Stocks Slip Ahead Of U.S. Data, Sterling Up

Also worrying was fresh data showing much weaker than expected euro zone industrial output in December -- another sign of a global slowdown.

Caution ahead of key U.S. retail sales data on Wednesday prompted investors to pare some gains in stocks while tough talk on inflation by the Bank of England helped boost sterling.

Though rising off early lows, stocks were still in the red with investors taking risky bets off the table in case the U.S. report, due at 1330 GMT, showed more weakness in the world's biggest economy than already anticipated.

A weakening consumer sector, which accounts for more than two thirds of the U.S. economy, has fuelled concerns that a recession is increasingly likely.

Also worrying was fresh data showing much weaker than expected euro zone industrial output in December -- another sign of a global slowdown.

"Euro zone growth is in trouble and the ECB had better get its skates on for easing soon," said David Brown, chief European economist at Bear Sterns International.

U.S. stock index futures were up a touch ahead of the retail sales data, which will set the scene for U.S. Federal Reserve Chairman Ben Bernanke's congressional testimony on Thursday.

Tuesday's news that billionaire investor Warren Buffett had offered to reinsure $800 billion in municipal debt guaranteed by bond insurers had helped to soothe worries about further fallout from the credit crisis, although doubts have started to creep in.

The FTSEurofirst 300 index of top European shares, which jumped 3.4 percent on Tuesday, fell 0.7 percent, with Germany's DAX down 0.7 percent and Britain's FTSE 100 shedding 1.2 percent.

"The market really doesn't have any conviction. There is so much uncertainty out there," said Dirk Thiels, head of global equity funds at KBC Asset Management.

MSCI's main world equity index fell 0.3 percent. Earlier, Japan's Nikkei edged up just 0.4 percent, while MSCI's measure of other Asian stock markets slipped 0.2 percent.

STERLING RISES

Sterling erased losses against the dollar to be up 0.1 percent at a one-week high of $1.9634 after the Bank of England (BoE) quarterly inflation report signalled that rates would be eased only modestly.

"If there is one thing we can take away from the Feb inflation report, it is that the BoE is trying to tell us that interest rates are not going to fall as much and as quickly as the market assumes," said Jodie Tiller, an economist at CIBC.

The dollar edged up 0.3 percent to 107.59 yen, while the euro was 0.2 percent higher at 156.90 yen, both also reversing from early losses. Against the dollar, the common currency was flat at $1.4579.

Euro zone government bond futures pared early gains as stocks climbed off the session lows. The March Bund future put on just 12 ticks to 116.59, while the 2-year Bund yield edged up to 3.14 percent.

Among commodities, U.S. crude was little changed just below $93 a barrel, remaining subdued after a three-session rally fizzled out on Tuesday. Copper fell around 2 percent as Chinese buyers, returning to the market after the lunar New Year holidays, proved unwilling to push prices higher.