By Marc Jones
LONDON (Reuters) - A three-day sell-off in world stocks slowed on Tuesday as investors settled into position for the start of U.S. earnings season and gains in China added to signs of revived emerging-market demand.
European shares and bonds were both dragged down by ongoing caution, amid renewed tension in Ukraine and signs the European Central Bank may not be as eager to begin large-scale stimulus as had been hoped.
After some early resistance, the region's main bourses buckled, leaving London <.FTSE>, Paris <.FCHI> and Frankfurt <.GDAXI> 1 percent lower and recent top performing Spanish <.IBEX> and Portuguese <.PSI20> indexes down more than 2 percent.
Euro zone bond yields, a proxy for government borrowing costs, rose . The euro strengthened to its highest in a almost a week.
"The QE (quantitative easing) talk continues to be very much in focus in Europe," said Jan von Gerich, the chief developed markets strategist at Nordea in Helsinki. "The ECB is clearly tempering the expectations, and I think the Ukraine news is also contributing to the weakness."
Earlier, Asian stocks had managed to shrug off the gloom of a third day of sizable losses on Wall Street. Chinese shares <.CSI300>, particularly those of banks, rose on stimulus hopes and helped to take MSCI's benchmark emerging market index <.MSCIEF> to its highest since mid-December.
Emerging markets have rebounded sharply in the past two weeks. Investors appeared to have largely put aside the worries about geopolitics, slowing U.S. stimulus and China's stuttering economy that had fuelled a turbulent start to the year.
But Japan's Nikkei <.N225> fell 1.4 percent on concern over a decline by global tech stocks. The yen also rose as the Bank of Japan kept its policy steady on Tuesday and offered little to suggest more stimulus was likely in the near term.
The latest Wall Street shakeout comes as investors prepare for the first-quarter corporate earning season, which begins later when resources giant Alcoa reports results.
All three of the major U.S. indexes - the S&P 500, Dow Jones Industrial Average and tech-focused Nasdaq - were expected to see little in the way of a rebound when trading resumes.
Rising tensions in Ukraine also tempered investor appetite for risk. Police detained 70 people occupying a regional administration building in eastern Ukraine overnight, but pro-Moscow protesters held out in a standoff in two other cities, in what Kiev called a Russian-led plan to divide the country.
Against the yen, the dollar fell about 0.5 percent to 102.56 yen, well off the 2 1/2-month high of 104.13 yen it reached on Friday.
The euro also bumped lower, down about 0.4 percent to 141.15 yen. But the cooling QE talk pushed it up against the dollar at 1.3769, rebounding from Friday's five-week low of $1.3672.
After ECB policymakers aroused expectations at their policy meeting last week, some of the more conservative members suggested on Monday the bank was not yet ready to begin the kind of mass asset-buying used in the United States, Japan and UK. [ID:nL6N0MZ42G]
"QE is definitely something that the ECB has been discussing, but we still think the bar to full blown-purchases of government bonds is still very, very high," said Vasileios Gkionakis Global head of FX strategy at UniCredit in London.
GOLD, OIL FIRM
World financial powers are set to gather this week at the IMF's Spring Meeting. Washington engaged in some pre-meeting jockeying with China, warning Beijing that recent depreciation of the Chinese currency could raise "serious concerns".
Much of the focus is likely to concentrate on the Russia's moves into Ukraine. They are being met with the threat of stronger sanctions from the West, though Russian stocks <.MCX> and the ruble seemed largely unconcerned on Tuesday.
In commodity markets, safe-haven gold was trading around two-week highs, up about 1.2 percent from the previous session at $1,311.45 an ounce.
U.S. crude for May gained about 0.9 percent to $101.35 a barrel, pushed up by the renewed tensions over Ukraine, a major supply route for Russian gas to Europe. But the rise was capped by expectations U.S. crude oil stocks were building up.
Brent rose 0.5 percent to $106.35 a barrel.
(Reporting by Marc Jones; Editing by Larry King)