World stocks edged up on Friday but were set to post their biggest weekly drop in eight weeks on concerns that rising inflation in emerging economies could lead to aggressive policy action and hurt global growth. Spain's stocks rose. Madrid plans a partial state takeover of its weakest savings banks as it seeks to reassure investors a costly bank rescue will not weigh on its deficit, sources and reports said.

The euro hit a two-month high against the dollar on growing expectations that euro zone policymakers will arrive at a more durable solution to the debt crisis. Hawkish noises from the European Central Bank were also cited as a reason for the latest surge in the currency.

Worries over inflation in China and India have put their stock markets under pressure, with Chinese stocks <.SSEC> down 3.3 percent so far this year and Indian equities <.BSESN> down 7 percent.

Other euro zone peripheral equities, which were hit hard last year by the sovereign debt crisis, have also recovered in 2011 on the back of rising inflation in emerging markets.

Commodity prices have also suffered as China is a top consumer, though copper and oil prices recovered on Friday.

Background is still somewhat nervous given concerns over further tightening measures in China, said Keith Bowman, equity analyst at Hargreaves Lansdown in London.

World equities as measured by the MSCI All-Country World Index <.MIWD00000PUS> added 0.1 percent after losing for two days in a row. The index has fallen 1 percent this week, on track for its worst weekly performance since late November.

Spain's stocks <.IBEX> rose 0.9 percent and are up nearly 9 percent in January, while yields on 10-year Spanish government bond over benchmark German Bunds were steady at 219 basis points.

A source familiar with the matter told Reuters that Spain is planning to force its debt-laden regional saving banks to become conventional banks and seek stock market listings.

High levels of bad property loans at the savings banks are seen as a major risk for Spain's government as it aggressively cuts its budget deficit to stave off fears it will need an Irish or Greek-style bailout from the European Union and International Monetary Fund.

Among Spanish banks, Banco Santander advanced 2.2 percent and BBVA put on 2 percent.

EURO RISES, COMMODS REBOUND

The euro rose 0.5 percent to $1.3533 after rallying to a two-month high of $1.3556. It also hit a five-week high against the yen, at around 112.20 yen.

This reaction seems overdone as it's highly unlikely the ECB will raise rates soon and there's been nothing concrete on the rescue fund, said Raghav Subbarao, currency strategist at Barclays Capital.

We think Portugal will have to be bailed out eventually. After that the euro can rise further as Spain we believe is solvent, but the euro rally is not sustainable here, he added.

The dollar <.DXY> was down 0.4 percent against a basket of major currencies.

The pan-European FTSEurofirst 300 <.FTEU3> index gained 0.2 percent, while U.S. stock index futures eased around 0.1 percent, indicating a weak open on Wall Street ahead of results from General Electric and Bank of America.

In Asia, Japan's Nikkei average <.N225> dropped 1.6 percent and posted its biggest weekly loss in three months.

Copper recovered 0.5 percent after falling 3.6 percent in the two previous sessions, and is down 2.5 percent for the week, while oil snapped a three-session losing streak, up 0.4 percent.

(Additional reporting by Atul Prakash, Neal Armstrong, Anirban Nag and Kirsten Donovan; Editing by Catherine Evans)

Vs