Adds quote in paragraphs 5-6, updates prices throughout

By Nell Mackenzie and Wayne Cole

LONDON/SYDNEY, July 8 (Reuters) -World stocks held just below record highs on Monday, with sentiment slightly cautious as growth woes in China and the prospect of political deadlock in France took the shine off optimism about a U.S. interest rate cut as early as September.

European shares reversed early falls .STOXX, but U.S. stock futures were broadly flat and Japan's Nikkei .N225 slipped 0.32% while the Chinese blue-chip index .CSI300 was off 0.9%.

China's bond yields rose as the central bank launched new money market operations to increase its market liquidity.

Mainland China and Hong Kong stocks ended lower, with a key index logging its fifth straight losing session. Investors were disappointed by a lack of policy stimulus measures amid a weak economic recovery, rising geopolitical tensions and foreign outflows.

In France, a leftist alliance unexpectedly took top spot ahead of the far right in Sunday's election, a major upset that was set to prevent Marine Le Pen's National Rally from running the government.

The weaker than expected showing for the far right was something of a relief for investors, though they also have concerns the left's plans could unwind many of President Emmanuel Macron's pro-market reforms.

"Market uncertainty has somewhat decreased following the election, as the prospects for significant increases in public spending are low, given that neither left-wing nor far-right parties secured an absolute majority," said Bruno Schneller, managing director at Erlen Capital Management.

"Nevertheless, a political risk premium is likely to persist, and any rebound in the market is expected to be short-lived," said Schneller.

The single currency steadied at $1.0837 EUR=EBS, having been as high as $1.0843 on Friday when a soft U.S. jobs report undermined the dollar.

The euro was up 0.2% against the yen at 174.54 EURJPY=EBS. The dollar stood at 161.04 yen JPY=EBS, just off its recent top of 161.86.

The closely-watched France-Germany 10-year government bond yield spread dropped one basis point (bp) to around 64 bps, its narrowest since June 13, but then widened in later trading.

"French government bonds are currently not attractive," said Schneller.

France's sovereign credit outlook is worsening amid a high and increasing debt ratio, substantial fiscal deficits, and rising funding costs, he added.

Europe's region-wide STOXX 600 .STOXX and the CAC 40 .FCHI in Paris were both up over 0.4% after early falls.

Across the pond, U.S. equity futures steadied.

S&P 500 futures ESc1 and Nasdaq futures NQc1 were both nearly flat. Earnings season kicks off later this week when Citigroup C.N, JP Morgan JPM.N and Well Fargo WFC.N all report.

Investors took Friday's jobs report as adding to the case for a September rate cut from the Federal Reserve, with futures 0#FF: now implying a 77% chance of a move. FEDWATCH

Markets also have 53 bps of easing priced in for this year, up from around 40 bps a month ago.

"Three-month payroll growth fell sharply to +177k from +249k as previously reported, driven by 111k of downward revisions," wrote analysts at Goldman Sachs.

"We continue to expect the FOMC to deliver its first cut in September, followed by quarterly cuts to a terminal rate of 3.25-3.5%."

In London trade, 10-year U.S. Treasury yields US10YT=RR were up around 4 bps at 4.31% on Monday, having been as high as 4.49% early last week.

Fed Chair Jerome Powell will have a chance to offer his outlook when he appears before Congress on Tuesday and Wednesday, while several other Fed officials are speaking this week.

The main economic event will be the U.S. consumer price report on Thursday, where headline inflation is expected to slow to 3.1%, from 3.3%, with the core steady at 3.4%.

German inflation data are out the same day, while China releases consumer prices and trade figures this week.

In commodity markets, gold XAU= fell from near one-month highs in earlier trading to stand down 0.8% at $2,372 an ounce. GOL/

Oil prices slipped as the market waited to see what impact Hurricane Beryl might have on supplies from the Gulf of Mexico. Brent LCOc1 fell 81 cents to $85.73 a barrel, while U.S. crude CLc1 dropped 95 cents to $82.21 per barrel. O/R

Reporting by Nell Mackenzie and Wayne Cole; Editing by Dhara Ranasinghe, Sherry Jacob-Phillips and Mark Potter

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