European stocks edge higher before ECB meeting

LONDON (Reuters) - Stocks in Europe extended a week-long rally on Thursday while the euro slipped as investors awaited a European Central Bank policy meeting for signs of any future interest rate cuts.

The ECB is expected to keep its benchmark rate at 0.75 percent. However, markets are looking for clues on whether the deepening recession across the euro zone will prompt President Mario Draghi to signal a further easing in policy.

European stocks covered by the FTSE Eurofirst 300 index, which hit its highest level for the year this week, edged up 0.2 percent to 1,126.13 points in early trade. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were as much as 0.35 percent higher.

The MSCI world equity index, which has risen over 11 percent this year, added 0.1 percent, helped by further strong gains in Asia-Pacific shares outside Japan that are trading near a 16-month high.

"The momentum is positive for equity markets, which remain cheap compared with credit and government bonds," said Frederic Jamet, head of management at State Street Global Advisors France.

Signs of renewed growth in the United States and a possible end to the slowdown of China's economy have supported world equity markets this week. However, a lack of progress in Washington in talks to avoid the "fiscal cliff" of spending cuts and tax rises starting in January is limiting the gains.

Financial markets were reassured on Wednesday by a statement from U.S. President Barack Obama that a deal was possible in "about a week" if Republicans compromise on taxes.

The lack of a breakthrough so far was supporting safe haven government bonds, lifting the main German bund future contract 5 ticks to 143.33. Ten-year 10-year U.S. Treasury yields are hovering near a three-week low at 1.59 percent.

In the European bond market investors were focused on an auction of new French government paper later, which should see good demand due to higher yields than on German debt, but could reflect growing concerns about the outlook for France's economy.

The euro, which hit a seven-week high of $1.3127 on Wednesday, was down about 0.15 percent at $1.3045.

Gains in crude oil and other commodity markets were being checked by niggling worries about the outlook growth in the global economy before Friday's release of the U.S. non-farm payrolls report for November.

U.S. crude futures eased 0.15 percent to $87.74 a barrel while Brent steadied around $108.82.

"Overall, the markets are weak with the global economic concerns and will be trapped in a range until the U.S. 'fiscal cliff' issue is behind us," said Tony Nunan, an oil risk manager with Mitsubishi Corp in Tokyo.

Spot gold edged down 0.3 percent to $1,687.74 an ounce, nearing its one-month low of $1,684.40 hit in on Wednesday after a weaker price forecast by Goldman Sachs.

(Reporting by Richard Hubbard; editing by David Stamp)