Doubts about the euro zone's ability to come up with a comprehensive plan shook financial markets on Thursday although confirmation that a bailout fund could buy bonds took the edge off the worst fears.

Wall Street looked set for a slightly higher opening, but world stocks as measured by MSCI .MIWD00000PUS were down around two-thirds of a percent, European shares lost half a percent and volatile emerging market equities lost around 2 percent.

Investors are also increasingly concerned about a slowdown in China's economy, fearing that it will become sharp rather than gradual.

News that deposed Libyan leader Muammar Gaddafi had died of wounds suffered in his capture near his hometown of Sirte on Thursday had little market impact.

Optimism had been growing that the weekend meeting of European Union leaders in Brussels would come up with a substantial plan for dealing with the debt crisis, primarily through ramping up the bloc's bailout mechanism, the EFSF.

But French President Nicolas Sarkozy said on Wednesday that

plans to tackle the crisis had stalled with Paris and Berlin at odds over how to increase the bailout fund.

This kind of wrangling -- a kind of two steps forward, one step backwards process that has been going on for most of this year -- is wearing down investor confidence in government action.

With the mood they're in at the moment, markets won't even believe anything that is decided (at the summit), said Justin Urquhart Stewart, director at Seven Investment Management.

A report in the Financial Times that a related plan to plan to strengthen Europe's banking system is set to fall short of market expectations also accentuated the mood.

Nonetheless, guidelines for the bailout fund obtained by Reuters confirmed it will be able to buy bonds on the secondary market once a request from a country is approved by ECB and euro zone finance officials.

This helped erase the worst losses on equity markets and turned the euro around.


The guidelines reversed gains in core German bonds, where the yield was up slightly.

Earlier, the spread between the German yield and that of France and Spain widened.

Both countries had what analysts said were reasonably successful bond auctions.

Spain sold 3.91 billion euros of three lines of government bonds in its first bond auction since Moody's cut the country's sovereign ratings by two notches on Tuesday.

France sold 7.49 billion euros of a fixed coupon bond, days after Moody's warned on the country's sovereign ratings.

On foreign exchange markets, the euro climbed sharply after the guidelines document was reported.

It was at $1.3788 after earlier being as low as $1.3672.

The market is grateful for some small mercies at the moment ahead of the summit, said Steve Barrow, head of G10 currency research at Standard Bank.