Global shares edged up to their highest in nearly two weeks on Tuesday, but the rally looked to be running out of steam on the back of concerns over Europe's debt troubles and U.S. growth.
World stock markets, as measured by MSCI, were up 0.17 percent, but European markets were mixed, with Germany's DAX index down half a percent and U.S. futures pointed to a weaker open for Wall Street.
With big-ticket data like U.S. job numbers due later this week, many investors remain uncertain about a recovery in the world's largest economy, leaving risk for a correction in markets still trading at low holiday volumes.
Tepid demand at a bond tender in Italy also did little to quell renewed concerns over the euro zone's debt problems and a banking sector which the IMF has warned should be recapitalized to deal with the fallout of three years of crisis.
With consumer confidence, the (U.S) ADP jobs report, ISM Manufacturing, jobless claims and nonfarm payrolls report all due in the coming days, there is going to be a lot of nervousness around, said Ben Potter, strategist at IG Markets.
The market could also be seen as vulnerable given it has rallied ahead of these big economic reports. We think a lot of participants will be employing a 'wait and see' approach as we navigate through the next few days.
The main index of European shares rose 0.8 percent, tracking gains in Asia, but that was largely due to London advancing 2.4 percent as investors caught up with moves elsewhere after a domestic holiday.
Investors are awaiting minutes from the Federal Reserve's last committee meeting later on Tuesday which could offer more clues on divisions among board members over further stimulus measures.
While the uncertain recovery in the U.S. dominated trade, euro zone worries remained on investors' radar and were likely to discourage them to betting big on riskier assets.
An Italian bond auction drew weak demand from investors, although yields fell sharply compared to the previous auction in July, largely due to some 43 billion euros in bond purchases by the European Central Bank since.
Traders said the ECB was buying Italian government bonds in the secondary market on Tuesday, to drive borrowing costs even lower, as it beefs up its attempt to ringfence the euro zone's third-largest economy from the debt crisis.
While the ECB's efforts lent some support to the euro, it is unlikely to lift broader concerns that the risk of contagion could still engulf larger euro zone economies like France.
The premium investors charge to hold Italian bonds over German ones rose to 300 bps, its highest since the ECB stepped in to the market, on Monday.
These concerns have made investors such as U.S. money market funds reduce exposure to European banks and pushed their credit default swap spreads higher.
The Itraxx European senior financials index has pushed beyond the peaks seen during the last crisis, and at 247 basis points the spread is starting to reflect credit ratings that are not in line with their current ones.
I don't think many people will wholeheartedly buy into the recovery in equities, said Niels Christensen, currency strategist at Nordea in Copenhagen.
People going long on euro/dollar are very quick to liquidate, and to take profit on those positions, so it will be tough for the euro to rise beyond $1.4570, he said, referring to a high hit in early July.
The euro was down 0.7 percent against the dollar at $1.4412, off a session low of $1.4399 after the Italian bond auction. It also eased against the Swiss franc.
The franc, hit by Switzerland's efforts to weaken it in the past month, traded lower against the dollar, at 0.8195 francs, hovering near a five-week low touched on Monday.
Spot gold stabilized around $1,793 per ounce levels, up 0.3 percent, and after falling by nearly seven percent in about a week. It hit a record $1,911 last week.
U.S. Treasuries rose, unwinding some of the sharp losses seen in the previous session as investors braced for the Federal Reserve meeting minutes for clues on how the policy-setting panel view the economic outlook.
(Additional reporting by Atul Prakash and Naomi Tajitsu in London)