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But data published on Friday also offered tentative signs that the government was making some headway in taming price rises without inflicting undue harm on growth in the world's second-largest economy.

Consumer inflation steadied in February at the same level as in January, the National Bureau of Statistics said. Although above forecasts for 4.7 percent, the 4.9 percent reading contrasted with dire warnings a few months ago of runaway prices. Core inflation, stripped of volatile food costs, slowed.

Though far too soon for Beijing to declare victory in its battle against inflation, the stabilization suggested that it was more than midway through a sustained tightening campaign launched nearly half a year ago.

People's Bank of China Governor Zhou Xiaochuan struck a guardedly optimistic note.

"If we observe the CPI (consumer price index) figures for December, January and February, although they are high, inflationary expectations are currently relatively stable," he said at a news conference during China's annual session of parliament.

Nevertheless, worries that further increases of Chinese interest rates and reserve requirements were inevitable -- and potentially imminent -- weighed on global markets, which were already reeling because of weak U.S. economic data and unrest in Saudi Arabia. Asian equities added a touch to losses on the day, and the Shanghai stock market had dipped 0.2 percent as of 0515 GMT.

"Clearly, the consumer price index is stabilizing, but the risk is still significantly on the upside," said Wei Yao, economist with Societe Generale in Hong Kong. "It means the central bank will probably stay on the course of tightening," she added.

INFLATION A PRIORITY

Industrial output in the first two months of 2011 rose 14.1 percent year-on-year, picking up from a 13.5 percent pace in December and vaulting past market expectations of a 13.3 percent increase.

Investment was also robust, up 24.9 percent year-on-year in the first two months, topping forecasts for a 23.3 percent rise.

The broad strength reflected Beijing's balancing act in managing the economy this year. While restricting the flow of cash with monetary policy, the government is once again spending lavishly on infrastructure projects and, especially, the construction of public housing to keep growth humming along.

China's top leaders have declared that their priority this year is to control inflation. So far, complaints about rising prices have amounted to little more than grumbles, but serious inflation has sparked social unrest in China in the past.

To meet the official goal of keeping inflation to a 4 percent average this year, the government has raised interest rates three times and banks' reserve requirements five times since October, while also using a series of direct controls to cap price rises.

The next round of tightening may be just around the corner.

Germany has lowered expectations for a major breakthrough at the summit, saying the best that can be hoped for is an agreement on competitiveness.

Bigger decisions to tackle the crisis -- such as whether to strengthen the euro zone bailout fund -- will be handled at an end-March summit.

Instead, Germany's aim on Friday is to get the 17 euro zone states to enshrine EU rules on deficits and debt in national law -- effectively making it illegal for any euro zone member to exceed fixed deficit and debt limits in the future.

The EU's Stability and Growth Pact sets a government deficit limit of 3 percent of GDP and debt of 60 percent of GDP. Translating that into national laws would entail the adoption of a "debt brake," similar to what German law requires.

"Euro area member states commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation," the latest draft of the agreement euro zone leaders' are expected to sign up to on Friday reads.

"Member states will retain the choice of the specific national legal vehicle to be used, but will make sure that it has a sufficiently strong binding and durable nature (e.g. constitution or framework law)," the draft said.

If Germany and France can get the remaining euro zone members to sign up to the competitiveness pact -- which also includes moves to gradually raise retirement ages and work toward a common corporate tax base -- there is an expectation that Germany will agree to back a stronger bailout fund.

The European Financial Stability Facility, used to bail out Ireland, has an effective lending capacity of 250 billion euros ($345 billion), not its full 440 billion, because of guarantees needed to retain its triple-A credit rating.

Increasing the capacity will require German backing and all member states to increase their contributions or guarantees, not a straightforward task given popular opposition to bail outs. That debate will be taken up on March 24, but its outcome may depend on how much backing Germany gets on Friday.

While Euro zone leaders will hail any agreement on competitiveness as a big step in tackling the debt crisis, analysts regard it as a sideline issue, saying it goes nowhere toward tackling the fundamental problem of bad banking debts and highly indebted sovereigns with poor growth prospects.

In that respect, Friday's summit merely clears the ground for March 24-25, when a "comprehensive package" of measures leaders hope will draw a line under the crisis will be debated.

PORTUGAL BACK UNDER PRESSURE

Measures in the comprehensive package include the EFSF plus the European Stability Mechanism, a permanent fund that will replace the EFSF from mid-2013, and more stress tests to examine the stability of Europe's major banking firms.

While Germany has hinted that a deal on Friday may ease the way for it to back a stronger and potentially more flexible EFSF at the end-March summit, there are no guarantees.

German Chancellor Angela Merkel signaled to lawmakers in a closed-door meeting that she was prepared to agree an increase in Europe's rescue fund later this month, participants said, but only under conditions that other states may find difficult to accept.

Investors pushed the single currency to a one-week low under $1.38, the risk premium on Spanish bonds widened and the cost of insuring Spanish, Greek and Portuguese debt against default rose as a fresh wave of euro zone jitters hit financial markets.

Leaders from the currency area are expected to back a watered-down version of a German-French plan to boost economic competitiveness at Friday's Brussels summit but are unlikely to overcome sharp differences over whether the rescue fund should be given new powers that would help it ease the burden on highly-indebted euro states.

A German official lowered any expectation of a breakthrough, saying no decisions would be taken on strengthening the European Financial Stability Facility (EFSF) on Friday.

