Banking worries shot back into equity markets on Wednesday after leading European bank UBS said it saw its earnings at risk for some time, weighing on investors a day after many had their best day since December.

Worries also returned about China's economy with news of a severely shrinking trade surplus. The dollar clawed back some of its previous session losses as a result.

MSCI's all-country world index <.MIWD00000PUS> was flat, held up mainly by Japanese gains that reflected something of a catch-up from Tuesday's large rally. The U.S. S&P 500 index <.SPX> gained nearly 6.4 percent overnight.

But sentiment in Europe was shaken by UBS , which said its 2008 net loss had risen to 20.9 billion Swiss francs ($18.06 billion) from the previously reported 19.7 billion francs.

The pan-European FTSEurofirst 300 <.FTEU3> was down around 1 percent. It gained more than 5 percent on Tuesday.

Markets have entered a period of volatile trading in which good or bad news -- particularly about banks -- triggers sharp reactions almost daily. Tuesday's gains, for example, were set off by Citi saying that it was profitable in the first two months of the year.

This is typical bear market behavior -- big drops and huge rallies. Investors want to hold on to most of the gain and take profits, said Justin Urquhart Stewart, director at Seven Investment Management.

Earlier, Japan's Nikkei average <.N225> jumped 4.6 percent a day after hitting a 26-year closing low. The benchmark gained 321.14 points to 7,376.12 while the broader Topix <.TOPX> rose 2.7 percent to 722.28.


The dollar has also been swinging up and down on short shifts in sentiment. It was up a quarter of a percent on Wednesday against a basket of currencies, recouping about a third of its losses on Tuesday.

The currency turned around after data showed China's trade surplus shrank to $4.84 billion in February. This was much lower than forecasts of a $27.3 billion surplus, and exports slid 25.7 percent on a year ago.

China's been weathering the storm better than most Western countries and any signs it is really starting to suffer and global trade finance is declining rapidly doesn't bode well for the West, said Christian Lawrence, an FX strategist at RBC Capital Markets.

The euro shed 0.1 percent on the day to $1.2657, having touched a two-week high of $1.2823 on trading platform EBS on Tuesday.

On euro zone government debt markets, the 10-year cash Bund yield was up 4 basis points at 3.046 percent. The interest rate-sensitive two-year Schatz yield was flat at 1.363 percent. Bond yields move inversely with prices.

(Additional reporting by Joanne Frearson and Kirsten Donovan; editing by David Stamp)