The greenback's decline accelerated after Prime Minister Naoto Kan won an unexpectedly decisive victory in a ruling party vote. Markets were braced for a shift toward yen intervention if Kan lost the contest to a rival who argued more forcefully for a weaker currency.

The yen traded below 83 per US dollar and the euro hit a one-month high against the greenback, breaking above $1.30.

Gold rose to a record high above $1,270 an ounce, aided by the weakness in the US dollar. Oil edged up in cautious trade ahead of weekly oil inventory reports.

Stronger-than-expected US retail sales and a raised outlook from US electronics retailer Best Buy helped limit equity sales by investors looking to lock in profits.

"Jeans, T-shirts are big items, but computers and electronics in general have really overtaken back-to-school. And the big fear was the back to school (consumer) rolled up and died this year, and it doesn't look like that happened," said Kim Caughey, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

US equities made fresh five-week highs, recouping some early session losses. In midday New York trade, the Dow Jones industrial average rose 31.56 points, or 0.30 percent, at 10,575.69. The Standard & Poor's 500 Index gained 3.74 points, or 0.33 percent, at 1,125.64. The Nasdaq Composite Index climbed 14.31 points, or 0.63 percent, at 2,300.02.

European shares drifted lower into the close. The FTSEurofirst 300 index of top European shares ended the session down 0.03 percent at 1,087.63 in a choppy session after closing on Monday at its highest level since late April.

Outsource firm Capita rose 2.87 percent after investors were reassured about public sector contracts, while Dutch group Philips fell 3.86 percent after announcing what analysts said were unambitious growth targets.

MSCI's All-Country World Index traded at a four-month high, up 0.57 percent on the day.

Tokyo's benchmark Nikkei-225 stock index finished down 0.24 percent.

"Kan's not very attractive for the markets. It will probably mean more of the same in terms of policy, so there is no reason to welcome him," said Mitsuhige Akino, chief fund manager at Ichiyoshi Investment Management.

YEN PLAY The yen traded at 82.99 against the US dollar, down 0.82 percent, its strongest level since mid-1995.

Prime Minister Kan's victory over party heavyweight Ichiro Ozawa, who had made more strident calls to curb the yen's rise, raised speculation Japanese authorities would not intervene imminently.

The Kan victory provided "positive yen news," said Joseph Trevisani, chief analyst at FX Solutions in Saddle River, New Jersey. But he added that "83 has no more meaning than the typical round number in dollar/yen. The level to look at is the all-time low," which comes in around 79.75 yen.

The euro traded up 1.06 percent at $1.3015 while the Australian dollar reached a two-year high against the US dollar at $0.9443 up 0.93 percent.

Benchmark 10-year US Treasuries rose 19/32 of a point in price, pushing the yield down to 2.68 percent.

US light sweet crude oil slipped 55 cents to $76.64 per barrel. Spot gold prices rose $24.35 to $1269.30, just off its all-time high.