Profit-taking took the euro off two-month highs on Monday and caused euro zone stocks to pare back recent gains amid signs of an improving if uneven recovery by the region's economy.

Debt-ridden Ireland's politics were in focus and emerging market stocks were weak, hurt by inflation worries.

The flash purchasing manager services index for the single currency zone came in above expectations, confirming gathering strength. Markit's index, comprising surveys of around 2,000 businesses ranging from banks to hotels, rose to 55.2 from 54.2 in December, comfortably beating expectations of 54.3.

Worries about euro zone debt have eased in recent weeks on the back of renewed economic vigor in core economies and on hopes for a beefing-up of the bloc's rescue fund.

German Finance Minister Wolfgang Schaeuble was quoted on Sunday as saying the country's conservative coalition government wants to deliver a comprehensive package soon to strengthen the EFSF bailout fund.

But there is also concern about Ireland, which has been at the center of the crisis, after its junior coalition party withdrew from Prime Minister Brian Cowen's government on Sunday, signaling the end of a crisis-riddled administration and hastening an election due on March 11.

You've got to think Ireland's going to come under some pressure... but it remains to be seen whether that upsets the positive tone in the rest of the periphery, a bond trader said.

The euro was down half a percent at $1.3569 but only after hitting a new two-month high of $1.3648 in early Asian trading.

Speculators turned long on the euro for the first time in two months in the week ended January 18 while doubling their bets against the dollar, figures from the Commodity Futures Trading Commission showed on Friday.


World shares as measured by MSCI were slightly lower, weighed down by European and emerging market stocks.

The FTSEurofirst 300 index of top European shares was down 0.4 percent, having started in positive territory. It has been an outperformer for much of this year.

Philips Electronics weighed on the index, after reporting lower-than-expected fourth-quarter net profit on poor TV sales. It warned that consumers in mature markets will be reluctant to spend this year.

Earlier, concerns about rising inflation gave investors an excuse to book profits in some Asian markets after strong rallies in 2010, but rather than exiting the region, funds were being reallocated to countries seen as having a better grip on price pressures.

Japan's Nikkei average rose 0.5 percent, with resource shares popular and recently beaten-down exporters bought amid expectations of robust earnings reports from Japanese firms this week.

Spot gold rose around 0.5 percent to around $1,350 per ounce, after posting its third consecutive weekly loss..

(Editing by John Stonestreet)