By Richard Leong and Richard Hubbard
NEW YORK/LONDON (Reuters) - U.S. and European shares slipped on Monday as weak economic data from China and worries about Italy following a credit downgrade undermined optimism generated by last week's strong U.S. employment report.
The dollar held on to gains from the payrolls data, trading near a 3-1/2-year high against the yen and a 3-month peak to the euro and keeping pressure on gold and oil prices.
U.S. and German government debt prices held steady, as prices of Italian and other peripheral euro zone bonds fell in the wake of a cut in Italy's credit rating by Fitch Ratings late on Friday.
"I think the Italian downgrade is acting as a bit of a wake-up call," Alastair Winter, chief economist at investment bank Daniel Stewart & Co. in London.
Fitch cut Italy's rating one notch and gave it a negative outlook, citing political uncertainty following last month's election, a protracted recession and high levels of debt.
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Still, some analysts still see appetite for stocks, propelling them to further gains.
"The market may advance more slowly than in previous weeks, but there are numerous bullish signs, including the fact that hedge funds continue to buy into the market," said Todd Salamone, director of research at Schaeffer's Investment Research in Cincinnati, Ohio.
Shortly after the U.S. stock market opened, the Dow Jones industrial average was down 1.27 points, or 0.01 percent, at 14,395.80. The Standard & Poor's 500 Index was down 1.24 points, or 0.08 percent, at 1,549.94. The Nasdaq Composite Index was down 5.62 points, or 0.17 percent, at 3,238.74.
Europe's broad FTSEurofirst 300 index was 0.15 percent lower at 1,193.39 points, down from September 2008 peaks hit last week, as the Italy rating cut and weak Chinese factory output data undermined sentiment.
MSCI's world equity index was little changed at 360.2 points, holding near its mid-2008 highs.
China reported over the weekend that annual industrial production for January and February combined rose 9.9 percent, the lowest since October 2012, while its consumer price index jumped more than expected last month.
Winter said the combination of weak industrial data from China and the renewed spotlight on the euro zone's problems caused by the Italian downgrade may have made investors wary of pushing prices higher after the strong gains so far in March.
Ten-year Italian government bond yields rose 7 basis points to 4.66 percent, while the main futures based on the debt was down 0.5 percent at 108.83.
In light of Italian downgrade, investors demanded higher compensation to hold the country's debt. The yield gap between 10-year Italian debt and safer German bonds widened to 320 basis points, and the cost of insuring Italy's debt against default also rose.
Fitch cut Italy's debt to BBB-plus from A-minus and gave the rating a negative outlook, raising the risk its next ratings change will be a further downgrade.
DOLLAR DOMINATES
In the foreign exchange markets, the dollar added to the gains it made against most major currencies after Friday's strong payrolls data boosted hopes of a steady economic recovery this year.
The data has also fuelled speculation the U.S. Federal Reserve could back off from its ultra-loose monetary policy sooner than anticipated, and this added to the currency's appeal as traders speculated about looser policies by other major central banks ahead.
The dollar firmed 0.1 percent at 82.803 against a basket of major currencies, not far from the seven-month high of 82.92 hit on Friday, having risen nearly 5 percent since early February.
The euro was flat at $1.2993, not far from a three-month low of $1.2955 also hit on Friday, while the yen was also little changed against the greenback at 96.12 yen.
Brent crude fell 73 cents or 0.66 percent to $110.12 a barrel, after ending last week marginally higher to snap three straight weekly losses. U.S. oil futures declined 57 cents or 0.6 percent to $91.38.
Spot gold was steady at $1,579.30 an ounce on Monday and was seen staying within a range of $1,560 to $1,590 an ounce.
(Additional reporting by Angela Moon in New York and David Brett, Anooja Debnath, and Clara Denina in London; Editing by Chizu Nomiyama)