By Marc Jones
LONDON (Reuters) - Evidence that Britain's economy is accelerating away from its European neighbors drove sterling to a five-year high on Monday, as signs of backsliding in France and Spain spooked euro zone stocks.
This week may end up being the final one of the year that excites investors, with half a dozen top central banks holding meetings and a barrage of major global economic data on tap culminating with U.S. jobs data on Friday.
A decent reading on Chinese manufacturing had got markets off to a largely smooth start in Asia before some mixed signals from Europe's big economies turned things more lively.
Sterling surged to a five-year high after data showed UK manufacturing grew at its strongest rate in almost three years, adding to recent talk that the Bank of England may not be able to hold off from raising interest rates next year.
At the same, euro zone stocks were sent stumbling by disappointing equivalent figures from France and Spain that underscored the ongoing split in fortunes between them and euro zone powerhouse Germany.
"You have seen the PMIs and some are better than others, but what is does seem to point to is a diverging European economy, and that is a bit of a worry," said Michael Hewson, senior markets analyst at CMC Markets in London.
"There is a lot of U.S. data this week and we are also in the last month of the year. Investors are going to be reluctant to take on new risk."
Britain's FTSE 100 (.FTSE) was down 0.6 percent ahead of U.S. trading amid the talk of higher rates, while in the euro zone, Milan (.FTMIB) and Madrid (.IBEX) suffered from growth worries as they tumbled 1.3 and 0.9 percent respectively.
Debt and currency markets told a similar story.
Bonds from core euro zone countries Germany and the Netherlands to those in France, Italy and Spain all lost ground as did the euro as it hit an 11-month low vs the pound.
The European Central Bank also meets on Thursday, but having surprised markets by cutting rates last month the bank is expected to sit on its hands this meeting.
CHINA REASSURES, THAILAND FIGHTS
Futures prices pointed to a flat start for Wall Street after last week's Thanksgiving festivities.
It was a nervy start to the week on a number of fronts and investors had plenty of excuses to put a lid on world stock markets and halt 8 straight weeks of gains on Wall Street.
Thanksgiving sales were seen as disappointing, but it was geopolitics that grabbed the focus after upheavals in Ukraine and Thailand escalated over the weekend and tensions continued between China and Japan over disputed South China sea islands.
China's factory activity was more encouraging. It kept up steady growth in November boosted by new orders, though the pace of expansion eased from October, the HSBC/Markit Purchasing Managers' Index (PMI) showed.
That followed an official survey released over the weekend showing factory growth held at an 18-month.
"The data broadly says that things are stabilizing in China," said Thomas Lam, chief economist at DMG & Partners Securities in Singapore.
The Australian and New Zealand dollars rose sharply following the data highlighting the link to China's fortunes.
In Thailand though, the baht hit a three-month low and the SET index (.SETI) tumbled more than 1 percent as anti-government protesters renewed their fight to topple Prime Minister Yingluck Shinawatra, prompting riot police to fire teargas and stun grenades for a second day.
PAYROLLS IN FOCUS
After a soft run in Asia, the dollar rebounded in Europe to sit at $1.3545 to the euro which was the day's main loser, and to 102.77 against the Japanese yen.
U.S. ISM manufacturing PMI and employment figures will be closely scrutinized later and data later in the week also remain a key focus with the Federal Reserve poised to reduce its stimulus as soon as it deems the economy strong enough.
Non-farm payrolls for November, due on Friday, will be the most important. Economists expect an increase of 185,000 jobs last month, down from 204,000 in October, according to a Reuters survey of economists.
In commodities trading, gold was down about 1 percent at $1,238 an ounce, undermined by concern a stronger U.S. economy will lead the Fed to reduce its stimulus. Gold has lost around a quarter of its value so far this year, on course for its first annual loss in 13 years.
Copper shed about 0.5 percent to $7,016 a tonne and Brent crude oil dipped below $110 a barrel as traders weighed supply outages in Libya against U.S. inventory levels.
(Reporting by Marc Jones; Editing by Larry King and Toby Chopra)