* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* European stocks fall for fourth straight day, euro struggles
* Periphery euro zone bond yields rise
* Gold touches one-month high
* Oil slips lower
By Marc Jones
LONDON, May 30 (Reuters) - European shares fell for a fourth day running on Tuesday and the euro was battling to avoid a similar decline, as the prospect of early Italian elections and Greece's ongoing struggles nudged the political temperature higher.
The region's banks also came under pressure as Deutsche Bank cut the sector to "underweight", while sterling rebounded after being weakened recently by signs that Britain's election next week might be closer than originally expected.
All this drove the traditional safe-haven assets of gold and the Japanese yen higher and briefly pushed yields low-risk German government bonds to their lowest in more than a month.
Low inflation readings in Spain and Germany and European Central Bank chief Mario Draghi's commitment to continued stimulus in a speech on Monday helped keep the euro subdued at $1.116.
At the heart of the moves, however, were signs that elections in Italy may now come as early as September, after the 5-Star Movement became the fourth big party to back a switch to a proportional electoral system.
Italian shares remained flat having slumped 2 percent on Monday and the premium investors demand to hold Italian debt grew again as southern euro zone bonds were all pushed into the red.
"We always knew Italy was going to come back into the market's sights, but I think people thought we would have a longer stay of execution," said Rabobank currency strategist Jane Foley.
"It does seem like the market will have to face worries about elections and populism again over the summer. That of course is a drag for the euro."
Wall Street opened 0.2 percent lower, as traders returned from a three-day weekend and eyed profit maximisation as the S&P 500 and Dow Jones headed for their sixth month of gains in the last seven.
The dollar got a boost as U.S. consumer spending recorded its biggest increase in four months in April and monthly inflation rebounded, bolstering expectations U.S. interest rates will rise again next month.
The dollar index, under pressure during the past fortnight from concern over the difficulties of U.S. President Donald Trump, gained around 0.1 percent in morning trade in Europe .
In spite of Europe's recent weakness, the pan-European STOXX 600 index is still set to end May in positive territory and near a two-year high.
It will also be the index's fourth straight month of gains and the seventh for world stocks. But investors are reshuffling their portfolios as they seek fresh catalysts after a surprisingly strong earnings season and a hot streak of euro zone macro economic data.
European equity strategists at Deutsche Bank downgraded banks to "underweight" saying the sector's valuations - which have soared around 80 percent over the last year - were no longer "compelling".
They also cut tech firms to "neutral", and JP Morgan's analysts did the same to carmakers. At the same time, Deutsche upgraded construction and energy stocks to "overweight" and JP Morgan raised UK stocks to "neutral", saying they were at the cheapest-ever levels on a price-to-book basis relative to region.
"We think UK is becoming interesting in the regional allocation again," JPMorgan's strategists, led by Mislav Matejka, said in a note to clients.
"(The) UK is a defensive market with high dividend yield. It should perform better in the backdrop of potential softening in activity indicators, lower inflation prints and continued range-bound bond yields."
Greece's debt problems continued to simmer after it failed to reach a deal on the next installment of its bailout programme earlier this month.
Greek Finance Minister Euclid Tsakalotos on Tuesday dismissed reports in Germany's Bild newspaper, that the country could opt out of receiving the new tranche if it does not receive clearer debt relief terms.
There was also more turbulence in Washington as the White House announced that Trump's communications director, Mike Dubke, was preparing to quit after just three months in his job.
In commodities, oil prices retreated around 80 cents a barrel, as concerns lingered about whether the extension of output cuts by OPEC and other producing countries will be enough to support prices.
Global benchmark Brent fell 1.3 percent to $51.46 and U.S. crude futures slipped about 1.6 percent to $49.35 a barrel.
Gold rose to a one-month high of $1,270 an ounce before it ran out of steam. It has risen almost five percent over the last three weeks as stock markets and other risk plays have stuttered.
Risk surrounding the closeness of Britain's upcoming elections, the prospect of early elections in Italy and worries over Greek debt were supporting gold, said Jeffrey Halley, a senior market analyst at OANDA.
"The picture will get more muddy as the week goes on as we have a lot of data from around the world coming in," he said.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Patrick Graham in London and Nithin ThomasPrasad in Bengaluru; Editing by Larry King)