World stocks bounced back on Tuesday after hitting three-month lows a day earlier, but gains were limited ahead of key economic data and rate decisions from the European Central Bank and the Bank of England this week.

Worries over tougher banking regulations and Greece's deficit situation prompted equity investors to trade cautiously as they waited for the European Commission recommendations on the country's fiscal reform plans on Wednesday.

At 0927 GMT (4:27 a.m. EST), the MSCI world equity index <.MIWD00000PUS> was up 0.4 percent at 289.54 points after touching its weakest level since early November on Monday. The FTSEurofirst 300 <.FTEU3> index of top European shares was almost flat, but energy stocks fell after oil major BP's results disappointed investors.

Despite the triple digit rally in the U.S. yesterday, confidence still remains downbeat. There is a clear sense of nervousness across markets as a raft of economic data crosses screens this week, culminating in Friday's non-farms, said Owen Ireland, analyst at ODL Securities.

On Monday, the Dow Jones industrial average <.DJI> shot up 118 points after the Institute for Supply Management's manufacturing index showed U.S. factory activity grew in January at a faster rate than expected.

But investors are awaiting the U.S. employment report for January on Friday for a clearer market direction. Economists polled by Reuters are looking for a slim gain, probably not enough to put a dent in the 10 percent unemployment rate.

The Reserve Bank of Australia surprised the markets on Tuesday by holding its key cash rate steady at 3.75 percent, against expectations for a rise to 4.0 percent.

The Australian dollar tumbled on the move, which came ahead of Thursday's policy outcomes from the ECB and the Bank of England.

DOLLAR NEAR HIGHS

Australia's move sparked a knee-jerk sell-off in risk trades and boosted demand for lower-yielding currencies such as the yen and the dollar.

The dollar was trading flat versus a basket of currencies <.DXY> at 79.20, though still holding close to its recent six-month highs of 79.534.

The Australian dollar sold-off as investors reconsidered their long positions versus the U.S. dollar, the yen and the New Zealand dollar in particular, said Lauren Rosborough, a currency strategist at Westpac.

There may be more room on the downside, with the December Aussie/dollar low at $0.8735 now a key level to watch.

Caution is likely to prevail with White House adviser Paul Volcker due to appear before the Senate Banking Committee later in the day to defend the administration's proposal to limit risk-trading by banks, which triggered a sell-off in equities when it was first unveiled last month.

According to testimony obtained by Reuters, Volcker will urge Congress to curb the risks taken by large banks to help prevent them from being treated as too big to fail.

Euro zone government bond futures fell, with trade seen subdued as investors awaited European Commission recommendations later in the week on Greece's fiscal reform plans.

In other markets, European credit default swap indexes were marginally tighter, tracking gains in equities, while crude oil prices rose 0.5 percent to trade near $75 a barrel.

But gold fell after sharp gains on Monday, while copper prices slipped on rising inventories and worries about further monetary tightening in China.

(Additional reporting by Neal Armstrong, editing by Mike Peacock)

Australia