By Marc Jones
LONDON (Reuters) - A four-day rally in world stocks cooled in Europe on Thursday, as oil prices steadied and nerves set in ahead of crunch talks between EU leaders aimed at keeping Britain in the 28-member bloc.
Asian bourses had seen gains overnight including almost 3 percent for Tokyo's Nikkei. But the mood faltered shortly after Europe (FTEU3) opened as weak company results from the likes of Nestle (VX:NESN) compounded other sentiment-sapping factors.
London's FTSE (FTSE) lead the way down with a 0.7 percent fall as its miners dipped in tandem with oil and the political pressure mounted on sterling
British Prime Minister David Cameron will discuss a final draft agreement when he meets the other EU leaders on Thursday evening.
Summit chairman Donald Tusk is hoping to reach a deal that will enable Cameron to return to London on Friday and campaign for Britain to stay in the EU in a referendum on the issue expected in June.
"There will not be a better time for a compromise," wrote Tusk, a former prime minister of Poland. "It is our unity that gives us strength and we must not lose this. It would be a defeat both for the UK and the European Union, but a geopolitical victory for those who seek to divide us."
The bigger force for markets appeared to still be oil, however. Wednesday had seen a more than 7 percent jump in Brent on hopes that big producers will cap output. And though the rally had lost momentum, prices were holding their ground.
Brent futures (LCOc1) hovered at $34.71 a barrel after hitting an intraday high of $34.99, while U.S. crude (CLc1) steadied at $31.25 a barrel.
"The correlation between oil and equities is still pretty high," said Societe Generale (PA:SOGN) strategist Alvin Tan.
"It is true to say sentiment remains pretty fragile. We have had this big rally in oil since the Doha deal. That has dipped a little bit and market is now groping a little bit for the next move."
Late on Wednesday, Standard and Poor's delivered the latest blow to oil producers as it downgraded Saudi Arabia, Brazil, Kazakhstan, Bahrain and Oman's credit ratings.
The impact was felt almost immediately in Oman as borrowing costs jumped at an auction of government bonds.
BULLARD LESS BULLISH
In the currency markets the more subdued mood saw the safe-have yen
The euro
It would be "unwise" for the central bank to continue hiking rates given declining inflation expectations and recent equity market volatility, St. Louis Fed President James Bullard said late on Wednesday, in comments that mark a stark change of direction for one of the Fed's most hawkish members.
Despite the uncertain start in Europe, there was still a whiff of risk appetite around as lower-rated southern euro zone bonds made ground in the debt markets.
Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) jumped 1.9 percent. Tokyo's Nikkei (N225) gained 2.8 percent, shrugging off the biggest drop in domestic exports since 2009.
Australian shares (AXJO) climbed 2.2 percent and South Korea's KOSPI (KS11) added 1.1 percent, though Shanghai stocks <.SSEC> dipped in a muted reaction to a rise in inflation.
"Recovering oil prices have set the stage for an accelerated rebound in global stocks, while minutes from the FOMC supported the mood," said Rhoo Yong-seok, a stock analyst at Hyundai Securities.
Spot gold