By Marc Jones
LONDON (Reuters) - World markets remained under pressure on Friday after a Malaysian airliner was downed near the Ukraine-Russia border and Israel stepped up a ground assault against Gaza militants.
As investors scurried into defensive assets, European shares <.FTEU3> saw more selling after falling heavily on Thursday. Demand for safe-haven German government bonds kept their yields near record lows.
World leaders demanded an international investigation into the downing of the Malaysian plane with 298 people on board over eastern Ukraine. Kiev and Moscow blamed each other for a tragedy that stoked tensions between Russia and the West.
Russia markets took the heaviest hit. Dollar-traded stocks in Moscow <.IRTS> were down another 2.3 percent to put their losses for the week at more than 8 percent. The ruble <RUB=> recovered almost half a percent on the day but was heading for its biggest weekly loss in more than a year.
"While Ukraine, Russia and the rebels deny any involvement or responsibility, tensions will most likely continue into the weekend," Michael Rottmann, head of fixed income strategy at UniCredit, said.
"Furthermore, Israel sending ground troops into the Gaza Strip adds to geopolitical concerns. While at current levels both Bunds and U.S. Treasury valuations look extremely rich, it is clearly not the time to position in the opposite direction."
There were some signs that markets were trying to steady. Some analysts wondered whether the Malaysian jet tragedy could bring the two sides in Ukraine to the negotiating table and take the heat out of the crisis.
The United States called for an immediate ceasefire to allow easy access to the crash sitel. Pro-Russian separatists told the Organisation for Security and Cooperation in Europe (OSCE), a security and rights body, they would ensure safe access for international experts visiting the scene.
Gold <XAU=> dipped as buyers cashed in on some of its 1.5 percent overnight jump. The Japanese yen <JPY=> and U.S. government bonds <US10YT=RR> - the safe haven investors usually head for - both gave up some ground.
European shares took back some of their initial falls. International Consolidated Airlines <ICAG.L>, owner of British Airways and Iberia, rose [.EU], although the region's other two big names, Air France <AIRF.PA> and Lufthansa <LHAG.DE>, fell.
U.S. futures <Esc1> were also flat, suggesting some measure of stability might return to U.S. markets.
It was set to be another hectic day of company earnings. Analysts were already digesting some pre-market releases from global manufacturing giants General Electric's <GE.N> and Honeywell <HON.N> plus Bank of New York Mellon <BK.N>.
The situation in Ukraine and the rising tensions between the West and Russia were not the only concern weighing on sentiment.
Israel announced the start of a Gaza ground campaign on Thursday after 10 days of aerial and naval bombardments failed to stop Palestinian rocket attacks.
Asian markets had a turbulent day. Most emerging Asian currencies fell and Japan's Nikkei stock average <.N225> tumbled 1 percent to keep MSCI's 45-country All World index <.MIWD00000PUS> on course for a second week of falls.
"The general theme in the market, the predominant theme today, seems to be risk aversion. So we do expect dollar/Asia to head higher in the near term," said Divya Devesh, currency strategist for Standard Chartered in Singapore.
"Whether this move will be sustained is still quite uncertain. It will depend on how the geopolitical risks unfold."
In contrast to the broader downward global trend, European shares looked set to end the week up 0.5 percent. One reason is expectations the ECB will keep euro zone interest rates near zero for considerably longer than the Federal Reserve or Bank of England.
The head of the International Monetary Fund, Christine Lagarde, warned on Friday, however, that markets were "perhaps too upbeat" about the region. Germany Bundesbank chief, Jens Weidmann, also stirred thoughts as cited a litany of long-term dangers of continually providing easy money.
"There is a danger that the low interest rates will be used not to consolidate (government) budgets, but to finance additional spending," the German said as one of his concerns.
The dollar edged up about 0.2 percent to 101.34 yen <JPY=>, regaining some of its overnight loss of nearly 0.5 percent, its biggest one-day loss since early April.
The euro, which has lost roughly 0.9 percent against the yen this week, traded at 137.05 yen after reaching a five-month low and hovered near a one-month low versus the dollar at $1.3524
In commodities trading, U.S. crude oil <CLc1> gained about 0.2 percent to $103.41 a barrel after jumping by more than $2 on Thursday. Brent <LCOc1> was fetching 108.25, up 1.5 percent on the week. Russia pumps more than a tenth of the world's crude.
(Editing by Larry King)