By Richard Hubbard
LONDON (Reuters) - World share markets looked vulnerable to further falls on Friday, with better economic news from Europe doing little to encourage investors who are worried that central bank stimulus may curtailed.
MSCI's world equity index, which shed 1.4 percent for its second biggest daily loss of the year on Thursday, was virtually unchanged, with losses in Europe cancelling out a rise of nearly one percent in Japan's turbulent Nikkei.
Activity in markets was also limited by the approach of a long weekend in Britain and the United States, with few investors willing to build fresh positions.
"I think people want to cash in, particularly in May of all months," Alastair Winter, chief economist at Daniel Stewart.
Fears that Fed chairman Ben Bernanke was preparing the ground for an early tapering back of its $85 billion a month bond purchases sparked a sharp rise in volatility across the world's financial markets on Thursday.
Equity markets have hit multi-year highs on the back of the inflows from the Fed and other central banks and investors have become increasingly sensitive to any signs the liquidity surge could slow.
Thursday's sell-off was concentrated in Japan's stock market which suffered its biggest one-day percentage drop in two years, but also rattled European and U.S. markets and sent the yen to near two-week highs against the dollar.
Japanese shares have gained nearly 70 percent in the last six months on the back of Japanese Prime Minister Shinzo Abe's prescription of aggressive monetary and fiscal stimulus.
"The fact the market has had such a huge run over a relatively short period has left it incredibly vulnerable," said Shane Oliver, strategist at AMP Capital.
Europe's broad FTSE Eurofirst 300 index fell again, declining 0.4 percent after posting its biggest one-day fall in nearly 12 months on Thursday.
Although a key business survey showed sentiment in Germany was better than expected, this reduced expectations the European Central Bank would cut rates.
The Ifo survey found optimism over the economic outlook in Europe's largest economy may be improving. A view reinforced by earlier data on German consumers.
The euro rose to hit a day's high of $1.2959 after the survey data from German think tank Ifo, while German Bund futures cut some of the gains they had seen from the sell-off in equity markets.
"The euro has rebounded on the back of the Ifo data. There were a lot of expectations that the ECB could do more easing and some positive data surprises have taken the pressure off," said Ian Stannard, head of European FX strategy at Morgan Stanley.
Meanwhile The dollar index, which measures the currency's value against a basket of currencies, remains weak. It was down 0.3 percent at 83.535, off a three-year high of 84.498 hit on Thursday.
The dollar has gained around 17 percent against the yen this year and the euro is up around 15 percent, allowing room for a further correction.
(Editing by Toby Chopra)