LONDON/HONG KONG - European shares fell on Wednesday as bond markets suggested pain ahead for the US economy, tempering hopes of a negotiated end to the Ukraine conflict that had earlier buoyed equities.

The broad Euro STOXX 600 fell 0.8 percent in early trade after three sessions of gains that have taken the index back to levels reached before Russia’s special military operation against Ukraine.

Benchmark indexes in Frankfurt and Paris lost 1 percent and 1.3 percent respectively, with London shares also slipping a touch. Among significant losses was drugmaker Roche, which dropped 1.3 percent after a lung cancer drug failed to meet targets in a late-stage trial. 

Bond investors had bet overnight that aggressive tightening of policy by the US Federal Reserve could harm the world's biggest economy over the longer term.

The widely tracked US 2-year-10-year Treasury yield curve briefly inverted on Tuesday for the first time since September 2019.

Longer-dated yields falling below shorter ones indicate a lack of faith in future growth, with 10-year yields falling beneath 2-year rates widely viewed as a harbinger of recession.

Market players said the signals coming from bond markets were at odds with the mood in equity markets.

"It's a complete diversion of fixed income and the equity market," said Sebastien Galy, senior macro strategist at Nordea Asset Management.

"Equity markets are overly optimistic and the fixed income markets are probably being overly pessimistic."

An inverted Treasury curve has in recent decades been followed by a recession within two years, including the 2020 downturn caused by the COVID-19 pandemic.

Shares rallied in Asia and Wall Street overnight after Ukraine had proposed on Tuesday that it take on neutral status, seen as a sign of progress in face-to-face peace negotiations. 

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.3 percent to its highest in nearly a month, with most Asian stock markets in positive territory.

Yet the rally fizzled, with US S&P 500 futures turning negative and pointing to losses of about 0.3 percent.

The MSCI world equity index, which tracks shares in 50 countries, was up 0.1 percent.

The benchmark US 10-year yield was last at 2.3835 percent , having risen as high as 2.557 percent on Monday for its highest since April 2019, as traders position themselves for quickfire increases to interest rates by the US Federal Reserve.

The impact of rising US yields played out elsewhere, dragging Japanese government bond yields in their wake in a threat to Japan's ultra loose monetary policy.

The Bank of Japan increased efforts to defend its key yield cap on Wednesday, offering to ramp up buying of government bonds across the curve, including unscheduled emergency market operations.  

The widening gap between US and Japanese yields has caused the yen to weaken sharply, but it managed to regain some lost ground on Wednesday.

The Japanese currency rose 0.8 percent to 121.87 per dollar, compared with Monday's low of 124.3.

Elsewhere in currency markets, the euro was up 0.3 percent at $1.11, supported by the Russia-Ukraine peace talks.