(Updates throughout)

By Elizabeth Howcroft

LONDON, June 14 (Reuters) - European stock indexes

dropped on Friday as French assets took a battering from

political turmoil, and the cautious mood looked set to continue

on Wall Street as investors weighed up the U.S. rates outlook

after a week of mixed signals.

At 1234 GMT, the STOXX 600 was down 0.7% on the day

, on track for its worst week since October last year.

France's CAC 40 was down 2.7%, down 6.2% on the week overall, on

track for its biggest weekly loss in more than two years

.

President Emmanuel Macron's grip on power weakened after

European Parliament elections last weekend. He called a snap

election on Sunday, leaving market participants worried that the

far right, led by Marine Le Pen's Rassemblement National (RN),

could win and push a high-spending agenda.

France's finance minister said the country faces the risk of

a financial crisis if the far right were to win.

The risk premium on French government bonds surged to its

highest since 2017, and the spread between French and German

10-year government bond yields was at 81.5 basis points

.

"It is justified that some political risk is priced into

French assets. Markets are weighing the risks of an RN

government, assuming more fiscal slippage, nationalization

risks, etc," said Amelie Derambure, Senior Multi-Asset Portfolio

Manager at Amundi in Paris.

But Derambure added that the risks are "very different from

2017" because the RN is not talking about taking France out of

the European Union.

"That is a major difference," she said.

The euro was down 0.4% on the day at $1.068725, having

earlier hit its lowest in more than six weeks. Analysts said the

move was due to the risk premium on European markets, following

gains by far-right parties in various countries.

World stocks were down 0.2% on the day, having fallen since

they hit an all-time high earlier the week.

Wall Street futures were down, as investors focused on the

outlook for U.S. rate cuts. S&P 500 futures were down 0.5%

while Nasdaq futures were down 0.3%.

WATCHING THE DATA

The U.S. Federal Reserve on Wednesday pushed back the

expected start date for its rate cuts. Fed Chair Jerome Powell

said policymakers were content to leave rates where they are

until the economy sends a clear signal that something else is

needed.

But investors took some confidence from cooler-than-expected

producer prices and consumer price data.

Weekly jobless claims in the U.S. hit a 10-month high as the

labour market cooled.

"It's very likely that the last mile on the disinflation

process will require some weaker growth and weaker demand ...

the numbers that we have seen this week are clearly going into

that direction," said Amundi's Derambure.

The U.S. dollar gained, with the dollar index up 0.2% at

105.53, on track for a 0.6% weekly rise.

Elsewhere, the yen fell after the Bank of Japan said it

would begin trimming its huge bond purchases in the future, in a

move interpreted as signalling it was not in a hurry to do so

soon.

The dollar gained as much as 0.8% to 158.255 on the yen

, causing the yen to touch its weakest in more than a

month during Asian trading, though it recovered in early

European trading.

U.S. Treasury yields were down, with the benchmark 10-year

yield down 4 basis points at 4.1996%.

Euro zone government bonds were also down. Germany's 10-year

yield was at 2.353%, down 13.8 basis points on the

day.

Oil prices eased, but crude benchmarks were still on track

for their best week in more than two months.

Gold was up 1.4% on the day at $2,334.23.