A spike in Chinese inflation weakened equity markets on Thursday, as investors pondered the prospects of interest rate hikes in one of the world's main economic drivers.

World stocks as measured by MSCI <.MIWD00000PUS> were down slightly, led by emerging markets and Europe. Japan's Nikkei <.N225> rose nearly 1 percent with interest focused mainly on exporters.

Chinese consumer inflation jumped to a 16-month high in February and a raft of other domestic data displayed broad-based strength, providing fresh arguments for policy tightening sooner rather than later.

The inflation figures add a little bit more worry in regard to the actions the Chinese will take to try and control the economy, said Justin Urquhart Stewart, director at Seven Investment Management in London.

There is the concern that they will take too strong an action and that will reverberate back onto Europe ... The last thing we need to see is China trying to slow itself down.

The pan-European FTSEurofirst 300 <.FTEU3> index of top shares was down 0.3 percent, although it was coming off a seven-week closing high on Wednesday.

Globally, equities have been recovering somewhat this month from early-year weakness. Most major indexes are now in positive territory for the year.

But worries ranging from China overheating to European debt and the sustainability of the U.S. recovery are keeping investors cautious.

BOND DEMAND

Euro zone government bonds were steady, with core fixed income markets finding some support after a smooth sale of 10-year U.S. Treasuries on Wednesday.

There was strong demand for the U.S. Treasury's $21 billion reopening of a 10-year note issue it auctioned in early February.

The U.S. sale came after a solid 2-year German auction earlier in the session.

All this points to investors keeping up demand for government bonds amid worries about sovereign debt in parts of Europe and large deficits in major economies.

On currency markets, the yen rose against the dollar and the euro as investors pared back riskier FX positions following the strong Chinese inflation data.

The yen was rebounding from a two-week low against the dollar. The euro also fell against the dollar, but movements were limited. The euro was at $1.3650.

(Additional reporting by Joanne Frearson and Kirsten Donovan; editing by John Stonestreet)

China Japan Nikkei 225 Inflation