GLOBAL MARKETS-Euro lifts, shares drift as ECB easing bets evolve

Reuters - UK Focus

* Wall Street expect to nudge up after week of record highs

* Euro off lows as inflation cools bets for ECB cut next

week

* Dollar edges up against yen after weak Japanese data

* Shares (Frankfurt: DI6.F - news) head for 3rd week of gains amid Ukraine tensions

* German Bunds near record lows, money mkt rates sub-zero

By Marc Jones

LONDON, Aug 29 (Reuters) - The euro lifted off lows and

European shares sagged on Friday as a new five-year low in euro

zone inflation was viewed as not extreme enough to drive the

European Central Bank back into its increasingly bare policy

cupboard.

Wall Street was expected to edge back up towards all-time

highs though, suggesting the market's recent upswing remained

intact following this week's strong run of U.S. data and the

view that likely future action from central banks like the ECB

will keep markets well oiled.

Consumer prices in the 18 countries using the euro rose by

just 0.3 percent year-on-year in August, the lowest since

October 2009 and well below the ECB's preferred level of just

under 2 percent, data showed on Friday.

But it was also right in line with economists' expectations

and helped cool speculation that the ECB, which meets on

Thursday, would cut rates on its way towards U.S.-style

quantitative easing -- printing money by buying bonds --

following strongly-worded comments from ECB President Mario

Draghi last week.

The euro rose to the day's high of $1.3195 against

the dollar, and yields on core euro zone bonds inched away from

record lows as the region's share markets

also gave back their early gains.

"Although Draghi has waved the flag I don't thank there is

enough there (in the inflation data) to instigate another round

of easing," said Bank of Tokyo Mitsubishi currency strategist

Derek Halpenny.

"In terms of another rate cut, I think they will want to

wait until they can be more certain that inflation expectations

have become unanchored."

But together with updated projections from ECB staff, the

inflation data is likely to lead to a lively discussion next

Thursday about whether the bank should accelerate existing

policy measures because of the danger of deflation.

Overnight, euro zone money market rates dropped

into negative territory for the first time ever. That

essentially means banks are now paying to lend to each other,

and it reflects expectations for a long period of cheap ECB

money.

German Finance Minister Wolfgang Schaeuble warned on Friday,

however, that the ECB has run out of tools to fight deflation,

having earlier backed French President Francois Hollande's calls

for greater government investment to boost growth.

Front-running the euro inflation figures, French data showed

producer prices fell 0.3 percent month-on-month in July and 0.6

percent year-on-year. It has a host of reform measures planned

for September likely to push inflation even lower.

"What is more important for the ECB is inflation

expectations and what is worrying for them is that they have

been going down," said Philippe Gudin de Vallerin head of

European research at Barclays (LSE: BARC.L - news) .

RUSSIAN BEARS

Worries that persistent tensions between Russia and Ukraine

could damage Europe's already-weak recovery remained a concern

for markets.

The rouble was at an all-time low versus the dollar

in Moscow as Russian stocks extended a 5 percent

fall this week. Earlier, Asian shares had also felt the strains

as they pulled back from a six-year high.

Pro-Russia rebels fighting in Ukraine said on Friday they

would comply with a request from the Kremlin and open up a

'humanitarian corridor' to allow the withdrawal of Ukrainian

troops they have encircled.

It was not clear how the government in Kiev would react to

the offer, but the first word from the Ukrainian military was

negative. It said in a statement that the offer showed that

"these people (the separatists) are led and controlled directly

from the Kremlin".

NATO Secretary-General Anders Fogh Rasmussen added a

warning that Russian forces were engaged in direct military

operations inside Ukraine in a blatant violation of Ukraine's

sovereignty.

MSCI (NYSE: MSCI - news) 's broadest index of Asia-Pacific shares outside Japan

dipped about 0.2 percent and Japan's Nikkei

stock average shed 0.2 percent after a spate of weak

Japan data, bringing its monthly loss to about 1.3 percent.

RISKY BUSINESS

Overall, however, global share markets remain on a hot

streak. Investors are wagering that new stimulus from the ECB,

and possibly also the Bank of Japan before the end of the year,

is likely to keep cheap global funding flowing.

MSCI's 45-country world share index was on

course for its third straight week of gains after another run of

record highs on Wall Street this week and moves up in Europe and

emerging markets.

The high-flying dollar also edged up to 103.91 yen,

as it headed for a seventh straight week of gains versus the

basket of six major currencies.

Among commodities, gold was steady on the day at

$1,285 an ounce after rising for the third straight session

against a backdrop of Ukraine tension and ECB easing bets. It

was on track for its first monthly gain since June.

Brent crude added about 0.3 percent to $102.74 a

barrel, but was on track for its second monthly loss. Global

growth-sensitive metal copper, meanwhile, was set for

its biggest monthly loss since March.

(Reporting by Marc Jones, editing by John Stonestreet and Toby

Chopra)

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