* European shares recover as data lifts ECB rate cut hopes
* U.S. stocks seen lower after Fed falls short of dovishexpectations
* Tapering remains data-dependent, market still bet on March
* BOJ reaffirms commitment to stimulus at meeting
By Marc Jones
LONDON, Oct 31 (Reuters) - Weak euro zone data that uppedthe pressure on the ECB to cut rates again helped Europeanshares and bonds deflect concerns on Thursday that policytightening remains on the U.S. Federal Reserve's agenda.
Markets had been hit with a glancing blow on Wednesday afterthe latest Fed meeting minutes were deemed less alarmist aboutthe state of the economy than some had wagered, lifting bothbond yields and the dollar.
The impact was mostly superficial, however, and Europeanshares and bonds were quick to shrug off the after-effects wheneuro zone inflation topped off a morning of weak euro zone data.
Figures from Eurostat showed inflation in the 17-countrybloc unexpectedly dropped to a near four-year low in October andunemployment stayed at a record high in September. German retailand French consumer data also came in below par.
With the ECB aiming for inflation just under 2 percent MarieDiron, a senior economic advisor for Ernst & Young, said thecentral bank may now have to start considering action.
"The ECB can provide more liquidity and also express uneaseabout the strength of the euro to try to avoid the euro zoneslipping into deflation," she said.
"With high debt in both the (euro zone) public and privatesector, the impact of deflation would be devastating."
The pan-European FTSEurofirst 300 had started thesession down 0.3 percent in the wake of theless-dovish-than-expected Fed tone, but the data changed thecourse of the day.
Ahead of the U.S. restart, the index was up 0.2 percent ledby 0.8 and 0.4 percent gains for Spanish and Italian stocks. And as the euro headed south, the bloc'sbenchmark bonds slipped into positive territory.
"It (inflation data) was pretty far from consensus and thisis something that could help the doves inside the ECB board ...Even the Germans could be worried," said Sergio Capaldi, fixedincome strategist at Intesa SanPaolo in Milan.
Wall Street was expected to continue from where it left offon Wednesday, when it slipped after the Fed kept its $85billion-a-month stimulus plan intact but did not sound quite asalarmed about the state of the economy as some had anticipated.
Dealers said the market had talked itself into expecting thebank would make "dovish" changes to its statement in favour ofholding off longer with any monetary tightening. So it wassomehow considered "hawkish" when those did not materialise.
"We interpreted the statement as neutral and balanced andthink the Fed is essentially in a holding pattern," saidanalysts at Australia and New Zealand Bank.
U.S.-based Citibank moved its prediction for the Fed's firsttrimming of bond-buying forward to January and shortened theodds on a December move. But the vast majority of analysts stillpointed to it holding off until later in the new year.
The Fed funds futures barely budged on the statementand short-dated Treasury yields stayed well anchored while thelonger end moved up only modestly. Yields on the 10-year note were steady at 2.54 percent.
Currency moves were also moderate, with the U.S. dollaredging further away from recent lows. The dollar index was up 0.3 percent on the day and back above the 80 mark for thefirst time in almost two weeks and at 98.30 yen.
The soft euro zone data, which came after one ECB policymaker pointed to further cheap cash injections, meant the fallin the euro was slightly more pronounced as it dropped away fromlast week's peak of $1.3832 back to $1.3640.
"The good news from yesterday is that it put a stop on thedollar slide," said ABN Amro Chief Investment Officer DidierDuret. "We were risking getting into a territory where thedollar was undervalued and was creating a problem for others."
In Asia, shares had seen modest falls in line with WallStreet, but sentiment had been helped by the Bank of Japan'sdecision to stick with a massive stimulus program that has showntentative signs of breaking the grip of deflation.
Given U.S. shares had reached record highs this week, theresulting profit-taking came as no surprise. Economists werealready digesting a small rise in weekly U.S. jobless benefitclaims as well as monthly Chicago PMI numbers.
Further afield, The New Zealand dollar bounced after thecountry's central bank said increases in interest rates werestill likely to be needed next year, putting it well ahead ofmost other developed economies in tightening.
The currency rallied as much as half a U.S. cent inreaction, though the central bank also noted that a strongcurrency meant it might be able to wait longer before having toraise rates.
In commodities markets, spot gold faded after rising themost in a week at one stage on Wednesday. It fetched $1,325.20an ounce on Thursday while Brent crude eased 31cents to $109.25 a barrel.
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