* Headlines on Donetsk counter hopes of swift resolution of crisis
* Yen gains against euro, dollar
* German stock market down half a percent
* U.S. corporate results offer more upbeat message
By Patrick Graham
LONDON, July 21 European stock markets lost more ground on Monday, with optimism over U.S. corporate results drowned out by concern over the situation in Ukraine and the potential for growth-sapping sanctions.
A step-up in U.S. and British rhetoric over Russia's role in Ukraine after last week's downing of a Malaysian airliner had offered hope for some investors that stronger action by Western powers could push the conflict toward a peaceful conclusion.
But reports that Ukrainian forces were moving into the eastern city of Donetsk added to concerns that the conflict in one of Europe's biggest countries instead may escalate further.
"The Ukraine situation has the potential to get ever worse," said Hantec Markets analyst Richard Perry, referring to the reports out of Donetsk at the start of European trading.
"Anyone who believes this step-up in rhetoric will lead to some kind of deescalation is being complacent."
European benchmarks all lost ground with Germany's DAX index more than half a percent lower . U.S. markets were set to open 0.1-0.2 percent lower.
The yen, traditionally a beneficiary of concerns over geopolitical risks for markets, gained as much as 0.3 percent against the euro before cooling off.
Asian markets - excluding Japan, which was closed for a holiday - had gained 0.3 percent on the back of a strong finish for Wall Street on Friday and hopes for another round of upbeat U.S. corporate earnings this week.
Germany and other European Union members have trodden a more cautious line on moves against Russia than the United States, mindful of the damage an exchange of sanctions with one of their main energy providers could do to Europe's economy.
Any limitations on trade would be liable to hurt businesses, with Germany and its strong ties with the Russian economy a particular concern.
"The proximity to the Ukraine crisis does cause European investors to be a bit more circumspect over the issues there, while Wall Street is more distant and seems to be able to push on regardless," said Jeremy Batstone-Carr, an analyst at Charles Stanley in London.
Shocks to the system from Ukraine and Israel's ground invasion of Gaza come at a time when markets have been digesting conflicting economic signals from either side of the Atlantic.
In Europe, economic data has been mixed and troubles at Portugal's biggest bank have underlined worries that the rally in European shares may be overdone in the context of the decade of fiscal retrenchment still ahead for many countries.
But in the United States, Thomson Reuters data showed that of 82 companies in the S&P 500 which had reported earnings through Friday morning, 68 percent beat Wall Street's expectations. That was roughly in line with the 67 percent average for the past four quarters and above the 63 percent average since 1994.
U.S. 10-year yields were steady at 2.48 percent on Monday, while German bunds were yielding just 1.15 percent having neared all-time lows.
Crude oil prices were flat to lower after enjoying a brief rally last week. Brent fell 18 cents to $107.07 a barrel. U.S. crude was roughly unchanged at $103.14 a barrel.
Gold prices steadied above $1,300 an ounce. (Editing by Susan Fenton)