By Marc Jones
LONDON (Reuters) - World shares stepped back from three-week highs on Thursday, ending a five-day run of gains fuelled by assurances from major central banks their supportive policies would continue.
In Europe, the fading momentum was compounded by political uncertainty in Italy, where Prime Minister Enrico Letta defied pressure to make way for the center-left leader Matteo Renzi.
The stand-off threatens to pull apart a coalition government patched together after last year's deadlocked elections. That would further hamper efforts to turn around the country's sputtering economy.
Italian stocks (.FTMIB) led the losses among the region's bourses (.FTEU3), dropping as much as 1.2 percent. The country's government bonds were the worst performers on the debt market.
"Right now, you are not sure which (political) scenario will be in play and some of the scenarios could lead to inaction," said UniCredit strategist Luca Cazzulani in Milan.
A batch of disappointing updates from blue-chip companies in Europe also weighed on the region's stock markets but it was the rumblings in Italy that remained the central focus. (.EU)
There was no signs of trouble in a 7.5 billion-euro auction of Italian 3- to 30-year bonds. But the relief was short-lived - stocks and bonds in Milan remained rooted to the bottom of the European table.
Letta, a low-key moderate appointed to lead the cross-party coalition formed after last year's deadlocked elections, is fighting for his political future amid growing criticism from Renzi over the slow pace of economic reform.
A meeting of the 140-strong leadership committee of the Democratic Party at 3 p.m. ET will decide whether he has the backing of his party or will be forced out less than a year after taking office.
Among still-jittery emerging markets, Ukraine's ongoing woes saw the hryvnia and its sovereign bonds tumble. In Nigeria, Africa's second-biggest economy, fresh government sackings left the naira near a two-year low.
U.S. Treasury yields, the benchmark for global borrowing costs, added to the general pressure. They hovered near a two-week high at 2.75 percent, well above the 2.57 percent where they were trading just over a week ago.
Asian trading was also bumpy after Wall Street stumbled overnight. U.S. stocks are expected to fall roughly 0.5 percent when trading resumes later on Thursday.
Markets are still sitting on solid gains. Shares had rallied amid relief that Federal Reserve policy would continue unchanged and hints the European Central Bank may provide more support in the euro zone.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> lost 0.7 percent after jumping 4.5 percent in the previous five sessions. Japan's Nikkei (NIK:^9452) fell 1.8 percent, but that too was after a 4.6 percent surge this week.
Janet Yellen's appearance in front of a Senate banking panel scheduled for later has been postponed because of bad weather. But she made it clear on Tuesday, in her first public remarks since becoming Fed chair, that she would not make any abrupt changes to monetary policy.
Adding to the positive mood, Congress approved legislation on Wednesday to increase the U.S. government's debt limit for a year, avoiding a repeat of the government shutdown in October.
In the currency market, the dollar (.DXY) was on the back foot. The British pound continued to shine after a surprisingly upbeat economic outlook from the Bank of England on Wednesday that encouraged bets on an early 2015 rate hike.
Sterling edged up to $1.6640, near the 2 1/2-year high of $1.6667 it hit late last month.
The euro recovered to $1.3667, after tumbling on comments by ECB Executive Board member Benoit Coeure on Wednesday. Coeure told Reuters that cutting the ECB's deposit rate to negative figures -- in effect, charging banks to park spare cash at the central bank -- was "a very possible option" that the ECB was looking at seriously.
"Coeure's comments cannot be lightly dismissed and stoke expectations for action at the March meeting," said Sean Callow, a currency strategist at Westpac in Sydney.
The other big move among the majors was the Australian dollar. It tumbled around one percent, dipping as far as $0.8928, after Australian unemployment hit its highest in a decade, reviving rate-cut speculation.
As risk assets took a back seat, oil prices fell. U.S. crude futures slipped back under $100 a barrel after dropping 1 percent from Wednesday's four-month high. Safe-haven gold was at $1,293, after racing to a three-month high of $1,295.91 the day before.
Recent U.S. data, including two straight months of weak jobs growth, have raised questions over whether the world's biggest economy can sustain the strength it showed in the second half of last year.
"There are emerging doubts about whether you can just blame all the soft data on the weather," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, referring to the recent U.S. cold snap.
"Investors are a bit bewildered. While they are relieved that major events are out of the way, they are still hesitating to chase shares higher."
Next up on the data front are January retail sales and weekly jobless claims data, both due at 8.30 a.m. ET.
(Additional reporting by Hideyuki Sano in Tokyo and Ian Chua in Sydney; Editing by Larry King)