* World stocks heading for 10th day of gains
* European shares down 1 percent, Japan up 1.7 percent
* Dollar rally falters, euro higher
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 7 (Reuters) - World stocks worked on their 10th
consecutive session of gains on Wednesday, but European shares
were breaking their winning streak and the dollar's recent drive
upwards faltered.
Investor sentiment has been boosted both by the promise of a
massive U.S. government spending and tax cut plan from
President-elect Barack Obama to stimulate the world's largest
economy and by cheap share prices stemming from last year's
falls.
The mood has taken many stock market indexes to two-month
highs.
"We are on the precipice of a new era, with Obama about to
take the reins, and the stimulus packages hopefully impacting on
the markets in the next few months," said Chris Hossain, senior
sales manager at ODL Securities.
MSCI's all-country world stock index <.MIWD00000PUS>, a
benchmark for many investors, was up 0.4 percent. It has gained
26 percent since hitting a low in November.
Its emerging market counterpart <.MSCIEF> hit two-month
highs in Asian trade but later turned lower.
Japan's Nikkei share average <> closed up 1.7 percent,
boosted by shares of small lenders after a newspaper report said
the government may inject money into regional banks.
But the mood failed to carry over into Europe, where
investors reversed a six-session rising trend in part because of
energy company shares falling on lower crude prices.
The FTSEurofirst 300 <> index of top European shares
was down 1.1 percent after finishing 1.9 percent higher on
Tuesday, its highest closing level since Nov. 10.
Crude oil <CLc1> was steady under $49 a barrel, after weak
U.S. economic data sparked a bout of profit-taking overnight,
outweighing escalating tensions in the Middle East and widening
supply cuts from the Russian gas row.
BUCKING A TREND
The dollar fell broadly, with its recent run to one-month
high's against the euro and yen losing steam.
As well as economic worries, the speed of the dollar's
recent rise makes it vulnerable to profit-taking.
"The dollar rally is showing signs of fatigue. Maybe there
is a bit of nervousness ahead of the U.S. non-farm payrolls on
Friday," said Audrey Childe-Freeman, senior currency strategist
at Brown-Brothers Harriman in London.
The euro was up 0.5 percent on the day at $1.3582 <EUR=>,
having dipped to a one-month low of $1.3308 on Tuesday according
to Reuters data.
The dollar fell 0.4 percent against a basket of six major
currencies.
Euro zone government bonds found a steadier footing after
two sessions of steep losses.
The two-year Schatz yield <EU2YT=RR> edged down 2 basis
points on the day to 1.718 percent, while 10-year Bunds yielded
<EU10YT=RR> 3.123 percent, down 4 basis points.
These moves saw the 2/10-year yield curve steepened slightly
to 144 basis points, nearing the steepest level of around 150
basis points seen in 2008. Levels higher than that were last
seen in late 2004.
"We would not call this the beginning of a bear bond market,
but factors this week are making it tough for bonds," said
analysts at Calyon in a note.
(Additional reporting by Atul Prakash, Ian Chua and Veronica
Brown; Editing by Andy Bruce)
