Global Markets - Shares edge up as U.S. jobs data seen flagging recovery

* U.S. jobs data seen adding to risk of early Fed tapering
* Ten-year U.S. Treasury yields near two-year peak, Bunds up 4 bps
* Gold set for weekly loss of 3 percent
* World shares head toward two-month highs

LONDON (Aug 2): Major government bond yields and world shares both edged higher on Friday as expectations hardened that the U.S. payrolls report will signal stronger growth and an early cutback in the Federal Reserve's stimulus efforts.

The improving economic outlook and rising yields added strength to the dollar and saw Brent oil pass $110 a barrel, but put gold on course for its biggest weekly loss in a month.

"The combination of rising bond yields and rising equity markets reflects the view that the Fed is going to start tapering, but that this is because the economy is reaching exit velocity," Nick Kounis, head of macro research at ABN-AMRO, said

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 expected to reflect recent data on factory activity and private sector hiring, that have pointed to growing economic momentum in the world's largest economy.

But coming just after Fed Chairman Ben Bernanke tried to ease concerns that any imminent tapering of its money-printing stimulus does not mean rate hikes, 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.

Stimulus

The prospect of an end to U.S. stimulus pushed the yield on benchmark U.S. Treasury notes up an extra one basis point in European trading, to 2.736 percent — a level it has not surpassed since August 2011.

German government bond yields kept pace with the move in Treasuries and rose 4 basis points to 1.71 percent .

The dollar, which saw its biggest one-day percentage gain against the yen in about four months on Thursday, extended the rise by 0.25 percent to 99.77 yen. Against a basket of major currencies, the greenback was up 0.1 percent at 82.4.

The dollar's broad strength weighed on gold, which slipped to a two-week low and below a key technical level near $1,300 of $1,2883.29 an ounce, heading for its worst weekly performance in a month.

In equity markets, where the signs of a strengthening U.S. economic recovery have offset fears over China's slowdown, MSCI's world equity index was up 0.2 percent, closing in on its highest level since late May.

European shares added 0.35 percent during morning trade to reach their highest levels in more than two months, although Italy's benchmark index, the FTSE MIB, fell 0.5 percent on the rising political uncertainty.

Analysts said investors were also keeping a close eye on earnings reports, which saw the insurance sector topping the leaderboard due to surprisingly strong results from two of the biggest names, AXA and Allianz.

Brent crude oil reached a four-month peak of $110.09 a barrel and a weekly increase of 2 percent after two weeks of losses, as the improving economic outlook for the world's biggest consumer adds to concern over supply disruptions in Iraq, Libya and Nigeria.

U.S. crude oil futures fell 5 cents to $107.84 a barrel, but were still heading for 3 percent rise on the week.