Oil prices also eased after hitting an eight-week peak on supply concerns linked to rising Middle East tension, but the rally in soft commodities, which has seen corn and soybean prices soar to record highs, showed no signs of abating.

The FTSEurofirst 300 index .FTEU3 of top European companies was down 0.25 percent at 1,062 by 4.15 a.m. EDT. It closed at its highest level since early April on Thursday, helped by a robust start to the second quarter company earnings season.

In stark contrast, investors are now paying for the privilege of holding shorter-dated government debt of perceived safe havens such as Germany and France, suggesting a high degree of nervousness about the euro zone debt crisis.

Something may have to give, although there appears to be a floor underlying stock markets at least -- namely that the gloomier the economic horizon, the more investors expect central banks to ride to the rescue with all guns blazing.

"I do see profit taking coming in sooner rather than later. I don't see how the UK and European markets can keep ignoring Spanish bond yields at above seven percent," JN Financial senior trader Adrian Redmond said of the stock market rally that has seen leading European shares climb nearly 3.5 percent in little more than a week.

Euro zone finance ministers are expected to finally sign off on a deal to bail out Spain's banks with up to 100 billion euros but the exact amount will probably not be known until September.

The impending bank bailout was not having much impact on Spanish bonds, with the 10-year debt yield holding near an unsustainably high 7.0 percent although a rise in financial stocks lifted Spain's IBEX .IBEX by 0.2 percent, bucking the trend elsewhere in the region.

"We've had most of the details leaked already on what they're going to rubber stamp today. Spain didn't trade well after the auction yesterday -- to me it's only a matter of time before it goes for the full bailout," a bond trader said.

The MSCI world equity index .MIWD00000PUS slipped 0.17 percent and the euro fell 0.2 percent against the dollar to $1.2253, staying above a two-year low of $1.2162. It hovered near a record low versus the Australian dollar.

"I think there is a bit of a theme going on, and the biggest single mover is central bank reserve diversification out of the euro, and into especially Aussie," said Jesper Bargmann, head of Asia G11 spot FX for RBS in Singapore. "I do think we can carry on lower ... As a macro trade it's got everything going for it."

RECORD GRAIN

Grain prices pushed to record highs as scattered rains in U.S. Midwest did little to douse fears that the worst drought in half a century will not end soon and relieve worries around the world about higher food prices.

U.S. new-crop corn rose on Friday, taking its rally to more than 55 percent in five weeks, as crops continued to wilt under searing Midwest heat.

Brent crude held above $107, edging lower after a surge of 20 percent in four weeks prompted some selling.

Oil hit an eight-week high on Thursday as escalating fighting in Syria, the bombing of a bus carrying Israeli tourists in Bulgaria and disruptions in output in the North Sea stoked supply fears. A strengthening of the dollar .DXY after a recent slide is also weighing on crude futures.

Gold held around $1,585 per ounce as investors clung to hopes for more monetary easing from the U.S. central bank after weak data in the previous session, but a dollar rebound is likely to cap gains.

(Additional reporting by Richard Hubbard, Colin Packham, Masayuki Kitano, Rujun Shen, Manash Goswami and William James; Editing by Catherine Evans)

• A Permanent Economic Emergency