World stocks fell for a second consecutive day on Thursday and the yen extended broad gains, with equity investors avoiding risky assets and preferring to take profits from a rally to 10-month highs this week.

Asian markets led the decline, with Japan's Nikkei average <.N225> falling 1.6 percent and Shanghai shares <.SSEC> down 0.7 percent. European stocks were subdued but off early lows.

The MSCI world stock index <.MIWD00000PUS>, which hit its highest level since early October on Tuesday, was down nearly 0.1 percent at 275.63 points after falling as low as 275.18, while emerging markets stocks <.MSCIEF> fell 0.4 percent.

Whilst the rally hasn't truly run out of steam, it has slowed down over the past couple of sessions as investors take a breather to consider if this is in fact a fools rally or a sustainable move to the upside, said Brian Myers, analyst at ODL Securities in London.

A sense of caution seems to be the overwhelming factor, as lessons have been learnt from those still tending burned fingers, he added.

Macro-economic data continued to support the view that the global economy was on a recovery path, but investors paused for a breather at the fag end of the European summer holiday season.

Data showed that Australian business investment surged past all expectations last quarter in a dramatically strong result that suggests the economy is growing faster than anyone thought, while consumer confidence in Italy rose by more than expected in August to its highest level since March 2007.

Longer-term outlook is still probably positive and as long as interest rates and inflation stay very low, people are still looking for things to invest which actually generate meaningful yield, said Edmund Shing, strategist at BNP Paribas, in Paris.

That's still going to be things like equities in the longer term, but that's being played up quite a lot in the short-term. So there is still risk of a pull back first.

YEN GAINS; BONDS DEFY GRAVITY

The yen extended broad gains, hitting a five-week high against the dollar, as investors turned toward relatively safer and low-yielding assets such as the Japanese currency.

The dollar fell 0.8 percent to a low of 93.38 yen, its lowest level since late July, before paring losses.

The yen is strengthening today on doubts about the view that China will pull the global economy out of recession, said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.

Also, Asian equities were in minus territory, which is supporting the yen.

But despite growing optimism about the global economic recovery, euro zone government bond prices remained well supported, with the 10-year Bund yield not far off a 3-1/2-month low set on Wednesday.

We have already highlighted this week that demand coming from commercial banks, due to excess liquidity, as well as huge wave of interest from foreign investors is the driving force behind the move higher, Calyon said in a note.

For the remainder of the week, it is difficult to go against this move particularly with month-end bond index extensions approaching, which is especially large for the U.S. Treasury market.

European credit derivatives indexes edged wider on weaker stock markets. The investment-grade Markit iTraxx Europe index was at 92.75 basis points, according to data from Markit, 0.75 basis points wider versus late on Wednesday.

Among commodities, crude oil fell toward $71 a barrel, extending losses by more than $3 after touching a 10-month high this week, as rising crude and diesel stocks eclipsed healthy economic data from the U.S. and Europe.

(Additional reporting by Naomi Tajitsu, Ian Chua and Dominic Lau; Editing by Jon Boyle)

Japan Nikkei 225 BNP Paribas