(Refiles to fix typo in headline)
* Wall St opens up, trims gains after consumer sentiment
* Europe shares up 2 percent on short-selling ban relief
* U.S. retail sales see biggest gain since March
* Investors still nervous euro zone debt risk may spread (Updates to U.S. open)
By Leah Schnurr and Naomi Tajitsu
NEW YORK/LONDON, Aug 12 (Reuters) - European stock markets rallied on Friday as a ban on bearish bets in financial shares tempted investors back into the battered sector, but world shares trimmed gains after U.S. consumer sentiment dropped to its lowest point in more than three decades.
That data tempered earlier optimism after U.S. retail sales rose in July to rack up their biggest gain since March. Consumer spending accounts for two thirds of U.S. economic activity, and the data indicated the third quarter was off to a decent start. For details, see [ID:nN1E77B08W]
"The confidence was guaranteed to go down given all the upsets in the market. Hopefully this won't be the precursor of consumers' action in August," said Kurt Karl, chief U.S. economist at Swiss Re in New York.
But the Thomson Reuters/University of Michigan's preliminary August reading on the overall index on consumer sentiment came in at 54.9, the lowest since May 1980. [ID:nN1E77A0H0]
U.S. stocks rose as much as 1 percent in early trade before giving most of that back, while European shares jumped 2.8 percent. The MSCI world equity index <.MIWD00000PUS> rose 1 percent.
The Dow Jones industrial average <.DJI> gained 79.85 points, or 0.72 percent, to 11,223.16. The Standard & Poor's 500 Index <.SPX> was up 6.26 points, or 0.53 percent, at 1,178.90. The Nasdaq Composite Index <.IXIC> added 3.56 points, or 0.14 percent, to 2,496.24 after briefly turning negative.
Bank shares, which have fallen sharply in recent days, led the move higher in Europe after the ban on short selling imposed by France, Italy, Spain and Belgium.
The four countries banned short selling -- borrowing shares and selling them in expectation the price will fall -- of a group of banks and financial institutions, after a flurry of rumors knocked a third of the value off some European bank shares this month. [ID:nL3E7JC19I]
Traders said the measure would provide temporary relief to jittery investors, but concerns about euro zone debt problems and a deteriorating outlook for the global economy would keep trading erratic.
Jitters about the euro zone debt crisis were reflected in tense money markets, where dollar funding costs rose.
A key cost for Wall Street to borrow short-term cash rose as dealers sought financing for some of the $72 billion in Treasuries debt supply they bought this week. The interest rate on repurchase agreements secured by Treasuries was last quoted at 0.08 percent, up from 0.05 percent late Thursday. [MMT/]
The Swiss franc fell sharply against the euro for a second session on Friday a day after the Swiss National Bank said it may peg the franc to halt its rally, though many analysts said such a move was unlikely. (Additional reporting by Richard Leong; Editing by Kenneth Barry)