By Richard Hubbard
LONDON (Reuters) - A global share market rally petered out on Thursday as investors began worrying about likely U.S. political battles over spending cuts, halting the gains that followed a congressional deal to avoid sharp tax increases.
European shares, which had risen 2.1 percent to hit a 20-month high on Wednesday, edged up just 0.3 percent <.FTEU3> in early trade while other riskier assets such as oil and the euro eased. The MSCI world equity index <.MIWD00000PUS> dipped from an 18-month high to be down 0.1 percent at 346.7 points.
President Barack Obama and congressional Republicans face two months of tough negotiations on spending cuts and an increase in the nation's debt limit after the hard-fought deal averted the "fiscal cliff" of automatic tightening that had threatened to push the U.S. into recession.
"Investor concerns will now likely switch to uncertainty surrounding the raising of the U.S. debt ceiling which will involve another political battle over controlling public spending," said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ.
Thursday's retreat might have been sharper but for data showing activity in China's services sector and at U.S. factories had expanded in December, brightening the outlook for global growth.
Investors are now focusing on the December U.S. employment report due on Friday. This is expected to show modest job growth of around 150,000 compared with 146,000 in November.
Among the major currencies, the euro, which had touched an 8-1/2 month high against the dollar, slipped 0.3 percent to be at $1.3150. The dollar rose 0.15 percent <.DXY> against a basket of major currencies with the yen not far from a 29-month low against the U.S. unit.
The dollar's strength and profit-taking pushed oil prices lower, with Brent crude slipping 0.5 percent and U.S. crude futures down 45 cents to $92.67.
"After the initial excitement, reality sets in," said Victor Shum, oil consultant at IHS Purvin & Gertz. "There will be other negotiations and the deal is a compromise."
(Reporting by Richard Hubbard; editing by David Stamp)
