By Richard Hubbard
LONDON (Reuters) - World shares, bonds and commodities recovered some lost ground on Friday, after a sharp sell-off triggered by the U.S. Federal Reserve's plan to roll back the asset-buying program which sustained markets through the financial crisis.
Easing fears about an immediate banking crunch in China also made for a calmer tone, although short-term funding rates there remain elevated, especially for smaller banks.
But with investors still trying to map out a direction for life after the Fed's largesse comes to an end, emerging markets in particular remained under stress.
Growing signs of U.S. economic strength was seen sparking a migration by investors back to more advanced economies as the attractiveness of the returns on offer in star developing countries such as Turkey and South Africa waned.
"There have been huge moves, there have been huge repositionings, so maybe before the weekend volatility can come down a bit," Piet Lammens, a strategist at KBC said.
MSCI's benchmark index for emerging equities <.mscief> fell a further 0.5 percent on Friday after sliding by over 4 percent in Thursday's violent selloff.</.mscief>
World stocks in general <.miwd00000pus> were up 0.15 percent, though still on track for their worst week in over a year.</.miwd00000pus>
In Europe, the broad FTSE Eurofirst 300 index <.fteu3> rose 0.4 percent in morning trade, having slid 3.1 percent on Thursday, its biggest one-day fall in 19 months. A 0.5 percent rise in U.S. stock futures also hinted at a rebound on Wall Street later. <.l><.eu><.n></.n></.eu></.l></.fteu3>
"The fear is ... setting in, with a lot of cutting of bullish positions. The most likely scenario is that rallies will be sold so I would be very careful buying the dip," said Lex van Dam, hedge fund manager at Hampstead Capital.
The dollar stepped back from a two-week high against a basket of developed currencies <.dxy> but was seen on a solid footing given the Fed's plans and could see its best weekly rise in a year. It gained 0.5 percent against the yen to 97.75 yen in choppy trade.</.dxy>
The euro was steady at $1.3220, having backtracked from Wednesday's four-month peak of $1.3414.
All major equity markets along with many of the world's main bonds and key commodities are still on course for their worst week in months if not years as investors prepare for the end of Fed's massive $85 billion a month of liquidity injections.
Fed Chairman Ben Bernanke had revealed the plan on Wednesday when he said that if the U.S. economy keeps improving as expected, the central would begin tapering back the cash inflows later this year and end them completely by the middle of 2014.
The huge stimulus effort has driven many riskier assets to new highs and even after this week's selloff many will still be in positive territory for the year though the adjustment to the Fed's new policy is expected to be ongoing.
"We are in a new environment," Larry Kantor, head of research at Barclays said. "It has been an extremely friendly (investor) environment and now, it is just going to be a bit more normal."
In the fixed income market, the core German bonds were little changed, pausing after posting their biggest daily drop since March on Thursday, largely tracking U.S. Treasuries yields which have steadied near two-year highs.
However, in the riskier peripheral euro zone markets fears of growing political turmoil in Greece were dominating trading, sending 10-year Greek debt yields up 70 basis points to 11.4 percent.
Commodity markets saw some demand from investor's attracted by the week's big price falls although worries about China's sluggish growth outlook weighed on sentiment.
Gold recovered from a three-year trough to be up 1.5 percent at $1,297.01 an ounce as Chinese buyers became more active.
Brent crude recovered to trade up 45 cents at $102.60 and U.S. oil was up 48 cents at $95.62, though both benchmarks were headed for their steepest weekly loss in two months.
(Additional reporting by Marc Jones; Editing by Toby Chopra)