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GLOBAL MARKETS-Stocks sag, euro steady ahead of ECB rate decision

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European shares soft, earnings in focus

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China stocks bounce after stimulus

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ECB rate decision upcoming

(Updates prices at 1220 GMT)

By Amanda Cooper

LONDON, Jan 25 (Reuters) - Global stocks retreated on Thursday, as a surge in China markets on the back of revived investor confidence helped offset a more muted performance elsewhere, while the euro held steady against the dollar ahead of a European Central Bank meeting.

Chinese blue-chips staged a robust rally, with the Shanghai Composite up 3% in its largest daily gain in nearly two years, after a series of measures by Beijing authorities to prop up the economy and the stock market.

The gain, however, was not enough to keep the MSCI All-World index in positive territory, given weakness in European equities and flat U.S. stock index futures .

The upcoming monetary policy decision by the European Central Bank kept pressure on bond prices and gave the euro a leg-up against the dollar, while keeping a lid on volatility in the stock market.

Earnings from Nokia, which beat expectations, pushed shares in the Finnish telecoms equipment maker to the top of the STOXX 600, while pressure on financials and healthcare offset that lift, leaving the regional index down 0.3%.

Denting investor sentiment too was a 8% drop in Tesla shares in the premarket following an earnings miss.

Investors expect no change in monetary policy from the ECB and are looking for guidance from central bank President Christine Lagarde for what to expect in terms of potential rate cuts this year.

Lagarde is expected to echo the rhetoric from some of her ECB colleagues, who have pushed back fairly heavily against market-based expectations for aggressive rate cuts.

"The key point here is that markets have been aggressively pricing interest rate cuts. And what we've seen since the start of the year is a bit of a paring back in those expectations," David Katimbo-Mugwanya, who is head of fixed income at EdenTree, said.

"Central banks have been fairly consistent that they will need time to reassess the moving parts especially vis-a-vis inflation heading back to target," he said.

Similarly, investors expect the Federal Reserve to bring U.S. interest rates down to 3.75-4.25% by year-end from 5.25-5.5% right now - a view some see as optimistic given inflation is still not back to 2% and economic growth is holding up.

U.S. 10-year Treasury yields were last flat at 4.17%, while yields on 10-year German government bonds rose 3 basis points to 2.361%, around their highest since early December, ahead of the ECB decision.

In currency markets, the dollar was under pressure against a basket of currencies, after investors took profit on its recent rise, with less than a week to go for the Fed's next meeting. The dollar index was down 0.1%, led mostly by gains in the euro, which rose 0.1% to $1.0889.

The Chinese yuan weakened a touch, falling 0.1%, which gave the local stock market an additional boost.

"Coupled with additional liquidity measures, credit support and impending plans to stabilise financial exposures in real estate, we expect markets to be on board with the 'stabilisation' narrative at least through the Lunar New Year," said BNY Mellon strategist Geoff Yu.

The yen was steady around 147.61, having staged its largest one-day rally against the dollar on Wednesday in a month after hints at rate rises in Japan triggered selling in the Japanese government bond market.

In commodity markets, Brent crude futures rose 1.1% to $80.93 a barrel after evidence of stronger U.S. demand, while China's various stimulus measures reinforced optimism over energy consumption in the world's second largest economy.

(Additional reporting by Dhara Ranasinghe in London and Tom Westbrook in Singapore: Editing by Shri Navaratnam, Miral Fahmy and Chizu Nomiyama)

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