Europe bucks global stock rally

LONDON (Reuters) - World stocks worked on their 10th consecutive session of gains on Wednesday, but European shares were breaking their winning streak and Wall Street looked set for a poor start.

The dollar's recent drive upwards faltered.

Investor sentiment has been boosted recently by the promise of a massive U.S. government spending and tax cut plan from President-elect Barack Obama to stimulate the world's largest economy.

Cheap share prices stemming from last year's falls are also proving attractive.

The mood has taken many stock market indexes to two-month highs.

"We are on the precipice of a new era, with Obama about to take the reins, and the stimulus packages hopefully impacting on the markets in the next few months," said Chris Hossain, senior sales manager at ODL Securities.

MSCI's all-country world stock index .MIWD00000PUS, a benchmark for many investors, was up 0.6 percent. It has gained 26 percent since hitting a low in November.

Its emerging market counterpart .MSCIEF hit two-month highs in Asian trade but later turned lower.

Japan's Nikkei share average .N225 closed up 1.7 percent, boosted by shares of small lenders after a newspaper report said the government may inject money into regional banks.

But the mood failed to carry over into Europe, where investors reversed a six-session rising trend in part because of energy company shares falling on lower crude prices.

The FTSEurofirst 300 .FTEU3 index of top European shares was down 0.4 percent, off its lows, after finishing 1.9 percent higher on Tuesday, its highest closing level since November 10.

Crude oil was steady under $49 a barrel, after weak U.S. economic data sparked a bout of profit-taking overnight, outweighing escalating tensions in the Middle East and widening supply cuts from the Russian gas row.

BUCKING A TREND

The dollar fell broadly, with its recent run to one-month high's against the euro and yen losing steam.

As well as economic worries, the speed of the dollar's recent rise makes it vulnerable to profit-taking.

"The dollar rally is showing signs of fatigue. Maybe there is a bit of nervousness ahead of the U.S. non-farm payrolls on Friday," said Audrey Childe-Freeman, senior currency strategist at Brown-Brothers Harriman in London.

The euro was up 0.7 percent on the day at $1.3608, having dipped to a one-month low of $1.3308 on Tuesday according to Reuters data.

The dollar fell 0.6 percent against a basket of six major currencies.

Longer-dated euro zone government debt prices fell after a disappointingly weak German 10-year bond auction, but persistent expectations of interest rate cuts helped shore up shorter-dated paper.

That saw the 2-10 year yield curve steepen to 150 basis points, just a whisker off the 2008 peak of around 151 basis points. Further steepening of the curve would take it back to levels last seen in late 2004.

The 10-year Bunds yield climbed 4.8 basis points to 3.204 percent, while the two-year Schatz yield eased 4.5 basis points to 1.712 percent.

(Additional reporting by Atul Prakash, Ian Chua and Veronica Brown; Editing by Andy Bruce)