(Changes in para 12 to clarify that German court ruling on ECB bond programme was deferred to European Court of Justice)
* European shares regain ground, Wall St up
* US short-term yields steady after touching 6-mth high
* Gold near 5-week low as dollar edges higher
* China stimulus hopes support emerging market shares
By Marc Jones
LONDON, March 25 Growing speculation that China may take steps to bolster growth, and efforts by the West to draw a provisional line under the Ukraine crisis, helped lift share and commodity markets out of their recent slump on Tuesday.
Wall Street clawed back the ground it had lost on Monday as trading resumed while European stocks were up almost 1.5 percent and on course for their biggest rise in almost a month.
Investors' spirits had brightened after a meeting of Western leaders ended with little more than fist-shaking at Russia and news emerged that Moscow and Kiev's foreign ministers had held an impromptu first meeting.
Adding to the upbeat mood was talk China may launch fresh stimulus to keep up the pace of its economic growth, as well as an apparent softening of the German Bundesbank's stance on the once-taboo subject of Federal-Reserve style asset purchases by the ECB.
"I think there is a perception that China will look to do some more stimulus," said Michael Hewson, an analyst at CMC Markets. "Personally I think those expectations are way overdone but if the market believes it, then that is all that matters."
On Wall Street, the Dow Jones Industrial and S&P 500 both added 0.7 percent in early trade though investors continued to watch global issues with caution.
While U.S. business is much less exposed to the region than European companies, market participants are concerned about the fallout from any escalation in what is already the biggest confrontation between the United States and Russia since the Cold War.
"You have a slightly improving macroeconomic picture but on the flip side you have the geopolitical tensions," added Hewson.
While equity investors sensed the opportunity to snap up bargains following the recent sell-off, currency and bond market moves were more modest.
Many of the recent trends continued, however. The dollar moved higher again most major currencies while the euro and yen were back under pressure along with a number of key emerging market currencies.
The euro dropped back under $1.38 after arch ECB hawk and Bundesbank chief Jens Weidmann said it was not out of the question for the ECB to buy assets to combat uber-low inflation, a radical softening of the German central bank's strict stance on quantitative easing.
He cited limits under the ECB's mandate on funding euro zone governments, which the German constitutional court underlined last month when it deferred a ruling on the legality of the bank's Outright Monetary Transactions (OMT) bond purchase programme to the European Court of Justice.
"This does not mean that a QE programme is generally out of the question. But we have to ensure that the prohibition of monetary financing is respected," Weidmann said.
His comments, together with a below-forecast German Ifo business sentiment survey, also pushed down yields on euro zone government bonds.
In Asian trading, Japan's Nikkei had dropped 0.4 percent and MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.2 percent.
After Federal Reserve chief Janet Yellen said last week that interest rates could rise early next year short-dated U.S. Treasuries prices remained in focus.
Two-year Treasuries, the most sensitive to interest rate changes, were steady at 0.4288 percent in early U.S. moves, after reaching a six-month high of 0.4650 on Monday.
Expectations for U.S. rate rises in the first half of next year continued to erase some of this year's rally in precious metals. Gold fetched $1,311.46 per ounce, close to Monday's near five-week low of $1,307.54. Silver tumbled to a six-week low of $19.84.
Rising U.S. interest rates are also generally negative for emerging markets, but many of them have held up so far. They have been helped in part by expectations the Chinese government will introduce economic stimulus measures after weak Chinese manufacturing data was reported on Monday.
Mainland Chinese shares had touched a one-month high in Asian trade as companies linked to Shanghai's free-trade zone gained on the back of media reports that its restrictions on foreign investors may be relaxed.
The Australian dollar, often seen as a liquid proxy for bets on the Chinese economy, briefly reached a three-month high of $0.9158. Copper, also highly sensitive to China's fortunes, hit a two-week high.
Copper prices look to have now stabilised after recently sinking to a three-and-a-half year low on worries that China's slowdown might trigger a wave of defaults on loan deals where copper was used as collateral.
"Copper is a little bit in pause mode at the moment," said analyst Mark Keenan of Societe Generale in Singapore. "People are watching for any signs of fresh defaults, but also for the official PMI stats out next week." (Additional reporting by Hideyuki Sano in Tokyo; Editing by Larry King and Susan Fenton)