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LONDON (Reuters) - World shares steadied near 17-month highs on Thursday, ending a week-long rally, while oil slipped as the latest setback in talks to avert a U.S. fiscal crisis kept buyers away.
The rising tension in the U.S. budget negotiations left futures prices for the S&P 500 and the Dow Jones pointing to a flat to lower open on Wall Street as well. .N
In the currency markets, the Bank of Japan's widely expected decision to ease policy for a third time in four months encouraged traders who had sold yen ahead of the move to take profits, sending the dollar and euro higher.
However, as trading winds down ahead of the holiday season all markets remain highly sensitive to progress in Washington - or the lack of it - in averting the automatic tax rises and spending cuts that could tip the economy into a recession.
"The 'fiscal cliff' is a reality and I believe that markets have got themselves into a hopeful state rather than a realistic state," said Gerard Lane, equity strategist at Shore Capital.
MSCI's world equity index .MIWD00000PUS has risen steadily over the past five weeks on optimism that a budget deal would clear the way for stronger growth in 2013. It was steady near 342 points, not far from levels last seen in July 2011.
In Europe, the FTSEurofirst 300 index .FTEU3 briefly touched a new, 19-month peak of 1,143.04 points, before slipping back to be little changed at 1,141.80.
London's FTSE 100 .FTSE, Paris's CAC-40 .FCHI and Frankfurt's DAX .GDAXI were all about 0.1 percent above opening levels. .L.EU.N
The wrangling over the U.S. budget has grown more heated since Republican leaders said they would push ahead with their own plan despite signs of strains within their own party and the opposition of Democratic President Barack Obama.
Hopes remain high that policymakers can still reach a deal by year-end, which would be positive for assets that benefit from an improved growth outlook. But few investors were willing to make any fresh bets at this stage.
"Despite the heated rhetoric, we expect a deal on the fiscal cliff to be struck between Democrats and Republicans by the deadline," BNP Paribas analyst Anne-Laure Tremblay said
"This should be mildly positive for risk appetite."
In the currency markets, the Bank of Japan's latest policy move was the main driver of prices. On top of expanding its asset-buying program, the BOJ said it would review its guidelines for medium- and long-term price stability at its next policy-setting meeting in January - a signal of further easing.
The dollar fell 0.4 percent to 84.09 yen, off a 20-month high of 84.62 yen hit on Wednesday. The euro was down 0.1 percent at 111.57 yen, retreating from a 16-month high.
The dollar had gained more than 6 percent against in the past five weeks as investors decided that Japan's new government would push the BOJ into more aggressive easing steps. Many players said there was still scope for further yen weakness.
"In the race to debase and weaken domestic currencies, the BOJ is still running behind the Fed in terms of the scale of asset purchases on both an absolute and relative basis," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
The worries over the latest course of events in Washington spread through the commodity markets, stoking concerns about future of demand from the world's biggest consumer.
Brent crude slipped 21 cents to $110.15 a barrel and U.S. oil fell 7 cents to $89.91.
Gold traded at around $1,668.90 an ounce, not far from its a 3-1/2-month low hit earlier this week of $1,661 an ounce. It is on track for its biggest quarterly drop since the third quarter of 2008 when the financial crisis hit hard.
London copper hit a three-week low, slipping by one percent to $7,844 a tonne. That extended losses in the previous session, when prices had dropped by more than 1 percent.
Additional reporting by Tricia Wright and Jan Harvey; Editing by Alastair Macdonald