(Updates with Wall Street outlook, state of credit markets, euro zone investor sentiment)
By Jeremy Gaunt, European Investment Correspondent
LONDON, March 10 (Reuters) - Recession fears following the biggest U.S. job losses in five years mixed with renewed strains in the credit market to depress stocks on Monday, although Wall Street looked set for a positive start after last week's losses.
European shares were flat, up from early losses. Japan's benchmark Nikkei index <
> closed at a 2-1/2-year low.The dollar was generally weaker and investors were seeking safety in government bonds.
"The real problem right now is the United States, with the final toll of the subprime crisis still unknown," said Katsuhiko Kodama, senior strategist at Toyo Securities Co. in Tokyo.
Worries that the world-leading U.S. economy is heading for or is already in recession were fuelled on Friday when the U.S. Labor Department said 63,000 non-farm jobs had been eliminated in February, in contrast to Wall Street economists' forecasts that 25,000 jobs would be added.
Investors have already been pricing in a decline in U.S. growth but are not clear how far the economy will fall or how much impact it will have on other economies.
Sentiment among euro zone investors, for example, deteriorated to the worst in more than 2-1/2 years this month.
The March index from a survey of 836 European investors by the Sentix research group fell to 0.4, the lowest level since July 2005 and a ninth consecutive decline. It was 4.3 in February.
At the same time, concerns have risen again over the health of the credit market. U.S. and European credit spreads have been widening.
The Federal Reserve announced a series of term repurchase operations on Friday totalling $200 billion to ease liquidity pressures, adding to a sense that the money markets are in poor shape.
Barclays Capital noted that liquidity in traditional European government bond markets has all but dried up.
"Markets are dysfunctional, positions are being liquidated as stop losses are being reached, and there are no players willing (or able) to take opposite positions at this stage," it said in a note.
VOLATILITY
With this mix of worries as a backdrop, stock markets were on the back foot.
MSCI's main gauge of world shares <.MIWD00000PUS>, a benchmark for many professional investors, was down 0.3 percent for a more than 11 percent loss since the beginning of the year.
In Europe, the pan-European FTSEurofirst 300 index <
> was reversing earlier losses on the better Wall Street outlook, but was up just 0.1 percent.Earlier, Japan's Nikkei finished down 250.67 points or 2 percent at 12,532.13, its lowest since Sept. 1, 2005. The broader TOPIX <
> closed down 1.9 percent at 1,224.39.Investors were generally seeking safer assets.
Euro zone government bond futures, for example, opened higher with the June Bund future <FGBLM8> up 31 ticks at 117.72.
The two-year Schatz yield fell 5 basis points to 3.209 percent <EU2YT=RR> as investors bought the paper. The yield on the benchmark 10-year Bund was slightly lower at 3.760 percent <EU10YT=RR>.
Top-rated German bonds were particularly in demand. The gap between their yields and the higher returns investors sought to hold other euro zone government bonds was close to the widest seen since the euro's inception in 1999.
Gold <XAU=> was priced around $970 an ounce, for a year-to-date gain of nearly 17 percent. On currency markets, the yen and Swiss franc gained and the dollar slipped toward record lows.
"It's a carry-over from last week's payrolls data and the credit stories rumbling on," said Chris Turner, head of FX strategy at ING.
The dollar fell around 0.5 percent on the day to 102.26 yen <JPY=>, but held above an eight-year low of 101.41 yen struck on Friday, according to Reuters data.
The euro rose 0.1 percent to $1.5362 <EUR=>, edging back towards a record high of $1.5459 hit on Friday.
The dollar index, which measures the dollar's value against a trade-weighted basket of six major currencies, fell to 72.881 <.DXY>, edging back towards a record low of 72.462 hit on Friday.
(Editing by Ruth Pitchford)