Uncertainty over prospects for economic stimulus measures from the U.S. Federal Reserve pulled world shares lower on Thursday, but the euro edged up after China voiced some support for the debt-laden currency bloc.
A successful Italian bond sale also pointed to growing confidence among investors that the European Central Bank will live up to its words and take measures shortly to tackle the 17-member euro-zone's debt crisis.
But most investors were content to wait for a speech by U.S. Fed Chairman Ben Bernanke at a conference in Jackson Hole, Wyoming, on Friday, which is seen as pivotal to market expectations over the central bank's next move.
Investors and economists have become more sceptical over the past two weeks that the Fed will announce another round of bond buying, or "quantitative easing" (QE), at its mid-September meeting, according to Reuters polls over the last week.
However, the nervous tone of markets guarantees anything the Fed's chief does say about the economic outlook or the prospects for more QE could have a significant impact.
"The risk with Jackson Hole is that unless there are further strong signals of more easing, the market will take it as a disappointment," said Christian Lawrence, currency strategist at Rabobank, adding that this would be positive for the dollar.
The euro was up just 0.1 percent against the dollar at $1.2545, edging towards last week's high of $1.2590.
The single currency gained some support after Chinese Premier Wen Jiabao, who met with German Chancellor Angela Merkel in Beijing on Thursday, said he was confident the euro zone could pull out of its debt crisis and that China would be willing, after a proper risk assessment, to keep buying the region's government debt.
Wen said Beijing would step up talks with the European Union, the ECB and the IMF - also known as the troika - to help struggling euro area nations.
Metals price in 2012: http://link.reuters.com/cag37s
Central bank balance sheets: http://link.reuters.com/jyh34s
EQUITIES RETREAT
Equity markets were in retreat ahead of the Jackson Hole meeting, with signs of flagging growth in the Chinese economy adding to worries about the economic outlook, which has also depressed demand for commodities like iron ore and steel.
"As investors count down the hours to Bernanke's speech at Jackson Hole they are clearly not prepared to take any chances, preferring to look for safe havens where they can be found," said Mike McCudden, head of derivatives at Interactive Investor.
The growth concerns and falling commodity prices sent Asian shares to one-month lows on Thursday, and the main Australian share index dropped 1.2 percent to a two-week low as mining stocks like Rio Tinto
The price of iron ore has fallen nearly 23 percent this month to its lowest level since 2009 and had dropped by a third, or more than $45 per tonne, since July as Chinese steel producers cut their purchases.
MSCI's world equity index, which has edged down over the past seven sessions, was 0.25 percent lower on Thursday at 322.45 points.
U.S. stock index futures also pointed to a slightly lower open on Wall Street later in the day.
The FTSEurofirst 300 index of top European shares was down 0.25 percent at 1,083.49 by 1223 GMT, having fallen 0.2 percent on Wednesday, but trading volume was below average.
ECB WATCHED
European share markets were closely watching developments ahead of an ECB meeting on September 6, where it is expected to announce plans to resume government bond buying to tackle the region's economic crisis, and may consider another rate cut.
Global investors, most of whom do not expect more monetary stimulus from the U.S. Federal reserve this year, have been edging back into equities during August, encouraged by the ECB's plans, a Reuters poll on asset allocation showed on Thursday.
The poll showed investors had trimmed their cash and government securities allocations and bought more stocks and corporate bonds.
Growing expectations of a beefed-up bond-buying programme from the ECB encouraged solid demand at a sale of 7.3 billion euros of new five- and 10-year Italian sovereign bonds on Thursday.
The new 10-year bond, which carried a 5.5 percent coupon, sold at a yield of 5.82 percent and attracted bids worth 1.4 times the 4 billion euros of debt offered.
However, there was only a tepid reaction to the auction in the debt market in recognition of the fact Italy still has to issue a lot of debt this year - up to 30 billion euros alone in September - and is paying a high cost for the funds.
"The fact that with all the speculation about what the ECB is going to do, yields are only 14 basis points lower than at the end of July suggests that investors are still demanding quite high risk premiums to hold Italian debt," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.
