Global stocks erased early losses on Monday, dollar money market tensions eased and the U.S. currency held near one-month highs against the yen ahead of an expected Federal Reserve interest rate cut this week.

Earlier, risky assets fell across the board after Swiss bank UBS unveiled $10 billion in shock write-downs on high-risk debt.

But investors took heart from news that UBS had obtained an emergency capital injection, taking this as evidence that the troubled banking sector is working towards repairing the damage from the crisis triggered by U.S. mortgage defaults.

The Fed is expected to cut interest rates by at least a quarter point on Tuesday from the current 4.5 percent in a move which investors expect to boost confidence, like the September easing.

The UBS news is ... part of the package but all eyes will be on liquidity. The Fed is only really going to have an effect if it doesn't move, said Padhraic Garvey, fixed income strategist at ING.

MSCI's main world equity index .MIWD00000PUS was up 0.1 percent. The FTSEurofirst 300 index rose 0.4 percent on the day. U.S. stock futures pointed to a firmer open on Wall Street later.

Lafarge, the world's biggest cement maker, rose more than 10 percent following its acquisition of Egypt's Orascom Cement in a deal that will boost Lafarge's exposure to emerging markets.

UBS obtained an emergency capital injection from a Singapore government entity and an unnamed Middle East investor. Its share price rose 2.5 percent on the day. However, it is still down 21 percent since the start of the year, along with the broader banking index which lost 12 percent this year.

DIVERGING MONEY MARKETS

Fears about tighter interbank liquidity had weighed on banks but expectations for Fed rate cuts have calmed tensions in dollar money markets. One-month dollar interbank lending rates fell for a fourth day in London to 5.23188 percent.

However, stress persisted in the euro, with one-month rates hitting fresh 7-year highs of 4.89625 percent. The rates have remained elevated after the European Central Bank left the cost of borrowing on hold at 4 percent last week and kept a firm focus on inflation.

The dollar rose as high as 111.88 yen, underpinned by expectations that a Fed rate cut would limit economic damage from the credit crisis.

The Fed has led some major central banks down the path of easing monetary policy, cutting benchmark rates in September and October. There had been expectations of a half point cut on Tuesday but strong U.S. jobs data on Friday scaled them back.

Emerging sovereign spreads tightened 6 basis points while emerging stocks .MSCIEF were down 0.5 percent.

The March Bund future was down 35 ticks.

U.S. light crude rose 0.2 percent to $88.43 a barrel, while gold was slightly higher at $801.80 an ounce.

(Additional reporting by Kirsten Donovan; Editing by Ruth Pitchford)

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