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GLOBAL MARKETS-European share rally halted as ECB hopes fade
* Doubts rise over prospects for bold central bank action
* European shares end three-day rally, on course for strong July
* Oil hovers near $106 a barrel after Chinese hint at growth measures
* Euro edges higher versus dollar, awaiting ECB meeting
By Richard Hubbard
LONDON, July 31 (Reuters) - European shares ended a three-day rally and oil dipped on Tuesday as investors turned cautious about the likely outcome of central bank policy meetings in the United States and Europe this week, despite mounting evidence of a global slowdown.
Markets for riskier assets like equities and oil have rallied strongly since the head of the European Central Bank raised expectations of bold action at its meeting on Thursday by pledging last week to do all he could to protect the euro.
Signs of flagging growth in the U.S. had also raised some hopes the Federal Reserve, which begins a two-day rate setting meeting later on Tuesday, might respond, though most economists do not expect any further easing before September.
"The markets have run ahead of themselves. And I think certainly the ECB and the Federal Reserve will hold back from pumping in more money at this point in time," said Manoj Ladwa, head of trading at TJ Markets.
European shares, which were heading for their best month since October after soaring more than 5 percent in the last three sessions, went into reverse, with the FTSE Eurofirst 300 index down 0.3 percent at 1,069.50 points.
"Today will probably be a quiet last day of the month. Everybody is waiting for Thursday to see if (ECB President Mario) Draghi can deliver," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.
"He'd better pull a big rabbit out of his hat."
However, U.S. shares appeared poised for a firmer start on Wall Street, building on their best year-to-date performance since 2003.
Investors in European shares were also given pause by weaker than expected earnings from several major banks, where the region's ongoing debt crisis has hurt revenues.
Deutsche Bank said its second-quarter profit had been badly affected by the crisis, dropping 63 percent in the second quarter from a year earlier.
"The European sovereign debt crisis continues to weigh on investor confidence and client activity across the bank," Deutsche Bank's co-Chief Executives Anshu Jain and Juergen Fitschen said in a statement.
The earnings season has proved a damp squib for many European companies, reflecting the harsh economic environment.
Not including Tuesday's results, nearly half the companies due to report earnings have done so, and 47 percent have missed forecasts, with second-quarter year-on-year profit growth expected to have contracted by more than 20 percent once all companies have released their results.
In the U.S. it's been a slightly better story. With 294 of S&P 500 companies having reported earnings, 67 percent have beaten analysts' expectations, with another 10.9 percent in line with forecasts and 22.1 percent below.
In a typical quarter 62 percent of companies beat estimates, 17 percent match and 20 percent miss estimates, according to Thomson Reuters data.
ECB DISAPPOINTMENT RISK
Meanwhile, the euro managed a slight gain against the dollar on month-end demand, but it stayed below three-week highs as doubts grew that the ECB would meet the market's high expectations of bold steps to combat the debt crisis.
"There is a clear danger that expectations might be too high ... (Draghi's) got to put his money where his mouth is, as there is a risk of disappointment around Thursday," said Nick Parsons, head of research for Europe at National Australia Bank in London.
The single currency rose 0.25 percent against the dollar to $1.2285, well below the high of $1.2390 hit last Friday.
The safe-haven German bond market reflected the growing fears that whatever ECB President Mario Draghi says at the bank's policymaking meeting is likely to disappoint markets looking for meat on the bones of his pledge to defend the euro.
German 10-year cash yields were 4 basis points lower at 1.34 percent.
"There's a bit of scepticism and wondering if maybe Draghi over-promised. Thursday is going to be very interesting to see what's actually said," one bond trader said.
Commodity markets are increasingly concerned about the health of the global economy as Europe's sovereign debt crisis, a slowing China and sluggish activity in the United States weigh on demand.
Major Asian exporters Japan, South Korea and Taiwan added to the deepening signs of economic stress on Tuesday.
A purchasing managers' report suggested Japan's factory sector is shrinking at its fastest pace since last year's earthquake, and industrial output in South Korea fell four times further than expected.
Taiwan sliced a full percentage point off its official forecast for 2012 economic growth, the seventh downgrade since last August.
But commodities and the growth-linked Australian dollar got some support from an official Xinhua news agency report quoting Chinese Premier Wen Jiabao as saying that China would increase fiscal and monetary policy support to the economy in the second half of the year.
Brent crude was down 7 cents at $106.13 a barrel, having dropped to a low of $105.27 before Wen's comments. U.S. crude was up 22 cents at $90.00 a barrel.
Brent has had a strong July, rising 8 percent for its biggest monthly gain since February.
Spot gold was up 0.2 percent at $1,623.31 an ounce in muted trade ahead of the ECB meeting, with prices on track for a 1.5 percent gain this month, its second straight monthly rise.
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