* European shares falls, U.S. stock futures weaker
* Asia ex-Japan rises 0.6 pct; Nikkei slips on stronger yen
* Oil prices nudge up but still reeling from selloff
* U.S. yield curve flattest in decade as Fed stays hawkish
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh (Updates prices, adds fresh comment)
By Dhara Ranasinghe
LONDON, June 22 (Reuters) - European stocks fell for a third straight day on Thursday, as oil prices kept within sight of the seven-month lows reached overnight on worries about a supply glut and falling demand.
Britain’s FTSE 100 and France’s CAC 40 slipped 0.4 percent each. Germany’s benchmark stock index DAX pared earlier losses but remained in negative territory.
Trading in U.S. stock futures suggested Wall Street shares would open flat to a touch weaker .
“Most of the weakness in equity markets is related to the energy sector, and that’s due to the massive weakness we’ve seen in oil, which is now trading in bear territory,” said Naeem Aslam, the chief market analyst at ThinkMarkets in London.
“In oil markets, however, we are at levels where you would see bargain hunters come back into the market.”
In fact, oil prices edged higher as the European session continued but remained within sight of lows hit on Wednesday.
Global benchmark Brent was up 0.6 percent at around $45.08 but not far off Wednesday’s seven-month low of $44.35.
U.S. crude futures were 0.4 percent firmer at $42.67 a barrel. They closed down 1.6 percent on Wednesday after touching their lowest level since August.
Since peaking in late February, crude has dropped around 20 percent, with only brief rallies, completely erasing gains at the end of the year after the initial OPEC-led production cut.
Oil’s decline has hurt energy stocks and curbed investor expectations for higher inflation that would pave the way for tighter monetary policies among major central banks.
“As far as the market mentality is concerned, as long as the oil price keeps weakening, this is going to tell us something about the underlying capacity of the global economy to generate inflation on a sustained basis,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.6 percent. But Japan’s Nikkei ended a touch lower as a stronger yen and a plunge in the shares of auto air-bag maker Takata Corp took a toll on sentiment.
Excitement after MSCI included mainland Chinese shares in its emerging market indexes this week further boosted China’s stock market. The blue-chip CSI300 index rose to its highest level in one and a half years.
Subdued inflation and concerns about the outlook for world growth when the U.S. Federal Reserve is raising interest rates have led to a flattening in bond yield curves.
The gap between yields on U.S. five-year notes and 30-year bonds narrowed to 95 basis points, holding near its smallest since December 2007.
A flattening yield curve is often viewed as a negative economic indicator. It shows concern about the future pace of growth and inflation, because buyers of long-dated debt would demand higher yields if they expected higher costs.
In currency markets, the New Zealand dollar gained 0.5 percent to $0.7257 after the central bank held official cash rates at record lows but sounded less dovish than bears in the market had wagered on.
The U.S. dollar dipped 0.1 percent to 111.26 yen.
The dollar index, which measures the U.S. currency against a basket of six other major currencies, was roughly flat at 97.53, down from a one-month high of 97.871 set on Tuesday.
The euro was also flat at $1.1164, after Wednesday’s 0.3 percent gain.
In emerging markets, Saudi Arabia grabbed the spotlight.
Saudi Arabian stocks rose more than 1 percent, heading for their biggest weekly gain in six years, after the promotion of a reformist Prince Mohammed to the role of crown prince and the prospect of inclusion in MSCI’s equity index.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Nichola Saminather in Singapore; Editing by Larry King)