LONDON (Reuters) - A shock British election result that left no single party with a clear claim to power hit sterling on Friday and left the dollar on course for its best day in over a month, while world shares headed towards their first weekly fall since April.
The outcome of the snap poll, called by Prime Minister Theresa May to try to bolster her parliamentary majority, was a blow to investors who had already weathered major risk events in the United States and Europe the previous day.
But the reaction as it unfolded suggested a more limited impact than after last year's Brexit vote, which triggered a prolonged decline in the pound and unsettled other assets.
After a sharp initial fall, the pound steadied early in European trading and then began to claw back ground. Safe-haven gold and U.S. Treasuries drifted lower and futures markets pointed to Wall Street opening modestly higher. [.N]
"The uncertainty is bad news for sterling," said Bank of America, Merrill Lynch European equity & cross-asset strategist James Barty. "I think for the global market it doesn't matter. Unlike Brexit, which at the time had a spillover into other markets, this is a very UK-specific thing."
Bets that another drop in sterling would flatter international firms' profits pushed London's FTSE as much as 1 percent higher but it was up a more limited 0.4 percent by mid-session.
Bourses in Frankfurt, Paris and Milan had also slipped back to leave MSCI's closely-followed 46-country 'All World' index down 0.1 percent and set for its first weekly fall since mid-April.
May's Conservatives failed to win an outright majority in parliament. It meant she turned to Northern Ireland's small Democratic Unionist Party to retain power, amid serious questions about her own future.
That raised fears the political turmoil could delay and confound talks on leaving the European Union, which are due to start in less than two weeks.
The pound shed more than 2 percent against the dollar, dropping as low as $1.2636 and 88.6 pence per euro -- two- and six-month troughs -- before recovering all the way to $1.2741 and 87.70. Yields on 10-year gilts also ticked higher after falling to 1 percent.
John Wraith, a strategist at UBS, said there was a high likelihood of a potentially prolonged period of uncertainty over whether May would be replaced. But he cautioned bears against chasing the pound much lower.
"Today's result will in part be seen as a vote against a definitive break from the EU, and the market may soon begin to reassess the probability of a so-called 'hard Brexit'."
NO SMOKING GUN
There was much less drama elsewhere.
E-mini futures for the S&P 500 edged up 0.1 percent. Japan's Nikkei added 0.5 percent and MSCI's broadest index of Asia-Pacific shares outside Japan ended the day all but flat.
The Japanese yen eased to 110.40 per dollar, while the euro was down 0.35 percent against the U.S. currency at $1.1173.
The single currency had slipped overnight when the European Central Bank cut forecasts for inflation and said it had not discussed scaling back its massive bond-buying campaign, sending bond yields to multi-month lows.
Italian bond yields fell again on Friday as the head of the country's ruling Democratic Party, Matteo Renzi, said he was pessimistic over the chances of reaching a new cross-party pact on a reform of the electoral law.
Political analysts see that as reducing the chances of a snap election in the coming months.
"The dollar is right at a key point," said Saxo Bank head of FX strategy John Hardy. "There is the FOMC (Federal Reserve) meeting next week and we had a maximum-dove ECB meeting."
Overnight, Wall Street had also seemingly judged that the testimony of former FBI director James Comey was not life-threatening for the administration of President Donald Trump.
Comey accused Trump of firing him to try to undermine the investigation into possible collusion by his campaign team with Russia's alleged efforts to influence the 2016 election.
"I think the market is taking less of an alarmist review of this situation because there is no smoking gun here," said Jefferies & Co money market economist Thomas Simons.
"So it's not particularly impactful for thinking about ... Trump's economic agenda to go through."
The Dow rose 0.04 percent, while the S&P 500 gained 0.03 percent and the Nasdaq Composite 0.39 percent. [.N] The S&P and Dow are both marginally lower for the week.
In commodity markets, spot gold was 0.3 percent lower at $1,274.45 an ounce.
Oil prices remained subdued, with Brent having settled at its lowest since Nov. 29, the eve of an OPEC production cut deal.
U.S. crude futures was flat at $45.63 a barrel, with Brent crude at $47.84. [O/R] Both benchmarks are down roughly 4 percent in what will be a third consecutive weekly fall.
(Additional reporting by Wayne Cole in Sydney; Editing by Catherine Evans)