(Updates throughout)

By Elizabeth Howcroft

LONDON, March 22 (Reuters) - European stocks were mixed

in early trading on Friday after cautious Asian markets put a

dampener on the recent equity rally, in a move attributed to

profit-taking after a busy week.

A surprise rate cut from Switzerland's central bank on

Thursday helped push markets to new highs, as traders realised

that major central banks around the world would not necessarily

wait for U.S. Federal Reserve rate cuts before delivering their

own.

Wall Street rallied overnight, with all three major indexes

extending their streak of record highs. But sentiment turned

more cautious during Asian trading hours.

China's yuan dropped sharply, hitting a four-month low, in a

move analysts attributed to rising expectations that there will

be more monetary easing to prop up the country's economy.

Chinese shares fell, dragging down markets more broadly.

At 1007, the MSCI World Equity Index was down 0.1% on the

day, but up 1.9% on the week as a whole, on track for its

biggest weekly gain so far this year.

Europe's STOXX 600 was up 0.1%, touching a new

all-time high, while London's FTSE 100 was up 0.9%.

MSCI's Europe index was down 0.2% and France's CAC 40

was also down 0.2%.

In a busy week for markets, traders drew confidence not only

from Switzerland's rate cut on Thursday, but also from the Bank

of England being more dovish than expected. The BoE said the

economy is "moving in the right direction" for it to start

cutting rates.

The U.S. Federal Reserve said at its meeting on Wednesday

that recent high inflation readings had not changed the

underlying "story" of slowly easing price pressures.

"I think there might be some profit-taking at the end of the

week, just because of the amount of data that we've seen and the

fact that we have seen more positive surprises," said Baylee

Wakefield, multi-asset fund manager at Aviva.

Trading may also reduce in the lead-up to the Easter

weekend, Wakefield added.

The U.S. dollar index was up 0.4% at 104.400, on

track for its best week since the first week of the year.

"The dollar's basically going to have its best week since

January and that is because markets are now accepting that other

major central banks will reduce their policy rate faster than

the Fed, especially because we've had further evidence from the

strong economic data we've had out of the U.S. this week,"

Aviva's Wakefield said.

U.S. jobless claims unexpectedly fell, sales of previously

owned homes increased by the most in a year in February and U.S.

business activity held steady in March, data this week showed. A

gauge of future economic activity in the U.S. turned positive in

February for the time in two years.

The euro was down 0.4% at $1.0819. The probability

of a European Central Bank rate cut before summer is increasing,

Bundesbank President Joachim Nagel said.

The pound was down 0.6% at $1.258, hurt by BoE

Governor Andrew Bailey saying in a Financial Times interview

that the expectation of more interest rate cuts this year on a

whole was not "unreasonable".

Euro zone government bond yields were set for a weekly

decline. The benchmark German 10-year yield was down by 3 basis

points at 2.371%.

Oil prices fell due to the possibility of a ceasefire in

Gaza. The stronger dollar and lower U.S. gasoline demand also

weighed on prices.

Gold was down 0.7% at $2,166.31 per ounce, having hit

a record bid high of $2,222.39 on Thursday.

Investment flows into gold in the week to Wednesday reached

their highest in almost a year, Bank of America Global Research

said.