(Reuters) - The dollar pared losses and world stocks and crude prices gave up some of their gains after a ratings blow for Japan brought further bad news for markets already rattled by the euro zone's worsening debt crisis.
Yields on 10-year German Bunds fell back to below 3 percent after Fitch cut Japan's outlook to negative. The rating agency said the massive cost of a March earthquake and tsunami would put added strain on the country's already shaky public finances.
News that shares in Franco-Belgian financial services group Dexia (DEXI.BR) had been suspended also put upward pressure on German bond prices.
Benchmark Bund yields probed below what is a key psychological level on Thursday for the first time since mid-January due to concerns over a possible Greek debt restructuring and its impact on other heavily-indebted peripheral euro zone countries.
The weaker dollar, along with persistent Middle East tensions, helped Brent crude to trade above $115 a barrel, though it was still headed for its first monthly loss since last August.
Europe's FTSEurofirst 300 .FTEU3 index of leading stocks gained 0.5 percent, helped by gains in bank shares after the Financial Times said stringent capital requirements for European banks could be relaxed.
"There is a big chance that they don't have to go out to shareholders to ask for more money and that is the main advantage because a capital increase will weigh on their stock prices," said Koen de Leus, strategist at KBC Securities.
"It's good for banks, but it's not good for regulation. In the long term it's not a good thing for financial stability."
World equities measured by the MSCI All-Country World Index rose 0.5 percent, though they trimmed some of the gains after the Fitch announcement and were still set for their biggest monthly percentage losses in a year.
DOLLAR PARES LOSSES
The dollar .DXY fell 0.3 percent against a basket of currencies and was down 0.4 percent against the Japanese currency at 81.02 yen.
The euro was up 0.4 percent at $1.4188 and down 0.6 percent at 1.2166 Swiss francs.
Yields on benchmark 10-year Treasuries were steady at 3.0627 percent after falling more than 7 basis points overnight on the back of unexpectedly weak consumer spending numbers in U.S. first quarter growth data.
Brent crude prices turned flat and were down 8.5 percent for the month. Copper prices put on 1.5 percent, but they were on track for their third straight monthly losses.
(Additional reporting by Harpreet Bhal, Naomi Tajitsu and Marius Zaharia; Editing by John Stonestreet)
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