By Dominic Lau

Global stocks as measured by the MSCI world index <.MIWD00000PUS> were up 0.5 percent, with Japan's Nikkei average <.N225> up 1.3 percent and the pan-European FTSEurofirst 300 <.FTEU3> gaining 1.1 percent.

"The unprecedented events of 2008, and continuing fallout into 2009 will see a number of false dawns and continuing volatility throughout the coming year," said a trader at derivatives broker Blue Index in London.

Data still painted a bleak picture for the global economy after factories in China, India and Russia slashed output and jobs at a record pace in December.

Manufacturing activity in the euro zone also sank to a record survey low last month, below an already dire flash reading and the outlook remains grim as new orders also sagged to new lows.

The downturn in activity was accompanied by falling inflationary pressures, clearing the way for the European Central Bank to cut interest rates again when it meets later this month, as it is expected to do.

"The good news about this year is that people have been so pessimistic at the beginning of this year as opposed to being so optimistic at the beginning of last year, they may have overdone the pessimism," said Justin Urquhart Stewart, London-based investment director at Seven Investment Management.

"And that's quite sensible because there are some huge challenges to face. The thing people should remember is that equity markets generally recover in a recession but it's like trying to fight your way through the dust after the explosion's gone off."

The euro fell 0.3 percent to $1.395 and the yen also slipped against the dollar, which last year posted its firstly year gain against a basket of currencies since 2005.

As global demand weakened, oil prices remained in the doldrums after reaching their peak of $147 a barrel in July. Crude traded at around $41 a barrel, down more than 7 percent.

Gold also gave up gains, having started on a firm note in early trade, as the dollar bounced from lows, but expectations of more grim U.S. economic data could still ignite safe-haven buying from investors.

Prices in relatively risk-free government bonds also slipped. Yields in benchmark 10-year U.S. Treasuries ticked up 1 basis point, while 10-year Bund yields were 7.3 basis points higher at 3.022 percent.

Euro zone government bonds had a stellar year in 2008 with two-year yields falling around 50 percent and 10-year yields by a third as the market rallied due to the credit crunch and resulting economic downturn.

(Additional reporting by Jon Hopkins and Atul Prakash in London)