(Corrects first paragraph to show Italy is the euro zone's third largest economy)
By Richard Hubbard
LONDON (Reuters) - The euro dipped just below its highest level in more than a week and European stocks edged lower on Tuesday as investors eyed talks between Italy's government and unions on reforms seen key to turning around the euro zone's third largest economy.
Prime Minister Mario Monti's meeting with union bosses could make or break his brief tenure as head of a government struggling to pay down massive debts and find ways to revive an economy in which factory output has fallen sharply.
Ahead of the meeting, investors were expected to be cautious about pushing stock markets higher after they rose to eight-month peaks on signs of a recovering U.S. economy and improving corporate balance sheets.
"Strategically, I am bullish on equities," Neil Dwane, chief investment officer for Europe at Allianz Global Investors/RCM, said.
"The thing is that they have rallied quite a long way, so it's harder to be as confident when you think: have we solved any of the economic issues."
The FTSE Eurofirst 300 opened down 0.2 percent at 1,103.05 points after snapping a four-session winning streak on Monday that saw it touch levels last seen in July.
Meanwhile the flow of funds into riskier asset markets has raised U.S. Treasury yields, underpinning the dollar against most major currencies and leaving the euro hovering at $1.3215, around half a cent below one-week highs.
Bund futures reversed opening losses in volatile early exchanges.
Commodities were broadly weaker, with base and precious metals both edging down, while crude oil eased on an improved supply outlook as Libyan exports return to pre-war levels faster than expected.
The possibility of a sharp slowdown in China raised concerns after BHP Billiton (BLT.L), the world's biggest miner, noted signs of "flattening" iron ore demand there.
Additional reporting by Toni Vorobyova; Editing by John Stonestreet