* U.S. makes late effort to avoid fiscal crisis
* MSCI all-world index near flat, Euro shares down as uncertainty weighs
* Yen hits 2-year low vs dollar before Japan stimulus
* Wall Street expected to open lower
By Marc Jones
LONDON, Dec 28 (Reuters) - World shares sagged and the dollar climbed on Friday before U.S. lawmakers resumed talks on avoiding a fiscal crisis, while expectations that Japan will inject new stimulus into its economy pushed the yen to a two-year low.
President Barack Obama and lawmakers will meet as a New Year deadline looms for reaching a deal to avert massive tax increases and spending cuts which could drag the economy into recession - and others around the world along with it.
Obama and Vice President Joe Biden will hold talks with congressional leaders from the Republican and Democrat parties at the White House at 2000 GMT.
The MSCI all-world share index lost the momentum of an earlier rally in Asian shares to stand almost unchanged at 338.90. Wall Street was expected to open lower.
London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX also flagged after a positive start, with the pan-European FTSEurofirst 300 down 0.4 percent at 1300 GMT, and on track for a small weekly loss.
Going over the "fiscal cliff" - allowing $600 billion of h igher t axe s and lower spending cuts to start coming into force in January - would pr event U.S. debt spilling beyond a $16.4 trillion agreed limit. H owever, a nalysts fear that suc h me asures could wipe as much as 4 percent off the country's economy, if le ft unchecked.
Members of Congress were divided on the odds of success at the U.S. budget talks, but Daiwa Securities economist Emily Nicols said the chances of a deal before the year-end were now slipping.
"Markets in Europe are now down and that is reflecting the U.S situation," she said. "It looks increasingly unlikely that a solution will be found before the end of the year, although markets still expect a deal eventually even if it does go into January."
Earlier, Japan's benchmark Nikkei index hit a 21-month high and the yen fell to a new two-year low versus the dollar as markets prepared for a huge injection of stimulus by the Bank of Japan following the election of a new government.
Finance Minister Taro Aso said he wants the government and central bank to agree on an inflation target in January before the BOJ's next policy meeting and stressed a willingness to intervene in currency markets.
"The Japanese equity market has turned positive, providing good sentiment for global investors, with many making money and putting the money into commodity markets such as the oil market," said Tetsu Emori, a commodity fund manager at Astmax in Tokyo.
With the dollar at 86.64 yen, the Japanese currency has now fallen roughly 10.5 percent against the dollar in 2012, its biggest annual drop since 2005. At the same time the Nikkei share index is up 22 percent for the year.
Uncertainty about the outcome of the fiscal cliff negotiations strengthened the dollar and German government bonds, both seen as safe-haven assets.
In contrast, with markets starting to focus on Italian elections at the end of February, the country's 10-year borrowing costs rose to the highest since October at its first auction for long-term debt to be settled in 2013.
Mirroring equities, the euro gave up early gains to slip back under $1.32. It came as France reported it had managed just 0.1 percent growth in the third quarter.
Despite the tensions over the U.S. budget talks, the mood in financial markets has been improving in recent weeks. Data from emerging economies have shown signs of a pick-up while analysts are hopeful that Europe may also soon bottom out.
Fresh signs that China's economy is improving pushed growth-attuned copper prices as high as $7,955 a tonne, on track for the biggest weekly rise in a month.
A Reuters poll showed economists think China's factory activity probably expanded at its fastest pace in eight months in December.
The U.S. uncertainty weighed on other commodities though. Brent crude was down 0.25 percent at just below $111 a barrel. It is on course for a full-year increase of about 3.6 percent, which would be its smallest gain in four years.
Gold also gave up early gains to drop to $1,658.40 an ounce. However, it looks set to notch its first weekly rise in a month and for the year is up around 6 percent.
"We do expect a ... (U.S. budget) deal to happen at the last minute, but it will be a minimal deal," said Dominic Schnider, an analyst at UBS Wealth Management in Singapore. "I think that should be gold-supportive."