By Jamie McGeever
LONDON (Reuters) - European stocks fell on Friday and the euro rose to its highest level this year after euro zone inflation unexpectedly held steady this month, cooling growing expectations the European Central Bank might ease monetary policy as early as next week.
The "flash" estimate of annual consumer price inflation in February was 0.8 percent. Economists had forecast it would slip closer to deflationary territory, at 0.7 percent.
That followed the biggest weekly fall in China's currency for two decades and came ahead of the first estimate later in the day of U.S. economic growth in the fourth quarter of last year.
Investors also kept close tabs on Ukraine, where the central bank capped bank withdrawals and banned trading of certain currency contracts, as the acting President dismissed the army chief of staff and Russian helicopters were dispatched to Crimea.
Diminishing prospects of an interest rate cut by the ECB as early as next week was the biggest driver, though. Banking stocks fell, the euro climbed above $1.38 and government bond yields rose from their lows earlier in the session.
"There could be some disappointment on the basis that the ECB could step back from any action that it could have been considering next week to see how things pan out," said Keith Bowman, equity analyst at Hargreaves Lansdown. "There are still a lot of nerves in the background, particularly with regard to the geopolitical situation."
At 1250 GMT the FTSEurofirst 300 index <.FTEU3> was down 0.4 percent at 1,340.30 points, having traded in positive territory until the inflation data release. The index is on track for a gain of almost 4 percent in February.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose a slender 0.1 percent for a 4 percent gain on the month. Tokyo's Nikkei stock average <.N225> skidded 0.5 percent.
The euro was 0.7 percent higher on the day at $1.3805, rising above $1.38 for the first time this year. The dollar pared its losses against the Japanese yen to 101.90 yen.
CHINA AND UKRAINE
Earlier in the day, China's yuan posted its biggest weekly loss since China introduced its own foreign exchange market in 1994, as the central bank ramped up its intervention to weaken the currency ahead of a key government meeting.
"The PBOC (People's Bank of China) actions have triggered a response that we suspect is not wholly undesired by officials, which is unwinding of some of the highly speculative and leveraged plays," wrote Brown Brothers Harriman in a note on Friday.
Yet another day of fast-moving and dramatic events in Ukraine encouraged stock market investors to play defensively.
Armed men stormed the regional parliament and seized the airport in region, which is mainly ethnic Russian. Ukraine's acting president dismissed the head of the armed forces general staff, meanwhile, and the central bank imposed caps on the withdrawal of foreign currency from the country's banks.
The central bank also banned non-deliverable forward contracts for foreign currencies as part of measures it announced on Friday to shore up the hryvnia currency, which then recovered from the previous day's record low.
The unrest initially prompted investors to seek the safety of U.S. Treasuries, pushing yields to more than three-week lows in Asia of 2.638 percent. That rose to 2.67 percent after the euro zone inflation data, however.
Investors are now looking to U.S. gross domestic product figures at 1330 GMT, which are expected to show that growth slowed in the final three months of last year to an annual rate of 2.5 percent from 3.2 percent.
(Reporting by Jamie McGeever, additional reporting by Atul Prakash in London.)