* World stocks fall on N.Korea, economic tensions
* European shares lose 1 percent, Japan off 0.4 percent
* Dollar, euro zone bonds strengthen
By Jeremy Gaunt, European Investment Correspondent
LONDON, May 26 (Reuters) - World stocks fell on Tuesday with
Asian shares leading the way as tension about North Korean
nuclear tests added to questions over the global economic
outlook.
Pyongyang was reported to have fired two short-range
missiles off its east coast, a day after testing its second
nuclear device earned international condemnation.
The dollar edged higher, but remained near a five-month low
hit last week against a basket of currencies. Investors sold
higher-yielding currencies that had benefitted from hopes the
worst of the global economic crisis was over.
European shares opened lower. The FTSEurofirst 300 <>
was down 1 percent.
Earlier, Asian shares outside Japan fell 0.5 percent and
South Korea's stock market was off 2 percent.
Japan's Nikkei average <> closed down 0.4 percent.
Analysts said the tension with North Korea was not likely to
undermine stocks for long but that macroeconomic worries were
stalling a rally that began in March.
"I would expect the North Korea political event to weigh on
the market for one or two days, not more -- markets are waiting
for new macro data, new announcements, and volumes have
diminished a lot in the past three weeks," said Thierry Lacraz,
strategist at Swiss bank Pictet.
U.S. consumer confidence data is due later in the day.
Investors have become increasingly anxious for firm evidence
of real economic revival as opposed to a simple slowing down of
economic decline. []
Housing data from the United States over the next fews day
-- existing and new home sales and building permits for April --
will come under intense scrutiny. <ECONUS> []
DOLLAR, BOND STRENGTHEN
The dollar rose broadly, particularly after a media report
questioning the health of the German banking system prompted
traders to trim back bets against the currency that had driven
it to a five-month low last week.
Britain's Daily Telegraph reported that Germany's financial
regulator BaFin had warned that toxic debt of the country's
banks would prove devastating unless they took advantage of
government bad-bank plans.
The report was not new, however, as the regulator warned
last week that German banks have bad assets of around 200
billion euros ($280 billion). []
The dollar was up 0.4 percent against a basket of currencies
<.DXY> and the euro lost about the same to $1.3940 <EUR=>.
"It's premature to expect that the situation in the euro
zone is anything like stable enough to justify the increase in
euro/dollar," said Michael Klawitter, senior currency strategist
at Dresdner Kleinwort in Frankfurt.
Demand for euro zone government bonds rose. The two-year
Schatz yield <EU2YT=RR> was down 2 basis points at 1.390 percent
and the 10-year yield <EU10YT=RR> was down 1 basis point at
3.589 percent.
(Additional reporting by Sitaraman Shankar and Jamie
McGeever; editing by Patrick Graham)
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