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LONDON (Reuters) - The euro dipped to just below recent highs and European stocks fell on Tuesday amid concern about the scale of China's growth slowdown, while investors eyed crucial talks between Italy's government and unions on labor reforms.
U.S. stock index futures also pointed to a weaker start on Wall street ahead of new data on the housing market, and after the S&P 500 .SPX advanced for a third straight session to within 10 percent of its all-time closing high.
Italian Prime Minister Mario Monti is meeting union bosses in Rome to reach a deal on reforming labor laws, seen as crucial to government efforts to revive the debt-laden economy in which factory output has fallen sharply.
Before the meeting, equity investors were trimming positions for a second day after a rally to an eight-month peak last week on signs of a recovery in the giant U.S. economy and after big improvements in corporate balance sheets.
U.S. data on new building permits and housing starts could give the market a fresh boost if it shows signs of a recovery.
"Strategically, I am bullish on equities," said Neil Dwane, chief investment officer for Europe at Allianz Global Investors/RCM. "The thing is that they have rallied quite a long way, so it's harder to be as confident when you think: have we solved any of the economic issues?"
The FTSE Eurofirst 300 .FTEU3 was down one percent at 1,094.40 points after snapping a four-session winning streak on Monday that saw it touch levels last seen in July.
Traders' growing nervousness about the outlook could be seen in the Euro STOXX 50 volatility index .V2TX, a key gauge of sentiment, which jumped 9.1 percent after three days of falls. The higher the volatility index, the lower the investor appetite to take on more risk.
Meanwhile U.S. Treasury yields, which have risen sharply in the past week on the improved U.S. economic outlook and reduced expectations of further monetary easing in the near term, also dipped on Tuesday but the fall was expected to be short lived.
"I think that movement (in U.S. Treasury yields)...is definitely a confirmation that the market is switching much more in terms of its mentality towards a recovery mentality," Graham Neilson, chief investment strategist at Cairn Capital, said.
"I think yields are going to go higher from here as well."
The 10-year U.S. Treasury yield, which moves inversely to price, stood at 2.35 percent after rising as high as 2.392 percent on Monday, its highest level since late October.
Higher Treasury yields and concerns over the impact of China's economic slowdown on the world economy have helped lift the dollar against a basket of currencies. The dollar index .DXY was up 0.4 percent to 79.77 .DXY.
The euro dipped 0.35 percent to just under $1.32, over half a cent below one-week highs.
U.S. Treasury bond yields: link.reuters.com/cuq27s
Italy industrial orders: link.reuters.com/keq27s
China's industrial output: link.reuters.com/bam96s
German government bond yields followed Treasuries and dipped slightly as investors were lured back into the market after 10-year yields broke last week above 2 percent, the upper end of the year's trading range to that point.
Among the weaker euro zone economies, Italian bonds rose on wariness about the labor talks, and 10-year yields were last up 4.2 basis points at 4.88 percent.
The equivalent Spanish yield was up 5 basis points at 5.22 percent after ratings agency Moody's said Spain's fiscal outlook remained challenging despite recently softened deficit targets.
Commodities were broadly weaker, with base and precious metals both edging down after the worries about a sharp slowdown in China grew when BHP Billiton (BLT.L), the world's biggest miner, noted signs of "flattening" iron ore demand there.
Earlier this month China cut its 2012 growth target to an eight-year low of 7.5 percent, fuelling caution about demand for natural resources and heightening fears the euro zone crisis would hit global growth.
Brent crude fell towards $124 a barrel on Tuesday as signs of increased supply from Saudi Arabia and a return to pre-war exports from Libya added to the selling pressure on the market.
Gold lost about 0.6 percent on the day to $1,649.24 an ounce, snapping a three-session advance.
Additional reporting by Toni Vorobyova; Editing by Tim Pearce