The euro climbed for a third day on Thursday after news about a France-Germany accord on Greece's debt crisis relieved some concerns ahead of a European summit, while Asian stocks slipped after China manufacturing data contracted for the first time in a year.

In a potentially dangerous combination for investors, the flash Chinese PMI reading for July also reflected a jump in inflation, causing S&P 500 equity futures to cut gains and knocking mainland Chinese stocks further below a two-month high hit on Monday.

Gold cut its losses and oil reversed early gains after the China data and investors squared up before the euro zone crisis summit in Brussels later in the day.

Pending details of the deal between France and Germany that supposedly included European Central Bank President Jean-Claude Trichet, investors were cautious about pushing the euro much higher.

Deep questions remain about Europe, including whether a second bailout of Greece will address contagion in other fiscally weak countries such as Portugal and Ireland or even Spain and Italy, whose bond markets have been savaged in July.

Judging from the current crop of headlines, the most negative outcome for the euro would be a debt rollover without additional measures, Todd Elmer, currency strategist with Citi, said in a note.

Of course, the euro already appreciating ahead of the meeting and moves in other asset classes somewhat more modest than the FX price action would suggest it is far from clear that currency gains could be sustained beyond the short-term.

TECH CHECK

Summit hopes are also expected to help European stocks open higher as well. Financial spreadbetters expected Britain's FTSE 100 <.FTSE> to open 3 to 5 points higher, or as much as 0.1 percent, Germany's DAX <.GDAXI> to open 12 to 18 points higher, or as much as 0.3 percent, and France's CAC-40 <.FCHI> to open around 8 points higher, or as much as 0.2 percent.

The MSCI index of Asia Pacific stocks outside Japan <.MIAPJ0000PUS> was down 0.2 percent, with the consumer discretionary sector taking the biggest hit. The index was still up some 3 percent since hitting a 3-month low on June 20.

Hong Kong's Hang Seng index was down 0.2 percent <.HSI>, weighed by Chinese bank stocks and a 3.7 percent drop in CNOOC Ltd <0883.HK> in the wake of the offshore oil producer's acquisition of a Canadian oil sands firm valued at $2.1 billion.

Japan's Nikkei share average <.N225> was hardly changed on the day, with weakness in tech-related stocks slightly outweighing some strength in retailers.

The tech sector was getting whipsawed after weak results from Yahoo Inc , a lowered PC market forecast from Intel , and after Microsoft Corp stock dropped 1.7 percent ahead of its quarterly report on Thursday.

Apple's blockbuster results had given the sector a shove higher on Wednesday.

DON'T GET SO DEFENSIVE

From a sectoral point of view, some analysts have been recommending a shift from defensive segments of the market back to cyclical stocks based on valuations and positioning.

It is good to start collecting some of these blue-chip cyclical names because they have been beaten down so that includes some steel companies as well, Lorraine Tan, director of Asia equity research with Standard & Poor's, told Reuters Television.

Tan added that in the current quarterly results season, in which she expects materials and energy companies to do well, profit margins will be an important factor for bottom line growth because of the impact from higher commodity prices and tighter monetary policy.

The euro was up 0.3 percent around $1.4260 after hitting a session high near $1.4275 on news of an accord between France and Germany over Greece.

The euro is facing tough technical resistance in the $1.4280 to $1.4300 area, where among other things the 100-day and 55-day moving averages converge.

With uncertainties still high about negotiations over the U.S. debt ceiling, traders may focus on further covering their bets against the euro versus non-dollar currencies.

Indeed, the common currency was already up 0.5 percent against the Swiss franc, at 1.1719 francs.

The Australian dollar was down 0.1 percent at $1.0730, with a break below $1.0700 possibly paving the way for a test of support around $1.0670.

The Chinese economic news pushed gold prices back above $1,600 an ounce, within sight of the record high of $1.609.51 reached on July 19. The yellow metal has risen 6.6 percent in July.

Brent crude futures reversed early gains and slipped below $118 a barrel after the China PMI, although traders said hopes for debt deals in Europe and the United States could provide a floor for prices.

(Editing by Ramya Venugopal)

China