* European shares dip after Italian downgrade
* Dollar near 3-1/2-year high vs yen on U.S. jobs growth
* Oil prices fall as weak Chinese data dents demand
* Italian, peripheral debt prices weaken on Italy worries
By Richard Leong and Richard Hubbard
NEW YORK/LONDON, March 11 European stock prices dipped on Monday as weak economic data from China and worries about Italy following a credit downgrade undermined optimism generated by last week's strong U.S. employment report.
U.S. stocks were little changed, while a measure of global equities edged higher.
The dollar clung to gains from the payrolls data, trading near a 3-1/2-year high against the yen and a 3-month peak versus the euro and keeping pressure on gold and oil prices.
U.S. and German government debt prices held steady as prices of Italian and other peripheral euro zone bonds fell in the wake of a cut in Italy's credit rating by Fitch Ratings late on Friday.
The benchmark 10-year U.S. Treasury note was down 2/32, the yield at 2.0559 percent.
"I think the Italian downgrade is acting as a bit of a wake-up call," said Alastair Winter, chief economist at investment bank Daniel Stewart & Co in London.
Fitch cut Italy's rating one notch and gave it a negative outlook, citing political uncertainty following last month's election, a protracted recession and high levels of debt.
Still, some analysts see appetite for stocks, propelling them to further gains.
"There's a lot of pent-up demand and people seem to be buying on weakness," said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio.
U.S. and European shares proved resilient, paring early losses and climbing within striking distance of highs set last week. The benchmark Standard & Poor's 500 index was only 1 percent from its all-time closing peak.
In late-morning trading, the Dow Jones industrial average was up 16.86 points, or 0.12 percent, at 14,413.93. The Standard & Poor's 500 Index was up 0.72 points, or 0.05 percent, at 1,551.90. The Nasdaq Composite Index was down 2.44 points, or 0.08 percent, at 3,241.93.
Europe's broad FTSEurofirst 300 index was 0.15 percent lower at 1,193.43, down from September 2008 peaks hit last week, as the Italy rating cut and weak Chinese factory output data undermined sentiment.
MSCI's world equity index was up 0.18 percent at 360.77, holding near its mid-2008 highs and buoyed by a 0.53 percent gain of Tokyo's Nikkei earlier.
China reported over the weekend that annual industrial production for January and February combined rose 9.9 percent, the lowest 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.
Ten-year Italian government bond yields rose 7 basis points to 4.66 percent and the 10-year Spanish sovereign debt yield was marginally higher at 4.78 percent.
In light of Italian downgrade, investors demanded higher compensation to hold the country's debt. The yield gap between 10-year Italian debt 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.
In the foreign exchange markets, the dollar added to gains it made against most major currencies after Friday's strong payrolls data boosted hopes of a steady U.S. economic recovery this year.
The data has also fueled speculation the U.S. Federal Reserve could back off from its ultra-loose monetary policy sooner than anticipated, and this added to the currency's appeal as traders speculated about looser policies by other major central banks ahead.
The dollar was steady at 82.677 against a basket of major currencies, not far from the seven-month high of 82.92 hit on Friday. The currency has risen nearly 5 percent since early February.
Some analysts expect the greenback to struggle to make further advances, at least in the near term. "So while we would not be aggressive dollar sellers, we would look for a correction to dollar strength from here, and 83 on the dollar index is likely to prove difficult to break," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The euro was flat at $1.3013, not far from a three-month low of $1.2955 also hit on Friday, while the yen was also little changed against the greenback at 96.05 yen.
Brent crude fell 84 cents or 0.76 percent to $110.01 a barrel, after ending last week marginally higher to snap three straight weekly losses. U.S. oil futures declined 73 cents or 0.8 percent to $91.22.
Spot gold edged up 0.07 percent at $1,578.54 an ounce and was seen staying within a range of $1,560 to $1,590 an ounce.
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