German stocks wavered either side of Tuesday's closing level at the start, with traders saying a one per cent decline in Tokyo's Nikkei 225 index and rumours of heavy Japanese banking losses were weighing on the market.

The Nikkei's fall hurt the yen and the dollar shot above 133 yen on a spate of short-covering after the US currency stopped short of falling below 130.50 in Asian trade. German government bonds reversed early losses as German stocks gave up initial gains but British gilts ticked higher ahead of the Bank of England's monetary committee meeting on interest rates.

The US market rallied hard on Tuesday when it resumed trading after Monday's Labor Day holiday, driven higher by hopes that comments from Federal Reserve chairman Alan Greenspan might indicate a US rate cut.

Although such a big gain could have been expected to galvanise bourses around the globe, rumours of massive derivatives losses at Japan's Fuji Bank pulled the Japanese market lower.

Fuji held a briefing to try to dispel the speculation, sparked by the Kochi Shimbun newspaper in southern Japan which said Japan's top 19 banks had potential derivatives losses of 24 trillion yen ($171.8 billion).

Yutaka Komatsu, the general manager of derivatives products at Fuji, told reporters the bank had a maximum possible loss of 15 billion yen in derivatives-related trade.

Hong Kong's Hang Seng index also shrugged off the huge boost from Wall Street to retreat 2.5 per cent by late trade as investors took profits following the big gains of recent days and short-covering pressures dried up.

London traders said they expected Europe's premier stock exchange to jump up to one per cent at the start, although any rise would also be tempered by Asia and a fall in S&P Futures.

"We were calling the market up a good 70 or so points early on but the S&Ps came off and Asia looks poor," said one dealer.

London, which failed to join the big European rally on Tuesday due to domestic concerns, was focused on a slew of company results which dealers said looked roughly in line with forecasts.

"There are no surprises in the figures and we're set for a much steadier day today than we've seen in the market of late," said one dealer.

Manchester United was set for a strong early rise, after the football club's board accepted an improved 623.4 million pound ($1.03 billion) takeover offer from Rupert Murdoch's pay-TV company BSkyB Plc.

French traders said they expected another rise in stock prices following Tuesday's 2.9 per cent gain on the CAC-40 index.

PSA Peugeot Citroen reported a big jump in net attributable profit to 2.22 billion francs ($382.6 million) for the first half of 1998, against a restated 505 million.

French bonds were boosted by declaration of a Bundesbank council member, Olaf Sievert, excluding any rise in main European interest rates before the end of the year.