LONDON (Reuters) - Investors positioned for a strong U.S. jobs report on Friday, balancing the likelihood it will confirm the economy is recovering with wariness it might prompt the Federal Reserve to end its stimulus earlier.
Gold headed for its biggest weekly loss in a month and German bond yields rose. World stocks headed towards two-month highs and Brent oil reached above $110 a barrel for the first time since April.
Italian bonds meanwhile braved growing political uncertainty after Italy's top court upheld a jail sentence against former premier Silvio Berlusconi that could throw the country's coalition into crisis.
Italian government bond yields were down 3 basis points at 4.34 percent.
The main market focus was on July's U.S. payrolls report, which is likely to fuel optimism that a recovery is taking hold.
But coming just after Fed Chairman Ben Bernanke tried to ease concerns about an imminent tapering of its money-printing stimulus, a strong number could reignite some market volatility.
The prospect of an end to stimulus - which has pumped billions of dollars into world markets - has already battered some assets, notably in emerging markets.
"The data in the U.S. is picking up appreciably at the moment. It's all pointing to a better (jobs) number today and bond markets should be scared," said William Hobbs, head of equity strategy at Barclays Wealth.
The payrolls report is forecast to show an increase of 184,000 in jobs outside the farm sector last month and the jobless rate dropping to 7.5 percent from 7.6 percent, according to a Reuters poll. ECONUS
The unemployment rate is closely monitored by the Fed as it gauges when to cut back its $85 billion a month bond-buying program.
The prospect of an end to U.S. stimulus pushed German bond yields up by 3 basis points to 1.7 percent as they kept pace with a rise in U.S. Treasury bond yields, which are now trading near two-year highs.
The dollar extended its gains versus the yen by 0.2 percent to 99.75 yen having surged about 1.7 percent on Thursday for its biggest one-day percentage gain in about four months. The dollar index .DXY was up 0.1 percent at 82.413.
The dollar's broad strength weighed on gold which slipped to a two-week low and below a key technical level near $1,300, on its way to the its worst weekly performance in a month.
In the equity markets, which have welcomed the signs of economic recovery, European shares were on course to reach highs not seen for more than two months, with the broad FTSE Eurofirst 300 index .FTEU3 up 0.15 percent in early trade.
MSCI's world equity index .MIWD00000PUS was up 0.2 percent, closing in on its highest level since late May. U.S. stock futures pointed to further gains later in the day.
(Editing by Jeremy Gaunt)