World stocks dipped towards the previous session's four-week lows on Tuesday as investors continued to fret over the early removal of government stimulus, particularly in the financial sector.

Positive US manufacturing and home sales data buoyed US stocks on Monday but investors worry that signs of recovery will lead governments to cut economic and fiscal support, a fear that has contributed to a reversal of equities' seven-month rally.

CIT Group INC, a US lender to hundreds and thousands of small and medium-sized businesses, filed for bankruptcy on Sunday, underscoring the continuing fragility of parts of the financial sector.

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European shares hit four-week lows as poor results from Swiss bank UBS and a shake-up of UK banks Lloyds and Royal Bank of Scotland rattled investors.

Lloyds launched a record 13.5 billion pound ($22 billion) rights issue and along with RBS agreed to sell off businesses as part of a complex deal to limit reliance on government support.

"UBS just posted ugly results that bode ill for European bank results and CIT just filed for bankruptcy. This raises the question: isn't it too early to pay back government money?" said David Thebault, head of quantitative sales trading at Global Equities in Paris.

World stocks as measured by MSCI fell 0.6 per cent to 281.32. The index rallied by 75 per cent between early March and late Oct on growing optimism over the global economy, but fell 4 per cent last week.

The FTSEurofirst 300 index of top European shares fell 1.5 per cent to a four-week low, losing ground for the sixth time in nine sessions. Riskier emerging market shares fell 1.0 per cent.

Action-packed  week

The dollar edged up against the euro but fell 0.4 per cent against the yen . Currency markets are likely to trade cautiously ahead of a raft of key events this week.

The Federal Reserve starts a two-day meeting on interest rates on Tuesday, the European Central Bank and Bank of England make rate decisions on Thursday, US employment data is due on Friday and G20 finance ministers meet in St Andrews, Scotland, this weekend.

The Fed is not expected to depart from a policy of maintaining low rates for an extended period of time but it could discuss how to prepare markets for an eventual policy shift.

The ECB and BoE are expected to keep rates on hold but the UK central bank may decide to pump yet more money into the economy.

The Australian dollar fell nearly 1 per cent after the Australian central bank raised rates on Tuesday for a second consecutive month, to 3.5 per cent.

Investors are becoming more tentative about markets going into the final two months of the year.

"We are inclined toward slightly more caution on the evolving global economic dataflow, at least as far as the next three to four weeks are concerned," said analysts at UBS in a client note.

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Oil slipped 0.5 per cent below $78 a barrel but gold was boosted by news the International Monetary Fund had sold 200 tonnes of gold to the Reserve Bank of India for $6.8 billion, half of a long-planned sale that threatened to slow the precious metal's rally.

Euro zone government bonds benefited from the fall in European stocks. The December Bund future rose 15 ticks to 122.06.