Global shares slip on "fiscal cliff", oil up on Mideast flare-up

World shares headed toward a second consecutive weekly loss on Friday as U.S. government fiscal problems and weak global economic growth weighed on sentiment, while violence in the Middle East pushed up oil prices despite ample stockpiles and weak energy demand.

U.S. stocks briefly rebounded after the open on a report that White House officials were in advanced talks to replace sweeping spending cuts with targeted cuts and tax increases, in a move to avoid the so-called "fiscal cliff" in early 2013.

"This is the first time we've had one iota of anything constructive being done," said Todd Schoenberger, managing principal at the BlackBay Group in New York. "That's very positive, but you can be flexible and still have us go over the cliff. Wall Street traders remain very nervous and need something concrete to get done."

President Barack Obama and congressional leaders are set to meet for budget talks on Friday. Investors have been concerned that if no deal was reached to modify automatic spending cuts and tax hikes, the U.S. economy could slip into recession.

But Wall Street stocks soon turned lower, following a downturn in equity markets in Europe, where persistent worries about the euro zone's ability to deal with its debt problems are depressing investors.

The Dow Jones industrial average was down 53.75 points, or 0.43 percent, at 12,488.63 by midmorning. The Standard & Poor's 500 Index was down 6.66 points, or 0.49 percent, at 1,346.67. The Nasdaq Composite Index was down 15.47 points, or 0.55 percent, at 2,821.46.

The MSCI world equity index <.MIWD00000PUS> was down 0.5 percent at 315.94 points, and has lost almost 2 percent this week.

FTSEurofirst 300 index <.FTEU3> of top companies shed 0.7 percent to 1,071.28, on course for its worst week since late September.

The Japanese yen steadied after a two-day pummeling against the U.S. dollar, but remained on track for its worst weekly loss since late June on expectations of aggressive monetary easing from the Bank of Japan.

"The basic driver is still the interest rate differential between the dollar and yen, which is very narrow, and we have to wait for what happens after the elections," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.

The U.S. dollar was up 0.06 percent at 81.19 yen. The euro was down 0.55 percent against the dollar at $1.2709.

Benchmark Brent crude oil prices rose towards $109 a barrel as a showdown between Israel and the Palestinians stoked worries about supply. Investors were concerned that Arab producers may be drawn into any potential conflict, which could impact supply lines.

Brent crude rose 56 cents to $108.55 a barrel. U.S. oil gained 60 cents to $86.05.

U.S. Treasury debt prices were little changed, with yields near two-month lows, ahead of the U.S. budget talks.

The benchmark 10-year U.S. Treasury note was up 3/32 in price to yield 1.5843 percent.

(Additional reporting by Richard Hubbard in London; Reporting by Herbert Lash)