Equities in Europe and Japan fell on Monday although emerging markets got a big boost from Indian elections which raised hopes of a stable, pro-economic reform government.

The dollar strengthened slightly against major currencies after last's week four-month low.

India was a bright spot for equity investors with the benchmark 30-share BSE index <.BSESN> surging more than 17 percent before trading was halted for the day.

Prime Minister Manmohan Singh's coalition defied predictions of a tight election result and was only about 11 seats short of an outright majority following the vote count.

A strong Indian coalition, free of the pressures from its former communist partners, has boosted the prospect of reforms to encourage growth in Asia's third-largest economy.

Elsewhere, however, the mood was generally downbeat. Some of the gloss has gone from the equity rally which began in early March as investors begin demanding more substantial signs of global economic recovery before continuing to buy.

The FTSEurofirst 300 <.FTEU3> index of top European shares was down 0.4 percent after losing 3 percent last week. Japan's Nikkei <.N225> lost 2.44 percent.

The market is drifting back toward risk aversion after a strong run, said Bernard McAlinden, investment strategist at NCB Stockbrokers, in Dublin. Others, however, are not willing to call an end to the rally that saw global stocks rise for nine weeks before slipping last week.

We think there is more upside, at least in the short term, as inventory re-stocking and survey data suggest stronger activity data ahead, Goldman Sachs said in a note. After that, deleveraging and a slow economic recovery is likely to bring a pause. But long term, valuation points to strong returns.

UNCERTAINTIES

The dollar edged up against the euro and yen. Large uncertainties surrounding the global economic outlook encouraged investors to buy currencies which they perceived to be safe.

Data on Friday showing a bigger-than-expected contraction in the euro zone economy highlighted that, although forward-looking surveys and indicators may have shown improvement, this has yet to be reflected in the more important hard economic data.

The euro fell 0.3 percent against the dollar as the U.S. currency gained 0.1 percent against a basket of currencies <.DXY>.

The dollar edged up 0.1 percent against the yen to 95.36, rebounding from a two-month low of 94.55 yen struck earlier on trading platform EBS.

Euro zone government bonds pushed higher as the retreat in share prices spurred demand for lower risk government debt.

In the cash market, 10-year Bunds yielded 3.34 percent, 3 basis points less than in late Friday trade while the two-year Schatz yield was 3 basis points lower at 1.26 percent.

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