* European shares edge lower after Italian downgrade
* U.S. stocks poised to retreat from record highs
* Dollar near 3-1/2-year high vs yen on U.S. jobs growth
* Oil, copper lower as Chinese data dents demand
LONDON, March 11 (Reuters) - European shares edged away from 4-1/2-year highs on Monday as weak economic data from China and worries about Italy undermined the optimism generated by last week's strong U.S. jobs numbers.
The dollar held onto gains from the payrolls data, trading near a 3-1/2-year high against the yen and a 3-month peak to the euro and keeping pressure on gold and oil.
Europe's broad FTSEurofirst 300 index had fallen 0.4 percent by midday, down from September 2008 peaks hit last week, as a cut in Italy's credit rating and weak Chinese factory output data undermined sentiment.
The cautious mood also looked to set to infect Wall Street, with U.S. stock index futures pointing to a lower open.
"I think the Italian downgrade is acting as a bit of a wake up call," Alastair Winter, chief economist at investment bank Daniel Stewart & Co.
Fitch cut Italy's rating one notch and gave it a negative outlook late on Friday, citing political uncertainty following last month's election, a protracted recession and high levels of debt.
The ratings cut and fresh data showing Italy's economy contracted a hefty 2.8 percent last year saw Italian shares drop 0.7 percent and also hit Spain, where the main equity index, the IBEX, sank by 1.3 percent.
"I think the downgrade has caused a ripple in the Italian market, which has been very calm since the election two weeks ago," said Heinz-Gerd Sonnenschein, equity markets strategist at Deutsche Postbank.
The bigger euro zone market indexes like Paris's CAC-40 and Frankfurt's DAX were 0.4 and 0.25 percent lower, respectively, while the main euro zone blue chip index, the Euro STOXX50E dropped 0.6 percent.
China reported over the weekend that annual industrial production for January and February combined rose 9.9 percent - the lowest level since October 2012 - while its consumer price index jumped more than expected last month.
Winter said the combination of weak industrial data from China and the renewed spotlight on the euro zone's problems caused by the Italian downgrade may have made investors wary of pushing prices higher after the strong gains so far in March.
The benchmark Euro STOXX50E has outperformed the more widely watched Dow Jones Industrial index this month, even as the U.S. benchmark has been posting record highs.
MSCI's world equity index was little changed at 360.4 points holding near its mid-2008 highs.
The Italian downgrade also sent tremors through Europe's sovereign bond market with investors worried about its effect on a bond sale for up to 7.25 billion euros ($9.4 billion) of new debt on Wednesday.
Ten-year Italian government bond yields rose 7 basis points to 4.66 percent, while the main futures based on the debt was down 0.5 percent at 108.83.
The yield gap between 10-year Italian and safer German bonds widened to 320 basis points, and the cost of insuring Italy's debt against default also rose.
Fitch cut Italy's debt to BBB-plus from A-minus and gave the rating a negative outlook, raising the risk its next ratings change will be a further downgrade.
"The downgrade in itself is limited to one notch, but the negative outlook means that should the structural reform come to a stop and the recession deepen further then more downgrades are in the pipeline," Nicola Marinelli, fund manager at Glendevon King Asset Management, said.
Foreign exchange markets were focused on the dollar, which has gained sharply against a broad range of currencies since Friday's strong payrolls data boosted hopes of a steady economic recovery this year.
The data has also fuelled speculation the U.S. Federal Reserve could back off from its ultra-loose monetary policy sooner than anticipated and this adds to the currency's appeal as other major central banks hint at looser polices ahead.
"There are expectations that the Fed could consider reducing the size of its asset purchases in the second half of the year and this could help the dollar," said Valentin Marinov, head of European G10 FX strategy at Citi.
The dollar was steady at 82.74 against a basket of major currencies, not far from the seven-month high of 82.92 hit on Friday, having risen nearly 5 percent since early February.
The euro dipped 0.1 percent to $1.2995, not far from a three-month low of $1.2955 also hit on Friday, while the yen was also 0.1 percent lower against the greenback.
The gains in the dollar and the weak Chinese industrial production data weighed on commodity markets, despite the latest outlook from Paris-based Organisation for Economic Cooperation and Development pointing to better growth ahead.
The OECD said its latest monthly leading indicator for the world's 33 major industrialised nations was at its highest level since June 2011.
Brent crude fell 54 cents to $110.30 a barrel, after ending last week marginally higher to snap three straight weekly losses. U.S. oil slipped 10 cents to $91.85, after ending 39 cents higher on Friday.
Copper, which is closely linked to the outlook for demand from China, dropped 0.5 percent to $7,710 a tonne on the London Metal Exchange.
Gold was little changed and seen staying with a narrow range all week while investors keep an eye on the dollar and monitor speculation abut the Fed's next move in monetary policy.
The Fed's aggressive policy easing has helped push gold to record highs in recent years as investors sought a hedge against the prospect of rising inflation. But as evidence of an economic recovery build, fears grow about how long this policy will last, sapping the interest in gold.
Spot gold was at $1,577.60 an ounce on Monday and seen staying within a range of $1,560 to $1,590 an ounce.