By Marc Jones
LONDON (Reuters) - World shares were just shy of a record and the euro was being squeezed on Tuesday, on expectations the European Central Bank will extend more than five years of easy monetary policy when it meets next week.
U.S. markets were set to catch up when they reopen after Monday's holidays. Futures prices point to 0.4 to 0.5 percent gains for Wall Street that would also nudge MSCI's all-world share index .MIWD00000PUS close to its 2007 record high.
Asset markets remain supported by record-low interest rates in the world's big economies as they recover from the financial crisis.
ECB chief Mario Draghi on Monday bolstered the view that the bank will cut euro zone interest rates again next week. (Full Story) Other policymakers drove home the message on Tuesday.
The ECB has discussed "a situation where inflation rates are so low that there is a danger of economic growth being held back," Austrian ECB policymaker Ewald Nowotny said. "We will discuss which measures we can take here."
British markets were also closed on Monday, and on Tuesday Britain's FTSE 100 .FTSE led the way in Europe. It rose 0.3 percent, compared with a 0.2 percent higher but record-high DAX .GDAXI and 0.1 percent lower CAC40 .FCHI in France.
The likelihood of lower rates also helped euro zone bonds from Germany DE10YT=TWEB to Italy IT10YT=TWEB, Spain ES10YT=TWEB and Greece GR10YT=TWEB. The euro EUR= came under pressure again as it dipped to $1.3625.
As well as a rate cut, the ECB is preparing a package of other easing measures, Reuters reported earlier this month. They include charging banks a penalty if they hoard cash and targeted measures aimed at boosting lending to smaller firms.
"The euro's inability to hold on to the early gains is striking," said Nick Parsons, global head of forex for National Australia Bank in London. "What I increasingly hear from investors and clients is that whatever Mr Draghi does next week will be seen as a disappointment, but they are not prepared to hold a longer euro position into that."
AFTERNOON SLUMP
Draghi said on Monday that the ECB needed to be "particularly watchful" for any negative price spiral in the euro zone, and that "more pre-emptive action may be warranted." He is set to speak again later on the final day of an ECB forum underway in Portugal.
Interest rates on benchmark 10-year German Bunds hovered at 1.358 percent. Italian bonds consolidated gains from Monday after Italy's government scored a surprisingly easy win in European Parliament elections over the anti-establishment 5-Star Movement.
The euro's early afternoon slump helped the dollar recover from a 0.2 percent loss against a basket of currencies. DXY earlier after another retreat in U.S. bond yields.
London-based analysts and traders said another big batch of U.S. economic numbers ECONG7 were the best bet for a bigger market move on Tuesday after a tight few days of trading, thinned out by the U.S. and UK holiday weekends.
Stronger-than-expected durable goods data helped the greenback. Sterling GBP=D4 sank as much as 0.4 percent against the dollar and euro as soft lending data in Britain added to concerns over a European election win for the anti-EU UKIP party.
M&A ACTIVITY
Asian trading had been largely timid, although Japan's Nikkei .N225 and shares in China saw another solid session.
A flurry of merger activity provided additional support for Europe. Intercontinental Hotels Group IHG.L jumped 4.5 percent, the top performer on the pan-European FTSEurofirst 300 .FTEU3, buoyed by British media reports of bid interest from the United States.
However, investors were keeping a wary eye on Ukraine, which launched air strikes and a paratrooper assault against pro-Russian rebels who seized an airport on Monday.
The escalation was tempered by a decisive win for billionaire Petro Poroshenko in Ukraine's weekend presidential election, which many hope will stabilise the situation.
In commodities trading, three-month copper on the London Metal Exchange CMCU3 edged to its highest in nearly three months as markets reopened after a holiday weekend.
U.S. crude futures CLc1 were flat at $104.27 a barrel. Spot gold XAU= was roughly $16 an ounce lower at $1,276.65.
(Additional reporting by Lisa Twaronite in Tokyo and Patrick Graham in London Editing by Larry King)
