By Marc Jones
LONDON (Reuters) - Heightened tension in Ukraine pushed world shares lower and lifted safe-haven European bonds on Friday, taking the shine off what looked set to be an earnings and M&A-driven week of gains for European and U.S. stocks.
Trouble in Ukraine escalated after Ukrainian forces killed up to five pro-Russia separatists on Thursday and Russia conducted military drills near the border, raising fears it was gearing up to invade.
European shares tumbled 0.5 percent in early trading as concerns also rose that the United States and Europe were readying increasingly tough sanctions on Russia which were bound to be met with retaliatory measures from Moscow.
The DAX in Germany, which has the region's biggest trade ties with Russia, were down almost 1 percent in early deals as the country's government bonds, favored by risk-wary investors, made ground.
Among the region's other main indexes the FTSE and CAC40 in London and Paris dropped 0.3 and 0.4 percent.
Shares in Moscow were staring at a weekly loss of almost 6 percent as they, and the ruble, took another bashing after Russia was also downgraded by Standard's & Poor.
"The escalation of tension in Ukraine is likely to keep markets risk-off," said Kyosuke Suzuki, director of forex at Societe Generale.
Asian stocks had also stumbled earlier after Wall Street had also struggled to shake off the geopolitical uncertainty despite some upbeat earnings.
U.S. Secretary of State John Kerry has said time is running out for Moscow to change its course in Ukraine and sources told Reuters President Barack Obama was expected to speak to European leaders on Friday to push for fresh sanctions against Russia.
A gloomy day for Chinese equities further darkened the mood in Asia as concerns about the state of China's economy and its banking sector continued. The country's currency the yuan also hit a fresh 16-month low.
The dollar was stuck near a one-week low versus the yen on Friday, struggling to gain traction as rising tension in Ukraine offset optimism about U.S. economic growth.
The dollar last stood at 102.25 yen, not far from Thursday's one-week low of 102.085, at the end of a lackluster week against the safe-haven yen during which it has lost about 0.1 percent.
"Geopolitical risks are not having too much of an impact on currencies with most investors still focused on growth prospects," Credit Agricole FX strategist Manuel Oliveri said.
The euro held steady at $1.3835, having recovered from Thursday's low of $1.3791 hit after European Central Bank President Mario Draghi reiterated the potential for asset purchases to ward off deflation risks.
For commodities front, spot gold was down about 0.1 percent at $1,292.30 an ounce after touching its lowest levels since February on Thursday, though fears about the Ukraine crisis provided some support.
Copper touched a session high of $6,775 a metric ton (1.1023 tons), as demand from China helped lift it to its strongest since March 7, and was last up about 0.2 percent at $6,763.
Brent crude was down slightly at $110.32 a barrel, but was holding close to seven-week highs after surging $1.22 a barrel on Thursday.
(Additional reporting by Anirban Nag in London; Editing by Alison Williams)