The question of raising the fund's lending capacity would be decided in a package at the end of March, he said, and Berlin opposed giving the EFSF or its successor any direct or indirect role in buying troubled states' bonds on the secondary market.

Merkel told members of the Bundestag's European affairs committee, according to the participants, that boosting the fund would depend on countries that do not have a triple-A rating injecting capital, a step some of them have already signaled they will resist.

EU diplomats said France and several other countries want at least an outline agreement on Friday on the remit of a planned permanent financial rescue mechanism for the euro zone.

"The quicker we get a deal the quicker we calm the markets," one senior diplomat said.

Traders said the euro could fall further due to market concerns that Friday's 17-nation meeting and a summit of the full 27-nation European Union on March 24-25 may fail to agree on decisive action to tackle the debt crisis.

"If officials make no progress and Germans remain unwavering in their demands, the likelihood of a capitulation (in the euro) will be significantly higher," said Jessica Hoversen, currency strategist at MF Global in Chicago.

SPAIN, PORTUGAL UNDER PRESSURE

Moody's Investors Service cut Spain's sovereign debt rating one notch to Aa2 and warned of further downgrades, estimating the capital shortfall at the country's banks at 40-50 billion euros, or as much as 110-120 billion euros under a more severe stress scenario.

That clashed starkly with a new 15 billion euro shortfall estimate from the Bank of Spain, which raised questions about the credibility of official forecasts.

"(Moody's) believes there is a meaningful risk that the eventual cost of the recapitalisation effort could considerably exceed the government's current projections," the credit ratings agency said in statement.

EU Competition Commissioner Joaquin Almunia's comments on Thursday underscored the hurdles the deal faces in Europe compared with the United States, where regulators are expected to clear the $10.2 billion takeover.

The tie-up, announced last month, would give the merged company a stranglehold on European exchange-traded derivatives, and immediately raised questions over whether competition authorities would block it.

"This is a complex case," Almunia told Reuters on the sidelines of an International Bar Association conference.

"The NYSE Euronext deputy chief executive has recognized this before his meeting with me; it probably will require a deep investigation," he said. "We are waiting for the notification."

NYSE Euronext Deputy Chief Executive Dominique Cerutti met Almunia last month. A NYSE Euronext spokeswoman said the exchanges plan to formally file the deal with regulators in due course. Recent media reports cited Cerutti as suggesting an April filing.

The merged group's dominance of securities such as swaps tied to interest rates or government bonds is expected to face intense regulatory scrutiny, antitrust experts have said.

In New York on Thursday, NYSE Euronext Chief Financial Officer Michael Geltzeiler said the U.S.-based company doesn't believe its Liffe derivatives market competes with Deutsche Boerse's Eurex platform in Europe.

"The rhetoric... was pretty pronounced early on," Geltzeiler said at a conference hosted by Citigroup.

"As we continue to put facts on the table and we're able to meet now that we've announced this transaction properly, with the regulators around the world the dialogues are going well."

HURDLES GLOBALLY

The D.Boerse-NYSE deal is the biggest in a recent rash of planned exchange-industry deals, and it has stoked talk of a brewing counterbid for NYSE Euronext, including possibly from Nasdaq OMX Group.

Geltzeiler said that NYSE Euronext would evaluate a counterbid "as one would expect," if one were to come.

There is a relatively steep 250 million euro ($346-million) termination fee attached to the blockbuster deal, which is the largest in a consolidation wave that includes Singapore Exchange, Australia's ASX and private venues BATS and Chi-X Europe.

As well, London Stock Exchange, Europe's largest stock exchange by value of daily trading, agreed to a takeover deal with Canada's TMX Group on February 9.

Global growth worries are likely to be a key concern as Brent crude topped $116 on Thursday after oil industry infrastructure was bombed by forces loyal to Libyan leader Muammar Gaddafi.

Investor sentiment may also be hit by news Moody's cut Spain one notch, raising concerns about the financial health of the euro zone periphery.

Meanwhile, China swung to a surprise trade deficit in February of $7.3 billion, due to the Lunar New Year holiday, but economists said the drop was likely to prove temporary.

HCA's shares are expected to begin trading on the New York Stock Exchange on Thursday under the symbol "HCA" (HCA.N) after the company sold more shares than planned in its initial public offering on Wednesday, marking the largest U.S. private-equity backed IPO ever.

Health officials cleared Benlysta a treatment for lupus, discovered by Human Genome Sciences Inc (HGSI.O) and according to Thomson Reuters consensus forecasts, annual global sales might top $3 billion in 2015.

Bailed-out insurer American International Group Inc (AIG.N) is discouraging investors from taking large new positions in the company and has set up a plan to protect tens of billions of dollars in valuable tax assets.

Looking at economic news, at 1330 GMT, investors will eye weekly U.S. jobless claims and U.S. international trade data for January.

At 1900 GMT, the Treasury Department issues its monthly budget for February.

The pan-European FTSEurofirst 300 .FTEU3 was down 0.5 percent in morning trade on Thursday, hit by euro zone peripheral debt concerns after Moody's downgraded Spain a notch and weak Chinese import data hurt heavyweight mining stocks.

The Nasdaq was weighed down by a weak outlook from Texas Instruments weighed on Wednesday and pushed an index of chip makers below a key technical level.

The Dow Jones industrial average .DJI dipped 0.01 percent, the Standard & Poor's 500 Index .SPX shed 0.1 percent and the Nasdaq Composite Index .IXIC fell 0.5 percent.

(Reporting by Joanne Frearson; editing by Sophie Walker)