Japan edged closer to deflation, highlighting a threat to the world economy before next week's G20 summit where Europe and the United States may clash over stimulus plans, but seek common ground on regulating the financial system.

With both domestic and external demand faltering, Japan could be the slowest among major economies to recover from recession.

Europe slid closer to zero inflation with Germany's consumer price index slowing to its lowest level in nearly a decade.

The wider euro zone reports inflation data on Tuesday, when economists predict the annual rate will fall under 1 percent in March and sink further in the next few months.

That is well below the European Central Bank's 2.0 percent ceiling, opening the door for it to cut interest rates at its monthly policy meeting on Thursday.

In the United States, the talk was of price increases after consumer spending rose for a second straight month in February.

The core price index was on the high end of expectations. This will fan inflation fears. The Fed is sowing the seeds of future inflation, said Scott Brown, chief economist at Raymond James & Associates.

U.S. consumers' mood brightened a bit in March, according to the Reuters/University of Michigan Surveys of Consumers.

But U.S. stocks retreated on Friday after the Dow posted gains of 21 percent over the previous 13 sessions. The Dow and the S&P 500 both traded about 1.5 percent lower, in line with European shares. Tokyo stocks ended flat.

Despite the signs of a bull market -- often defined as a 20 percent increase from a low -- and speculation the economy may have bottomed, economists polled by Reuters now expect data next Friday to show 654,000 jobs were lost in March, up from 640,000 forecast in the previous poll a week ago.

POTENTIAL CLASH AT G20

Policy-makers from the Group of 20 leading industrialized and emerging economies will also plan tougher regulations to ensure that mistakes that led to the banking crisis are not repeated.

The potential for discord was evident ahead of the Group of 20 meeting of leaders of the world's largest economies in London next week.

Europe is resisting U.S. calls for greater stimulus spending. [ID:nN26491633] In the latest salvo, Germany warned that surging debt levels could threaten the stability of the euro currency and lay the groundwork for future crises.

If it is not taken seriously, I am telling you, the euro will have trouble one day in terms of its own credibility and stability, German Finance Minister Peer Steinbrueck told parliament.

Before heading to London, President Barack Obama met leaders of the biggest U.S. financial institutions to discuss the economy and their businesses. Obama planned to tell bankers we're all in this thing together, a senior White House advisor said.

STRUGGLING TO STIMULATE

Global policy-makers are struggling to stimulate economic growth, cutting interest rates to close to zero in many big economies and raising infrastructure spending and buying assets from the private sector.

British Prime Minister Gordon Brown hopes to persuade his fellow G20 leaders at the summit on April 2 to agree on ambitious spending. But his own central bank governor, Mervyn King, has questioned how much Britain can borrow to fund this.

Speaking in Brazil on Thursday, Brown said Britain must not rule out taking action needed to boost growth while his host, President Luiz Inacio Lula da Silva, gave an uneasy reminder of the growing resentment in poorer nations.

(It is unfair) that the (poor) be the first to pay the bills of a crisis created by the rich -- not by any blacks, by any Indians or by any poor, Lula said. This is a crisis fomented by the irrational behavior of white and blue-eyed people, who before the crisis seemed to know everything.

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