* Stocks weaken after initial euro zone rescue euphoria
* Euro falls on nagging worries over deficits
* Chinese inflation data fuels tightening fears
* Gold reaches 5-month high on safe-haven flows
By Daniel Bases
NEW YORK, May 11 (Reuters) - Investors took back Monday's
gains, selling stocks and the euro, vacillating on bonds and
pushing gold to a five-month high on Tuesday unwilling to fully
commit to markets because of concerns the $1 trillion plan to
contain Greece's debt crisis is only a short-term fix, not a
long-term solution.
German Chancellor Angela Merkel's cabinet backed plans to
contribute 123 billion euros in loan guarantees to support the
euro currency which after initial euphoria on Monday brought it
to $1.31, is now down 0.46 percent on the day to $1.2725
<EUR=>.
"We realize now that this is just another way of delaying
perhaps the inevitable," said Shaun Osborne, chief FX
strategist at TD Securities in Toronto. "It pushes the debt
problems further down the road."
U.S. shares opened weaker in New York trade while European
markets floundered. Chinese inflation, rising to an 18-month
high in April, increased concerns the government still has its
work cut out to keep the world's third-largest economy from
boiling over.
In mid-morning New York trade, the Dow Jones industrial
average <> fell 35.67 points, or 0.33 percent, at
10,749.47. The Standard & Poor's 500 Index <.SPX> lost 4.27
points, or 0.37 percent, at 1,155.46. The Nasdaq Composite
Index <> lost 7.93 points, or 0.33 percent, at 2,366.74.
The FTSEurofirst 300 <> index of top European shares
dropped 1.53 percent, giving up some of Monday's 7.39 percent
advance.
Chinese stocks <> fell 1.9 percent to their lowest
level in a year on the worsening inflation outlook.
MSCI's all-country world index <.MIWD00000PUS> fell 0.9
percent. Emerging stocks <.MSCIEF> dipped 0.7 percent while
emerging currencies also pulled back.
In a sobering note, the International Monetary Fund said
that even though Greece's public debt was sustainable over the
medium term, the nation faced plenty of risks. []
Moody's credit ratings agency also warned on Monday that it
might downgrade Portugal's debt rating and further cut Greece's
to junk status, noting the contagion effect of Greece's crisis
on other euro zone members. []
"The EU was never going to be able to give the markets a
single knock-out blow," said Jim Wood-Smith, head of research
at Williams de Broe.
"Markets have lost confidence in the EU and the euro. Until
that confidence comes back we're in for a volatile period."
The greenback rose 0.33 percent against a basket of major
trading partner currencies <.DXY>.
But even with the U.S. dollar's strength making the
precious metals more expensive, investors pumped money into
gold, lifting the spot price to $1,223.90 an ounce, its best
level since early December.
"Investors are trying to search out safe havens, and
clearly gold is one of those," said RBS Global Banking &
Markets analyst Daniel Major. "While the current environment of
acute investor risk aversion remains, gold is bound to
benefit."
DEBT FLAT
The other traditional safe-haven, government debt, proved
lackluster.
In Europe, while the cabinet backed the plans, opposition
lawmakers warned it had yet to decide if it backed the rescue
plan, leading European government debt to pare gains.
Bunds had recouped less than half of Monday's drop, when
they suffered amid euphoria for riskier debt issuers following
the announcement of the European rescue package.
The June Bund future <FGBLc1> was up 17 ticks on the day at
125.66 but off its session high at 126.29.
Non-core European assets continued to attract attention,
such as 10-year Greek bonds, whose yield spread over Bunds
contracted by 30 basis points - although that was a much
smaller contraction than the 600 bps achieved on Monday
<GR10YT=TWEB><DE10YT=TWEB>.
The cost of insuring Greek debt against default for five
years fell to 560 basis points from 584.4 bps in New York on
Monday, according to Credit Default Swap monitor CMA
DataVision.
Volatile trade left U.S. Treasuries little changed. A raft
of new issues may have also dampened demand.
Benchmark 10-year U.S. Treasuries were off 2/32 of a point
in price, pushing the yield up to 3.54 percent <US10YT=RR>.
U.S. light sweet crude oil <CLc1> rose 38 cents, or 0.49
percent, to $77.18 per barrel
(Additional reporting by Wanfeng Zhou in New York, Blaise
Robinson in Paris, Rebekah Curtis, Harpreet Bhal, Jan Harvey,
and George Matlock in London)
(Editing by Theodore d'Afflisio)
