The euro fell on Tuesday and stocks retreated as a relief rally ignited by a $1 trillion plan to contain Greece's debt crisis ran out of steam, while doubts on how the country will cut its budget deficit persisted.

The euro dropped back to below $1.27 and European shares <.FTEU3> fell 2 percent, surrendering some of Monday's massive gains. Chinese stocks <.SSEC> meanwhile slipped 1.9 percent to their lowest level in a year on mounting concerns over China's worsening inflation outlook.

Wall Street was also set to trim Monday's stellar gains, with U.S. stock index futures down 0.9-1.3 percent at 1115 GMT (7:15 a.m. EDT).

Overall, world stocks <.MIWD00000PUS> were down 0.9 percent. Emerging stocks <.MSCIEF> dipped 0.7 percent while emerging currencies also pulled back.

The EU was never going to be able to give the markets a single knock-out blow, said Jim Wood-Smith, head of research at Williams de Broe.

Markets have lost confidence in the EU and the euro. Until that confidence comes back we're in for a volatile period.

The shock and awe plan unveiled over the weekend initially lifted sentiment, propelling the euro close to $1.31 on Monday and the STOXX Europe 600 banking index <.SX7P> jumping nearly 15 percent.

But after the initial euphoria, investors turned cautious again on Tuesday, worrying that the plan was not a long-term solution to the euro zone's sovereign debt problems.

In a sobering note, the International Monetary Fund said that even though Greece's public debt was sustainable over the medium term, the nation faced plenty of risks.

Moody's credit ratings agency also warned on Monday that it might downgrade Portugal's debt rating and further cut Greece's to junk status, noting the contagion effect of Greece's crisis on other euro zone members.

Markets are being a bit cynical and rightly so, Alex Heath, head of base metals at London's RBC Capital Markets, said of the rescue package.

There is an awful lot of hard work and belt-tightening to be done. The markets have factored in a recovery that hasn't been achieved yet.

CHINA TIGHTENING WORRIES

Investors were also digesting data showing Chinese inflation hit an 18-month high in April and bank lending topped expectations, although the full suite of monthly data signaled an economy that is not overheating as some have feared.

Oil dropped to below $76 a barrel while base metal prices also lost ground. Gold prices rose, hitting five-month highs in Europe, helped by renewed concerns over the euro zone's fiscal health.

Core euro zone government bond prices climbed, tracking gains in U.S. Treasuries.

The June Bund future was up 54 ticks on the day at 126.03. The 10-year Bund yield was down 4.7 bps at 2.901 percent while the two-year Schatz yield was down 3.6 basis points at 0.573 percent.

Traders said they were anxious to see whether peripheral sovereign debt yield spreads would widen, reversing some of the price action the previous day, after European Central Bank Governing Council member Axel Weber said late on Monday that bond-buying by euro zone central banks would be limited in scope.

(Additional reporting by Rebekah Curtis and Harpreet Bhal in London; Editing by Susan Fenton)

Portugal China European union