Europe shares rally as Ukraine fears ease, oil drops

By Nigel Stephenson

LONDON (Reuters) - European stocks rallied and prices of top-rated bonds fell on Monday as investors breathed easier over the crisis in Ukraine, which had appeared to escalate dangerously on Friday.

The dollar held steady against a currency basket after falling broadly on Friday, when the government in Kiev said its artillery had hit a Russian armoured column. Russia denied its forces had crossed into Ukraine.

Brent crude oil fell more than $1 a barrel to below $103, erasing a similar rise on Friday. Prices fell as Ukraine tension eased and supply increased from Libya, another trouble spot.

Wall Street looked set to open higher, with stock index futures gaining in pre-market trade.

Still, tension remained high in Ukraine. Each side accused the other of hitting a refugee convoy of buses with rockets, killing people trapped inside.

Russian Foreign Minister Sergei Lavrov said no progress had been made towards a ceasefire in talks with his Ukrainian, German and French counterparts, but that all issues related to a Russian humanitarian convoy heading for Ukraine had been resolved.

"We saw some diplomatic efforts over the weekend and there has been no major escalation in the conflict, but it is much too early to extrapolate this for the rest of the week," said Norbert Wuthe, rate strategist at Bayerische Landesbank.

The pan-European FTSEurofirst 300 stock index gained 1 percent, reversing Friday's losses but off the day's highs. Germany's Russia-exposed DAX index added 1.6 percent. Russian shares and the rouble firmed.

Asian shares were broadly flat. MSCI's main measure of Asia-Pacific shares outside Japan was up 0.1 percent.

Wall Street took a hit on Friday after the report of the attack on the Russian column. Stocks later pared losses to close mixed. [.N]

Yields on U.S. Treasury bonds, often sought at times of heightened tension, fell on Friday. Ten-year bonds hit 2.34 percent, their lowest since mid-June 2013, but traded close to 2.37 percent on Monday.

Yields on German 10-year debt, the euro zone benchmark, rose 2.6 basis points to a shade above 1.001 percent.

IRISH YIELDS

Bailed-out Ireland's 10-year bond yields touched a record low below 2 percent after Fitch upgraded its credit rating to A-minus on Friday, citing progress on its finances over the last year. The bonds last yielded 2.01 percent, up 1 bps on the day.

In currency markets, the euro was less than 0.1 percent down at $1.3388, still close to a nine-month low of $1.3333 hit on Aug. 6. The dollar edged up to 102.47 yen.

Analysts said dollar moves were likely to be restrained before an annual meeting of central bankers in Jackson Hole, Wyoming, at the end of the week.

Adam Myers, head of European FX strategy with Credit Agricole in London, said there were particular risks to the dollar against the euro.

"The euro tried several times to break out higher last week and was stopped each time around $1.34. I think the danger is we may see that (barrier) broken this week."

Sterling rebounded on Monday from six straight weeks of losses as stagnant wages pushed back expectations of when the Bank of England would raise interest rates. The pound rallied after BoE Governor Mark Carney said in a newspaper interview on Sunday a rise in real wages was not a pre-condition for a rate hike.

The pound was last up 0.2 percent at $1.6733, as Carney's comments offset data showing house prices falling.

Brent crude for October delivery was last down 1.2 percent at $102.29 a barrel.

Gold slipped below $1,300 an ounce in Asia and was last trading at $1,301.

(Additional reporting by Marius Zaharia in London and Shinichi Saoshiro in Tokyo, Editing by Larry King)