European stocks reversed course after China raised interest rates and corporate earnings disappointed on Friday, while the cost of insuring risky European debt rose on fears for the health of the U.S. credit market.

China's fifth increase in rates in 15 months was aimed at keeping inflation at bay. It added 0.27 percentage points to commercial banks' benchmark one-year deposit and lending rates.

Such a move had been expected after recent strong economic growth data, but it was enough to cool sentiment on bourses about the state of the world economy.

The FTSEurofirst 300 index of top European shares was down 0.1 percent. London's FTSE 100 index was flat while Frankfurt's DAX was down 0.4 percent, as was Paris' CAC 40.

Wall Street also looked set for a poor start.

World stocks had earlier hit another all-time high as investors set aside worries about the credit market to focus on recent, positive corporate earnings and a solid global economic backdrop.

MSCI's main world stock index rose briefly above its previous record, reached on Monday, as European and Japanese shares added to Wall Street's overnight gains. Japan's Nikkei, for example, closed up 0.23 percent or 41.36 points at 18,157.93.

China and some disappointing earnings -- Google in the United States and Ericsson in Europe -- put a lid on sentiment while concerns about securities based on U.S. subprime -- or risky -- mortgages kept investors on edge.

The iTraxx Crossover index a key barometer of European credit market sentiment, hit a fresh contract wide of 326 basis points, some 17 basis points higher than late on Thursday.

U.S. Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending.

Subprime is definitely there at the forefront of everyone's mind and it's not going away, said Marc Ostwald, bond analyst at Monument Securities in London


The dollar hovered near its record low against the euro while the Australian and New Zealand dollars gained as investors flocked to higher-yielding currencies.

The euro was steady at $1.3786, within sight of a record high of $1.3834 hit earlier this week when the dollar fell broadly on subprime worries.

The Australian dollar rose as high as 107.72 yen, its highest since September 1991, while the New Zealand dollar hit a peak of 97.31 yen, a level not seen in 21 years.

Both currencies are key targets in the carry trade in which investors borrow in low-yielding currencies to buy assets in high-yielding ones.

Credit worries gave some support to euro zone government bonds. Ten-year yields were 3.6 basis points down at 4.509 percent while the interest rate-sensitive two-year yield was 3.5 basis points lower at 4.459 percent.