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GLOBAL MARKETS-Share rally fades, markets watching diplomacy on Syria

* Week of stock market gains peters out as prospect of Syria

strike recedes

* Sell-off in oil, core bonds eases

* Wall Street expected to open -0.1 - +0.1

* Sterling hits 7-month highs vs dollar, euro after jobs

data

By Marc Jones

LONDON, Sept 11 (Reuters) - A week of gains for world stocks

petered out on Wednesday and a sell-off in oil and core

government debt eased, as talks began on trying to avert a U.S.

military strike on Syria against a broadly calm market backdrop.

The safe-haven yen was near a seven-week low against the

dollar and stood near multi-year lows against the euro and

sterling, while shares in Europe nudged higher ahead of what was

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expected to be a flat start for Wall Street.

U.S. President Barack Obama said late on Tuesday that

Russia's offer to push Syrian President Bashar al-Assad to put

chemical weapons under international control could potentially

head off the type of limited military action he was considering.

"Over the last few days, we've seen some encouraging signs,"

Obama said in televised speech from the White House.

Markets were largely in consolidation mode after the big

moves of the two previous sessions when what looked to be a

rapid move towards U.S. action was halted by Russia's plan.

Oil recovered some ground with Brent crude rising

back above $112 a barrel from a 2-1/2-week trough of $110.59.

The steadier performance came after a 4-percent drop in the past

two sessions, its largest two-day fall since June.

Copper edged slightly higher to $7,196 a tonne,

while gold inched back up to $1,365.90 having slid to a

three-week low of $1,356.85 an ounce.

"The calmer market mood is largely because the geopolitical

risks have diminished," said Vasileios Gkionakis, global head of

FX Strategy for UniCredit (Milan: UCG.MI - news) in London.

"At the same time, the market is still digesting all the

data that we have had over the last 10-days or so and with the

exception of the downward revision of the U.S. payrolls, in

general, that has painted a positive picture."

STERLING STRONG

There was little in the way of major economic news out of

Asia on Wednesday and offerings from the U.S. are thin, too.

In Europe, Britain's unemployment rate bucked expectations

of a steady reading as it dipped to its lowest level since late

2012 in the latest sign its economy is picking up.

Sterling rose to a seven-month high against both the dollar

and the euro and to a mammoth 4-year high

against the weakened Japanese yen, as the surprise

bolsted suspicions the Bank of England may have to raise

interest rates earlier than it is currently suggesting.

The FTSEurofirst 300 pan-European share index

shrugged off early lethargy to stand 0.2 percent higher ahead of

the start of U.S. trading, as a 0.4 percent rise on Germany's

Dax (Xetra: ^GDAXI - news) balanced falls of 0.1 on London's FTSE and

Paris's CAC 40 (Paris: ^FCHI - news) .

The region's core debt markets also saw a largely quiet

session as this week's save-haven sell-off abated.

Benchmark German government bonds tracked

minor gains by U.S. Treasuries, while focus remained

on Italy after its benchmark yields shifted above Spain's for

the first time in 18 months on Tuesday.

Political instability and worries about Italy's banks ahead

of a major health check of all euro zone banks by the European

Central Bank in the coming months are driving the move.

Rome sold 11.5 billion euros of treasury bills at its

highest rate in over nine months, ahead of a tripartite bond

auction on Thursday which aims to raise 7.5 billion.

Italy was well ahead of the game in terms of meeting its

2013 funding needs, but on Tuesday the Treasury asked parliament

to raise the ceiling on this year's net debt issuance to 98

billion euros from 80 billion, given the struggle to rein in

public finances.

Analysts at Newedge said German elections on Sept. 22 would

be the "pivot point" for euro zone debt markets in the near-term

but that Italy had some specific issues that made it a danger.

"While Merkel should win (German elections), her coalition

may not survive and force her into a coalition with center left.

This could weaken the euro but benefit the periphery," they said

in a note.

"However, Italy may underperform as the ECB prepares for new

euro zone bank stress tests that compel especially the poorly

capitalized Italian banks to raise more equity capital."

FED FOCUS

Stock futures pointed to a flat start on Wall

Street after the S&P 500 chalked up its sixth day of gains on

Tuesday. MSCI (NYSE: MSCI - news) 's 45-country strong world index

was holding on to hopes of an eighth consecutive day of gains

which would be its longest run since June 2010.

Also helping risk currencies against the yen, which had seen

some safe-haven buying in recent weeks, was

stronger-than-expected industrial output that reinforced signs

that China's economy was stabilizing.

The dollar backtracked to 100.27 yen having scaled a

seven-week peak of 100.55 yen, while the euro touched a 16-week

high around 133.37.

Against the dollar, the common currency reached a two-week

high of $1.3282 as it showed little interest in a warning

from one of the ECB's policymakers that Greece may need, not

one, but two more aid packages.

MSCI's broadest index of Asia-Pacific shares outside Japan

ended 0.1 percent lower but remained at a

three-month high having gained more than 8 percent in the last

two weeks. Emerging market stocks dipped 0.2 percent.

E-Trade Securities analyst Choi Kwang-hyeok said some

investors were choosing to book profits ahead of next week's

Federal Reserve meeting that could see the U.S. central bank

begin to scale back its massive stimulus campaign.

"The week ahead contains cues that could change foreign

capital flows," he said.