By Nigel Stephenson
LONDON (Reuters) - European shares held steady and the euro languished near four-month lows against the dollar on Thursday, with the common currency hostage to expectations the European Central Bank will ease monetary policy to support a fragile economic recovery.
In anticipation of lower interest rates, euro zone government bond yields fell. This helped push the premium that two-year U.S. government debt offers over euro zone benchmarks to its widest since 2007.
In one of its most keenly awaited decisions in years, the ECB is expected on Thursday to impose negative interest rates.
Economists in a Reuters poll expected the ECB to cut its main refinancing rate to 0.10 percent from 0.25 percent and cut its overnight deposit rate to -0.10 percent from zero. It may also launch a loan programme to banks to encourage lending.
The consensus view that the central bank will act is so strong that analysts see great scope for market disappointment if it fails to meet these high expectations.
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ECB President Mario Draghi has expressed concern that a strong euro is contributing to a slowing of inflation that could derail the recovery in the 18-country euro zone.
Steve Barrow, G10 strategist at Standard Bank, said in a note ECB officials would "have their fingers crossed" for a weaker euro but that the outcome was not certain.
"Achieving a weaker euro means fighting two enemies: economic fundamentals and market lethargy. Put the two together and the chances of significant success for the ECB seem limited," he said.
The euro held steady at $1.3600. It has fallen some 4 cents since the ECB's May meeting, hitting $1.3588 a week ago.
DOWNSIDE RISKS
The pan-European FTSEurofirst 300 share index was up 0.03 percent at 0800 GMT in very low volumes as investors moved to the sidelines before the ECB meeting.
"Stocks seem capped at the moment and risks are mostly on the downside if the ECB doesn't deliver. It's very difficult to predict what the new measures will be. It's best to be neutral equities right now," said Arnaud Scarpaci, fund manager at Montaigne Capital in Paris.
Also on Thursday, leaders of the world's leading industrial countries were meeting Paris for talks on the economy.
The talks are expected to reiterate that all members of the Group of Seven must focus on sustaining economic recovery and tightening regulations to prevent banking sector problems.
Asian shares edged higher, shrugging off a fall in HSBC/Markit's measure of Chinese service sector activity. It dipped to 50.7 in May from 51.4 in April but stayed above the 50-point level that divides growth from contraction.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.06 percent.
Japan's Nikkei ended 0.08 percent higher at 15,079, a near three-month closing high as yen weakness lifted the mood.
Emerging markets shares measured by MSCI were up 0.2 percent.
Trading volumes on Wall Street were light before the ECB meeting. The S&P 500 index edged up to a new record close as investors brushed off weaker-than-expected jobs data and focused on an acceleration in service-sector growth [.N]
The dollar index. which measures the greenback against a currency basket, held steady. The U.S. currency dipped 0.2 percent to 102.53 yen.
U.S. Treasury yields came off overnight highs as investors took profit on a recent rally before the ECB meeting. Ten-year yields were last at 2.59 percent.
In commodity markets, copper edged up after suffering its biggest one-day fall since mid-April amid jitters about the impact on financing deals from a probe at a Chinese port.
Benchmark copper was changing hands at $6,808 a tonne, having shed 1.2 percent on Wednesday.
Gold idled at $1,243 an ounce, still pinned near a recent four-month trough of $1,240.61.
Brent crude eased to $108.14 a barrel on reduced tension in Ukraine and ample supply in the United States.
(Additional reporting by Wayne Cole in Sydney, Jamie McGeever and Emelia Sithole-Matarise in London and Blaise Robinson in Paris; Editing by Gareth Jones)