European shares edged away from 4-1/2-year highs on Monday as weak economic data from China and worries about Italy undermined the optimism generated by last week's strong U.S jobs numbers.

The dollar was still rising on the payrolls data, touching a 3-1/2-year high against the yen and at a 3-month peak to the euro after the surprise employment growth boosted optimism over recovery in the world's largest economy. [FRX/}

But Europe's broad FTSEurofirst 300 index was down 0.2 percent at 1,192.70 points, away from September 2008 peaks, after ratings agency Fitch downgraded Italy and China reported weak factory output and consumer demand.

"I think the Italian downgrade is acting as a bit of a wake up call," Alastair Winter, chief economist at investment bank Daniel Stewart & Co.

Fitch cut Italy's debt rating one notch and gave it a negative outlook late on Friday, citing the current political uncertainty, a protracted recession and high levels of debt.

The ratings cut and fresh data showing Italy's economy contracted a hefty 2.8 percent last year saw Italian shares drop 0.7 percent and also hit Spain, where the main equity index, the IBEX, fell 8.4 percent.

The bigger euro zone market indexes like Paris's CAC-40 and Frankfurt's DAX were 0.3 and 0.2 percent lower, respectively, while the main euro zone blue chip index, the Euro STOXX50E dropped 0.5 percent.

China reported over the weekend that annual industrial production for January and February combined was 9.9 percent - the lowest level since October 2012 - while its consumer price index had risen more than expected last month.

Winter said the combination of weak industrial data from China and the renewed spotlight on the euro zone's problems caused by the Italian downgrade may have made investors wary of pushing prices higher after the strong gains so far in March.

The benchmark Euro STOXX50E has actually outperformed the more widely watched Dow Jones Industrial index this month so far even as the U.S. benchmark has been posting record highs.

U.S. stocks might also see a pullback on Monday after an historic week when all three major market indexes -- the Dow, the S&P 500 and the Nasdaq Composite -- racked up their biggest weekly gains since the first week of the year.

MSCI world equity index meanwhile was little changed at 360.4 points holding near its mid-2008 highs.

ITALIAN RIPPLES

The Italian downgrade also rippled through Europe's sovereign bond market with investors worried about its impact on a bond sale later in the week. an

Ten-year Italian government bond yields rose 7.4 basis points to 4.67 percent, while the main futures based on the debt was down 59 ticks to 108.78.

The yield gap between 10-year Italian and safer German bonds widened to 315 basis points, and the cost of insuring Italy's debt against default also rose.

DOLLAR DOMINATES

Foreign exchange markets were focused on the dollar which has gained sharply against a broad range of currencies since Friday's strong payrolls data boosted hopes of a steady economic recovery this year.

The data has also fuelled speculation the U.S. Federal Reserve could back off from its ultra-loose monetary policy sooner than anticipated and this adds to the currency's appeal as other major central banks hint at looser polices ahead.

"There are expectations that the Fed could consider reducing the size of its asset purchases in the second half of the year and this could help the dollar," said Valentin Marinov, head of European G10 FX strategy at Citi.

Commodities were drifting lower weighed down by the weaker Chinese industrial production data.

Brent crude fell 62 cents to $110.23 a barrel, after ending last week marginally higher to snap three straight weekly losses. U.S. oil slipped 19 cents to $91.76, after ending 39 cents higher on Friday.

Copper, which is also closely linked to the outlook for demand from China, dropped 0.9 percent to $7,670 a tonne on the London Metal Exchange.