MARKETS GLOBAL-Caution reigns ahead of U.S. payrolls, stocks fall

* U.S., European shares dip with payroll report awaited

* Euro, pound, claw back versus dollar; ECB, BOE hold rates

* Copper tumbles in biggest one-day drop since November

By Ryan Vlastelica

NEW YORK, Jan 9 (Reuters) - Stock markets around the world fell on Thursday, with investors cautious ahead of the December U.S. payrolls report on Friday, which overshadowed strong data on the U.S. labor market and European sentiment.

While recent data has indicated improving conditions, this is the first payrolls report since the Federal Reserve announced a slowing of its stimulus program, putting more pressure on the data to justify the market's steep recent gains.

U.S. initial jobless claims fell more than expected in the latest week, while a euro zone sentiment index jumped to a 29-month high in December.

"The numbers continue to be good and that should eventually push the market higher, but there's a lot of exhaustion after the strong push we had in December," said Bruce McCain, chief investment strategist at Key Private Bank. "We're waiting for the payroll report to assess where we go from here."

The European Central Bank and the Bank of England both kept their respective 0.25 percent and 0.5 percent interest rates unchanged on Thursday, but markets were on alert for any signs of future ECB monetary stimulus moves or shifts in the economic outlook.

ECB chief Mario Draghi has been at pains to stress in recent months that the bank is prepared to ease its record low interest rates below 0.25 percent and test out other, more unconventional, policy options if necessary.

The Dow Jones industrial average was down 66.66 points, or 0.40 percent, at 16,396.08. The Standard & Poor's 500 Index was down 5.32 points, or 0.29 percent, at 1,832.17. The Nasdaq Composite Index was down 18.89 points, or 0.45 percent, at 4,146.73.

U.S. investors were also looking ahead to the upcoming earnings season, with Alcoa Inc reporting after the market closes on Thursday.

"This is the 'show me' year in terms of earnings," said Bill O'Neill, head of wealth management research at UBS. "You have to see an improvement."

European shares fell 0.4 percent while the MSCI International ACWI Price Index was down 0.5 percent, pressured by Asia. Tokyo shares fell 1.5 percent.

A sharper-than-expected slowdown in China's annual consumer inflation in December also caused some jitters in Asia, with shares in China down 0.8 percent.

The pound was at $1.6469 while the euro was up 0.2 percent at $1.3593. The U.S. dollar index was flat against a basket of currencies.

COPPER FALLS

Among commodities, gold was 0.1 percent higher following a two-day decline.

U.S. crude futures rose 0.1 percent to $92.40 a barrel, rebounding from a five-week low hit overnight after data showed a large build-up of stockpiles at the U.S. benchmark delivery point.

Brent crude gained 0.5 percent to $107.62 per barrel, though copper prices, highly sensitive to the economic outlook for top consumer China, tumbled 1.5 percent in its biggest one-day drop since November.

"I'm a bear on copper prices - I think $7,000 is a more sustainable level," said Helen Lau, a senior commodities analyst with UOB Kay Hian.

"The dollar will continue to strengthen because of U.S tapering (stimulus withdrawal), and China's economic growth is slowing down."