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GLOBAL MARKETS-Euro bank review, Chinese tensions halt shares rally

* European shares down 0.8 pct, Wall Street seen opening

down 0.5 pct

* Spike in China's short-term rates underscores tightening


* Nikkei tumbles 2 percent, reversing rise as yen jumps

against dollar

* Fed tapering expectations pushed to next year after

payrolls disappoint

* U.S. 10-year Treasury yield wallows at lowest levels since


By Marc Jones

LONDON, Oct 23 (Reuters) - Concerns over tighter Chinese

monetary policy and worries a new check-up of euro zone banks

could prove costly for its weaker members halted a rally spurred

by hopes of extended U.S. stimulus.

European stocks were facing their sharpest falls in two

weeks on Wednesday as the details of a new, year-long test of

euro zone lenders by the bloc's central bank amplified anxiety

about China and the recent rapid run-up in world equity markets.

The pan-European FTSEurofirst 300 had extended

losses to 0.8 percent ahead of the Wall Street restart with

Italian, Spanish and Portuguese markets and banking stocks

leading the way with respective falls of 1.8, 2.0, 1.3

and 2.0 percent.

The ECB wants to unearth any risks hidden in the banking

system before supervision comes under its roof as part of a

three-pronged "banking union" plan designed to avoid a repeat of

the euro zone debt crisis.

Jan von Gerich, chief developed market strategist for

Nordea, said that if done properly the review should help the

euro zone, but in the short term it could revive questions about

its weaker members if public money is needed for bank repairs.

"The most interesting part will be what it says about Italy.

Its banks haven't gone through the same kind of scrutiny as the

ones in Spain or those in Greece, Ireland or Portugal - the

smaller countries, too, whether Slovenia will need a bailout for

example," he added.

The euro was 0.2 percent weaker at $1.3750 by 1130 GMT and

Asian markets had seen widespread weakness overnight on factors

ranging from a strengthening yen in Japan and fading rate cut

hopes in Australia.

Stock futures also pointed to falls of 0.5 percent for the

S&P 500 and Dow Jones Industrial when trading

resumes though it comes after the S&P hit yet another all-time

high on Tuesday.

"What has happened this morning is that we have the Chinese

rate surge on the policy tightening fears," said Alvin Tan, a

strategist at Societe Generale in London. "That has basically

generated a broad correction in risk assets."


In Europe, earning misses from some of the region's biggest

corporate names including chip maker STMicroelectronics

and brewer Heineken added to the pressure on shares.

Short-term Chinese money rates underscored

investors' concerns that regulators there are poised to tighten

liquidity to quell growing inflationary pressures.


The benchmark seven-day repo contract, which had

been steadily sliding since Oct. 9, spiked in the morning

session, a day after a policy adviser to the People's Bank of

China (PBOC) told Reuters it was weighing tightening measures.

The currency market focus remained on the prospect of

Federal Reserve keeping its stimulus programme running at full

pace after soft jobs data on Tuesday stoked concerns the U.S.

economy was losing momentum even before this month's budget


Nine of 15 U.S. primary dealers surveyed by Reuters on

Tuesday now expect the Fed to begin tapering its $85

billion-a-month bond-buying programme in March.

The dollar had stabilised down almost 1 percent against its

Japanese counterpart at 97.33 yen by 1130 GMT and was

hovering at $1.3760 to the euro after hitting a two-year

low in the previous session.

In the near term, the dollar could see further weakness

against other major currencies such as the euro and sterling,

said Sim Moh Siong, FX strategist for Bank of Singapore, adding

that the euro may rise towards levels around $1.39.

"There's certainly a high possibility that dollar weakness

might extend a bit further, but I'm not really sure that it

changes the medium-term dollar picture," Sim said.


The Australian dollar was last down 0.9 percent against the

dollar in a whipsaw session where it had jumped about a quarter

of a U.S. cent after a stronger-than-expected inflation reading

dampened rate cut expectations.

The yield on benchmark 10-year Treasury notes

fell to 2.462 percent, its lowest since late July, after closing

U.S. trade at 2.512 percent. German Bunds tracked the move as

they hit three-week highs.

On the commodities front, concerns about a near-term U.S.

crude surplus helped push U.S. crude prices down more

than 1.3 percent to $96.95 a barrel. Brent crude gave up

0.3 percent to $109.61 a barrel, supported by a weaker dollar.

Copper slipped from near one-month highs as traders

booked profits after the U.S. jobs report reinforced the metal's

weak fundamental outlook, falling 1.5 percent to $7,221.75.

Gold fell 0.4 percent to $1,331.80 an ounce, having

risen to a four-week high after the payrolls data.