Euro, shares sag as Ukraine woes hit German confidence

By Marc Jones

LONDON (Reuters) - Signs that tensions between the West and Russia are starting to hurt confidence in Europe's dominant economy Germany left the euro near an eight-month low on Friday and lifted the region's government bonds.

Germany's Ifo survey revealed a hefty fall in business confidence over the last few weeks, prompting concerns the region's growth engine and driver of its recovery could be stuttering.

It was the third consecutive fall in an index which monitors the mood of thousands of German firms, and Ifo's economists admitted the scale of the decline this month had come as a surprise.

"Geopolitical tensions are taking their toll on the German economy," Ifo said. "Companies were also less optimistic about future business developments."

The euro fell back towards Thursday's eight-month low of 1.34 and bonds from Germany to Greece made ground as traders wagered the downbeat data upped the likelihood the European Central Bank will need to provide the economy with further support.

Shares also clawed back some of their early losses .FTEU3 . keeping them on course for a second week of gains. It is a rise that has helped world stocks <.MIWD00000PU> gradually push back towards the all-time highs they reached last month.

Some encouraging U.S. company earnings, reassuring data from China, and still record-low global borrowing costs have persuaded investors to look past the rise in tensions in Ukraine and Gaza this week.

Chinese shares .CSI300 rose another 1 percent on Friday to secure their biggest weekly gain - 5.6 percent - since September last year. A survey on Thursday showed factory activity in the country expanded at its fastest in 18 months, dovetailing with hopes that Chinese authorities will drive through beneficial reforms in the coming months and years.

At the opposite end of the spectrum, dollar-traded Russian stocks <.IRTS> fell over 1 percent to take their losses over the last two weeks to 12 percent, though the rouble rose as the country's central bank unexpectedly raised interest rates.

European officials are to continue talks later over plans to squeeze Russia over Ukraine with further sanctions following the downing of a Malaysian Airlines that killed almost 300 people.

A deal is not expected to be struck until next week but options being discussed include curbing Russian access to capital markets and arms and energy technology that could hurt both Russian banks and its huge oil industry.

GROWTH PROSPECTS

As the week drew to a close in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was down about 0.3 percent but on track for solid weekly gain of more than 1 percent. Hong Kong's benchmark index hovered around its highest in more than three years after its best week since May.

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"The prospect for the global economy has not been too bad thanks to recently strong U.S. shares and China data, but we should not be overly optimistic," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Fujito said that long-only investors have stayed on the sidelines as events in Gaza and Ukraine have curbed their appetite for risk. He also said many are also waiting for more positive trading cues, after the International Monetary Fund cut its 2014 forecast for global economic growth.

On Wall Street overnight, the S&P 500 <.SPX> eked out a slight gain to its second record closing high in a row, even after earnings painted a mixed picture of the economy.

After a run of solid tech sector results this week, Amazon (O:AMZN) reported a much bigger loss than expected. The biggest U.S. online retailer's shares tumbled 10.6 percent in after-hours trade, wiping more than $17 billion from its market valuation.

Wall Street was expected to reopen around 1 percent lower according to European-traded futures ESc1 .

EURO NEAR 8-MONTH LOW

The downbeat Ifo survey pushed the euro back towards Thursday's eight-month low of $1.3438 as another albeit smaller-than-expected fall in lending to firms in new ECB data further underscored the bloc's struggles.

The dollar, the dominant force in currency markets again this week, was up slightly against the yen at a 2-week high of 101.90 aided by a rise in U.S. government bond yields.

The yen showed little reaction to Friday's Japanese consumer price data that was in line with forecasts and did not do much to stir expectations for further monetary easing by the Bank of Japan. Core consumer prices rose 3.3 percent in June from a year earlier, matching forecasts.

Gold was steady at $1,292.74 an ounce after dropping to a one-month low overnight. U.S. crude CLc1 edged down slightly to $102.05 a barrel, while Chinese growth-attuned copper headed for its fifth weekly rise in six.

Unrest in the Middle East and Ukraine continued to keep investors alert for any developments that could have a wider impact on risk sentiment and markets.