* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh
* S&P E-mini futures up 0.7%
* MSCI All Country World down 0.13%
By Ritvik Carvalho
LONDON, Feb 25 (Reuters) - Global stock markets stabilised on Tuesday after a wave of early selling petered out and Wall Street futures managed a solid bounce after the previous day's sharp selloff on fears about the spreading coronavirus.
European shares recorded their worst one-day loss since June 2016 on Monday as worries about the spread of the new virus far beyond China whacked global markets and risk sentiment.
But the pan-European STOXX 600 index rose 0.6% in early trade in London , with Italian shares, which tumbled 5.4% on Monday, also 0.6% higher. Italy is grappling with the worst outbreak of coronavirus in Europe.
"There is no question financial markets are coming round to the realisation that this particular crisis is likely to have a slightly longer shelf life than many thought was the case a couple of weeks ago," said Michael Hewson, chief markets analyst at CMC Markets in London.
"For now, there appears little prospect that financial markets look likely to settle down in the short term, which means investors will have to get used to an extended period of uncertainty and volatility."
MSCI's All Country World index, which tracks shares across 47 countries, was down 0.16%, paring some earlier losses when Asian markets were trading. The index suffered its biggest daily drop in two years on Monday.
Euro zone government debt markets stabilised, with Italian bonds on steadier ground after suffering their worst day in over two months.
Some dealers cited a Wall Street Journal report on a possible vaccine as helping sentiment, though human tests of the drug are not due until the end of April and results not until July or August.
Whatever the cause, E-Mini futures for the S&P 500 bounced 0.7% to pare some of the steep 3.35% loss the cash index suffered overnight.
The VIX volatility index, also known as Wall Street's "fear gauge", fell 2.2 points to 22.8, away from highs not seen since January 2019 that it hit on Monday.
In Asia earlier, South Korea's hard-hit market eked out a 0.6% rise and helped MSCI's broadest index of Asia-Pacific shares outside Japan fight back to flat.
Japan's Nikkei was down 3.4%, catching up with the global sell-off after having been shut on Monday, while Shanghai blue chips eased 1.6%.
European and U.S. stocks have suffered their biggest loses since mid-2016 amid fears the coronavirus may be morphing into a pandemic that could cripple global supply chains and wreak far greater economic damage than first thought.
The risks are such that bond markets are starting to bet central banks will have to ride to the rescue with new stimulus.
Futures for the Federal Reserve funds rate have surged in the last few days to price in a 50-50 chance of a quarter-point rate cut as early as April. In all, they imply more than 50 basis points of reductions by year end.
Central banks across Asia have already been easing policy, while governments have promised large injections of fiscal stimulus, something western countries might also have to consider.
Data showing sales of smartphones in China tumbled by more than a third in January, underlining the potential economic impact of the virus, helped knock Apple Inc shares 3.5% lower on Monday.
BONDS BET ON RATE CUTS
The coronavirus death toll climbed to seven in Italy on Monday and several Middle East countries were dealing with their first infections, feeding worries about a pandemic.
The rush to bonds left yields on 10-year U.S. Treasury notes at 1.39%, down almost 20 basis points in just three sessions and paying less than overnight rates. Yields are rapidly approaching the all-time low of 1.321% hit in July 2016.
The sharp drop, combined with the fact the Fed has far more room to cut interest rates than its peers, kept the U.S. dollar restrained after a run of strong gains.
"Besides a tapering in the geographical spread of the coronavirus or unexpected improvements in key short-term macro indicators, the circuit breaker for these market moves is starting to move towards the U.S. central bank," Danske Bank said in a note to clients.
In currencies, the euro edged up a little from recent three-year lows to reach $1.0862, while the dollar lost 0.06% to trade at 110.64 yen, away from a 10-month top of 112.21.
Against a basket of currencies, the greenback dipped 0.16% to 99.202.
Gold ran into profit-taking after hitting a seven-year peak overnight, and was last down 0.9% at $1,645.57 an ounce.
Oil steadied after shedding nearly 4% on Monday. U.S. crude was up 0.2% at $51.55, while Brent crude firmed 0.4% to $56.51.
(Reporting by Ritvik Carvalho; Additional reporting by Wayne Cole in Sydney; Editing by Catherine Evans)