Renewed worries over Europe's government debt crisis and a report that the Federal Reserve may announce a limited package of stimulus measures at its next rate-setting meeting weighed on European stock markets Tuesday

LONDON — A four-day rally in world stocks cooled in Europe on Thursday, as oil prices steadied and nerves set in ahead of crunch talks between European Union leaders aimed at keeping the UK in the 28-member bloc.

Asian bourses had seen gains overnight including almost 3% for Tokyo’s Nikkei. But the mood faltered shortly after Europe opened as weak company results from the likes of Nestle compounded other sentiment-sapping factors.

London’s FTSE lead the way down with a 0.7% fall as its miners dipped in tandem with oil and the political pressure mounted on sterling too as talk of "Brexit" risk swirled.

British Prime Minister David Cameron will discuss a final draft agreement when he meets the other EU leaders on Thursday evening.

Summit chairman Donald Tusk is hoping to reach a deal that will enable Mr Cameron to return to London on Friday and campaign for Britain to stay in the EU in a referendum on the issue expected in June.

"There will not be a better time for a compromise," wrote Mr Tusk, a former prime minister of Poland. "It is our unity that gives us strength and we must not lose this. It would be a defeat both for the UK and the European Union, but a geopolitical victory for those who seek to divide us."

The bigger force for markets appeared to still be oil, however. There was a jump of more than 7% jump in Brent on Wednesday on hopes that big producers would cap output. And though the rally had lost momentum, prices were holding their ground.

Brent futures hovered at $34.71 a barrel after hitting an intraday high of $34.99, while US crude steadied at $31.25 a barrel.

"The correlation between oil and equities is still pretty high," said Societe Generale strategist Alvin Tan.

"It is true to say sentiment remains pretty fragile. We have had this big rally in oil since the Doha deal. That has dipped a little bit and market is now groping a little bit for the next move."

Late on Wednesday, Standard and Poor’s delivered the latest blow to oil producers as it downgraded Saudi Arabia, Brazil, Kazakhstan, Bahrain and Oman’s credit ratings.

The impact was felt almost immediately in Oman as borrowing costs jumped at an auction of government bonds.

In the currency markets, the more subdued mood saw the safe-have yen kick higher again, while the Australian dollar was the biggest loser following a larger-than-expected rise in unemployment.

The euro was waiting on the minutes of the European Central Bank’s last meeting, when it signalled it was readying another round of easing measures and US dollar dipped on dovish comments from a top Fed official.

It would be "unwise" for the central bank to continue hiking rates given declining inflation expectations and recent equity market volatility, St Louis Fed president James Bullard said late on Wednesday, in comments that marked a stark change of direction for one of the Fed’s most hawkish members.

Despite the uncertain start in Europe, there was still a whiff of risk appetite around as lower-rated southern euro zone bonds made ground in the debt markets.

China’s yuan, one source of global financial nerves in January, inched lower after data showed producer prices sank 5.3% in January. It remained above the level reached against the dollar when the Lunar New Year holiday began two weeks ago.

China’s central bank sold a net 644.5-billion yuan ($98.9 billion) worth of foreign exchange in January, according to Reuters calculations based on central bank data published on Thursday.

The central bank’s net foreign exchange selling hit a record high of 708.2-billion yuan in December, according to the calculation based on the central bank’s balance sheet.

The People’s Bank of China has been supporting the yuan, burning through its massive foreign exchange reserves at a record pace to counter a tide of capital outflows.

Outflows have increased since China’s surprise devaluation of the yuan last August and have been fanned by concerns about its economic slowdown and expectations of interest rate rises in the US

Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1.9%. Tokyo’s Nikkei gained 2.8%, shrugging off the biggest drop in domestic exports since 2009.

Australian shares climbed 2.2% and South Korea’s KOSPI added 1.1%, though Shanghai stocks dipped in a muted reaction to a rise in inflation.

"Recovering oil prices have set the stage for an accelerated rebound in global stocks, while minutes from the FOMC supported the mood," said Rhoo Yong-seok, a stock analyst at Hyundai Securities.

Spot gold was nearly flat at $1,2089.00 an ounce. The precious metal had managed to snap a three-day losing streak on Wednesday after the Fed’s meeting minutes showed policymakers had considered altering their rate hike path.

Reuters