By Richard Hubbard
LONDON (Reuters) - European shares, the euro and oil all edged lower on Monday as political stalemate in Italy and the U.S. and China's plans for tighter controls on its property sector exacerbated worries about the global growth outlook.
The lack of progress in forming a new government in Rome over the weekend put the focus on Italy where the main share index tumbled 1.24 percent and Italian 10-year bond yields gained six basis points to 4.85 percent.
Analysts said there were growing concerns that the political stalemate made it difficult for the European Central Bank to provide support to Italy if the government were to struggle to fund itself.
"If the Italians don't have a government (ECB president Mario) Draghi, who said he would do whatever it takes, cant help them," said Alastair Winter, chief economist at Daniel Stewart.
The uncertainty in Italy has caused investor sentiment across the euro zone to fall sharply in March according to the latest Sentix index, ending a six month trend of improvement which had fuelled hopes of a region-wide recovery.
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While this also weighed on the single currency, traders said speculation that economic weakness across the euro zone will see the European Central Bank cut rates at its meeting on Thursday was mainly responsible for driving the common currency lower.
"Draghi could be more dovish and there could be a rate cut this week. If not, he could signal something is in the offing," said Jane Foley, senior currency strategist at Rabobank.
The euro was down 0.1 percent at $1.2985, just above Friday's 11-week low of $1.2966.
UK WEAKENS
Meanwhile Britain's pound fell to near a 2-1/2 year low against the dollar just above $1.50 after a weaker-than-expected survey of British construction activity added to evidence the economy may be sliding into another recession.
The data has increased the likelihood that Bank of England Governor Mervyn King will get his wish for additional monetary stimulus at this week's policy setting meeting.
"The construction PMI today was quite weak, but the really big one is the services PMI which comes tomorrow and if that comes in weak as well it would increase the possibility of further action at this week's BoE meeting," said Ian Stannard, Head of European FX Strategy at Morgan Stanley.
The latest slide left sterling just above Friday's July 2010 low of $1.4998.
Currency markets are also looking ahead to rate-setting meetings being held by central banks in Japan, Canada and Australia as evidence mounts of weaker global growth.
The market's fears have grown as broad U.S. spending cuts that automatically kicked in on Friday threaten to dampen growth in the world's largest economy, while China on Monday moved to slow activity in its property markets.
MSCI world equity index was down around 0.25 percent on Monday at the start of its fifth consecutive week in the red.
European shares opened around 0.35 percent lower with London's FTSE 100 index, Paris's CAC-40 and Frankfurt's DAX around 0.5 percent lower.
A fall in U.S. stock futures also pointed to a weak Wall Street start. The futures contract for the S&P 500 SPc1 fell 0.3 percent, while the Dow Jones DJc1 futures contract retreated 0.4 percent and Nasdaq 100 NDc1 futures shed 0.2 percent.
RISK RETREAT
Recent weak economic data from Europe and China have been weighing on all the major riskier asset markets, which had gained sharply in the first two months of the year on hopes of a gradual global economic recovery this year.
"The worry is, given how much markets have rallied in January and February, we might now have an excuse to take money off the table," said Alpesh Patel, a founder of fund managers Praefinium Partners.
The political stalemate in Italy, and the economic worries have supported safe-haven German government bonds.
Bund futures were slightly firmer on Monday at 145.50, having risen almost two full points last week.
Earlier MSCI's broadest index of Asia-Pacific shares outside Japan tumbled 1.7 percent to a nine-week low after China said it was tightening rules over lending for property purchases.
Data also showed growth in China's increasingly important services sector expanded at its slowest pace in five months in February, reinforcing the view that the recovery in the world's second-largest economy remains modest. China's factory growth also cooled to multi-month lows in February.
Meanwhile concerns about the negative economic impact from the U.S. spending cuts weighed on U.S. crude, which fell 0.15 percent to $90.50 a barrel. Brent was little changed at $110.50.
President Barack Obama and Congress remain deadlocked over how to resolve the latest fiscal crisis although there were signs a compromise was being worked on.
Republican leaders on Sunday promised moves to avoid a government shutdown on March 27, when funding runs out for most federal programs while President Obama raised anew the issue of cutting entitlements which has been a key stumbling bloc.
(Editing by Peter Graff)