chemical Co. up 5.25 percent to $31.65 after reporting a profit that beat expectations.

US bank shares rose, buoying the S&P 500, with J.P. Morgan & Co. up 2 percent to $43.25, while the KBW bank index added 1.5 percent.

Shares of Goldman Sachs Group rose 1.96 percent a day after members of a US Senate subcommittee grilled the bank's executives on its role in the financial meltdown. Goldman has been accused of fraud by the US Securities and Exchange Commission.

"Fundamentals are pretty strong, earnings should continue to surprise to the upside, and investors are catching their breath, realizing policy makers will ultimately do the right thing for Greece," said Paul Zemsky, head of asset allocation at ING in New York.

European shares fell for a second straight session after recording their biggest one-day fall in five months on Tuesday.

The FTSEurofirst 300 index of top European shares lost 1.15 percent to close at 1,056.89 points.

World stocks as measured by MSCI were down 0.96 percent, having lost more than 2 percent on Tuesday. The more volatile emerging market index lost 1.64 percent to add to 1.4 percent in the previous session.

Gold recovered ground to make a new high for the year, rising 0.31 percent or $3.62 to $1,171.65 on the euro zone's sovereign risk.

Meanwhile, oil steadied below $83 a barrel as declining US gasoline stocks helped offset investor concern about European economies after Standard & Poor's downgraded Spain's credit rating.

US crude for June delivery rose 24 cents a barrel to $82.68 by 1:14 p.m. EDT (1814 GMT). London Brent for June delivery was down 20 cents at $85.58 a barrel.

Brent retained an unusually high premium to NYMEX crude, of $2.91 a barrel, after reaching a $3.65 a barrel premium to NYMEX barrels in earlier trade, the largest since August of 2009.