Shares capped by U.S. budget, Italian worries

LONDON (Reuters) - World shares steadied, the euro hovered just above a seven-week low and German government bonds rose on Friday, as concerns over the economic fallout from possible U.S. spending cuts and Italy's political stalemate dampened sentiment.

Automatic spending cuts worth $85 billion are due to be introduced on Friday after U.S. lawmakers failed to reach a deal to avert them.

The International Monetary Fund said on Thursday it would probably slice 0.5 percentage points off its 2 percent 2013 growth forecast for the world's biggest economy if the cuts are fully implemented.

"Financial markets are eerily calm about the issue. Nobody is talking about the sequestration, and I worry about the seeming lack of interest when market sentiment is far from stable after sharp swings following the Italian election," said Hiroshi Maeba, head of FX trading Japan at UBS in Tokyo.

After shares in Asia had edged down, European shares also got off to soft start. Italy's main FTSE MIB <.ftmib> stock market was down 0.5 percent while London's FTSE 100 <.ftse>, Frankfurt's DAX <.gdaxi> and Paris's CAC-40 <.fchi> were all broadly flat. <.l><.eu/>

Italy's political deadlock has raised concerns about its economic rehabilitation program.

The country's bonds were steady as trading began to gather pace, following their biggest falls in six-months this week. German government bonds, which have been the main beneficiaries of the volatility, opened higher and were last up 9 ticks at 145.07.

New euro zone and UK manufacturing PMI data due just before 0900 GMT are also unlikely to change the picture of a currency bloc in recession and destined, at best, to recover only very slowly in the second half of the year.

China's equivalent survey, out earlier, showed growth cooling and underlined the country's patchy economic recovery . The U.S. report is also due out later in the day.

The biggest concern is that political instability in Italy, the euro zone's third-largest economy, could reignite the bloc's crisis, now in its fourth year. Some have questioned whether the European Central Bank's pledge to help struggling member states which ask for aid can be utilized if there is no workable government.

The euro was slightly higher against the dollar at $1.3090 in earlier trade, a day after it notched its biggest monthly fall against the dollar in nine months.

Italy's uncertainty is also expected to restrict the weekly repayments of the European Central Bank's 1 trillion euros worth of crisis loans, details of which are due at 1100 GMT.

(Reporting by Marc Jones)

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