* Dollar index steady, just off highest since mid-September
* Growth concern weighs on European markets
* Fed says in no rush to raise rates but upgrades view on economy
* Madrid shares hit after Argentina defaults again
By Patrick Graham
LONDON, July 31 (Reuters) - Doubts about whether stock markets can ride out a tightening of U.S. monetary policy dominated trade in European shares on Thursday, and the prospect of higher interest rates next year pushed the dollar to 10-month highs.
A steady rise for the U.S. currency is the central story for global financial markets so far this month. A jump in U.S. economic growth reported on Wednesday extended the dollar’s gains against the euro to 6 cents since early May.
U.S. growth of 4 percent in annualised terms in the second quarter came as poor company results and concern over conflict in Ukraine fuelled worries that Europe will take far longer to recover.
Euro zone data on Thursday showed inflation slowing to just 0.4 percent, adding to those doubts, and the pan-European FTSEurofirst 300 index was down one percent by midday.
A warning by sports group Adidas about its business in Russia underlined the threats facing European companies. U.S. stock futures also pointed to losses of more than half a percent at the open.
“The biggest worry is the uncertainty about the U.S. monetary policy,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
“The strong GDP data and an improving economic outlook have raised the risk of an early rate hike. Tomorrow’s U.S. non-farm payrolls data may further cement the view that a rate rise could happen earlier than expected.”
Another worry for some European companies was Argentina’s second default in 12 years, following the failure of last-minute efforts to do a deal with holdout creditors.
While debt insurance costs on Thursday suggested an eventual agreement still seemed possible, the default helped fuel weakness in Spanish and French shares, traders said, with Madrid’s main index down 2.1 percent.
The broader global impact of any default is likely to be limited. Argentina has been effectively shut out of financial markets since its 2002 default.
“We expect contagion to other markets to be fairly limited. This is a highly technical legal case and a selective default,” Steve Ellis, a portfolio manager with Fidelity Emerging Market Debt.
While the dollar gained against its Australian counterpart and other higher-yielding plays, the euro held steady just below $1.34 even after the U.S. data.
A rough ride this week has seen the single currency fall to its lowest since November, but it was little changed after the inflation numbers.
The promise of U.S. jobs numbers on Friday was also likely to keep trading in tighter ranges, dealers said.
“The market is now a little bit too far ahead of itself,” said Adam Myers, head of currency strategy at Credit Agricole in London. “There’s not going to be any Fed interest rate rises in the first half of 2015 and that’s what the market is pretty much pricing in at the moment. It will only take a weak payrolls number and we’ll see quite a snapback.”
Many Asian shares had also slipped on profit-taking after making hefty gains since the middle of this month.
MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.3 percent, but it was still not far from a 6 1/2-year high hit on Wednesday.
The Nikkei average fell 0.2 percent while Australian shares inched up to six-year highs. (Editing by Larry King)