(Updates ahead of Wall Street open, adds detail and quotes on

Argentina market support)

*

Yen rallies, Japanese stocks drop as coalition breaks up

*

Red hot rally in world stocks has paused this week

*

Gold hovers s $4,000 an ounce, silver above $50

*

China expands restrictions on sales of rare earths

By Marc Jones

LONDON, Oct 10 (Reuters) - Breathless markets had little

time for a break on Friday as record-setting stocks dipped, gold

shone bright still and the dollar headed for its best week of

the year despite more drama for the Japanese yen and in Europe.

With the ink still drying on a historic ceasefire between Israel

and Hamas, the political developments were still coming thick

and fast - and continuing to move markets.

Wall Street was set to tick higher despite the ongoing

government shutdown there, but Japan's yen has been

jolted out of its recent slide by the Komeito party quitting its

coalition with the Liberal Democratic Party.

That raises questions over the route to the premiership for

new LDP leader Sanae Takaichi, whose pledges of fiscal stimulus

and calls for the Bank of Japan to hold off on interest rate

hikes had sapped the yen and lifted the Nikkei 6% until

a 1% drop on Friday.

"If Takaichi doesn't become prime minister, or at least

can't govern effectively, you don't really have much of a

'Takaichi trade'," said Chris Scicluna, head of research at

Daiwa Capital Markets Europe.

Major European bourses also saw a low-key end to the week

as traders waited to see whether France's President

Emmanuel Macron can find a way out of his country's political

crisis.

He is expected to name his sixth prime minister in less than two

years later, with that person facing the vexing mission of

steering a belt-tightening budget through a deeply fragmented

parliament.

The pan-European STOXX 600 was steady at 571

points, heading for a third straight weekly gain. The CAC 40 in

Paris though is down on the week and the euro is

set for its worst seven days since July.

The yield gap between 10-year French government bonds and

uber-safe German Bunds - a market gauge of the

risk premium investors demand to hold French debt - was also

back at 80 bps having surged to 88 bps earlier in the week.

"At the moment the market is happy," Daiwa's Scicluna said,

referring to the prospect of the French crisis easing.

"Next year could well be another very different situation

though," he added, referring to the possibility of it all

falling apart again. "Spreads could break out to the highest

levels since Mario Draghi's 'Whatever it takes' speech," he

said, speaking about the former ECB President's 2012 pledge that

eased the debt crisis.

RARE EARTH CURBS

U.S. stocks were set to open fractionally higher with consumer

sentiment data due shortly and the all-important third-quarter

corporate earnings season due to kick off next week.

The U.S. dollar index, which measures the

greenback's strength against a basket of six currencies, was

nudging lower due to the yen's bounce on the day, but it

remained firmly on course for a 1.6% weekly rise, its best since

November.

Latin America's markets were set to remain squarely in focus too

after the U.S. confirmed it would provide budget

chainsaw-wielding Javier Milei's Argentine government a $20

billion swap line to try to quash renewed currency market

problems there.

"It's unclear what the U.S. will demand in exchange,"

William Jackson, Chief Emerging Markets Economist at Capital

Economics said.

Chinese stocks had tumbled 1.4% overnight meanwhile,

after Beijing expanded its rare earths export controls on

Thursday, tightening control over the sector ahead of talks

between Presidents Donald Trump and Xi Jinping.

Beijing also ramped up enforcement of its chip import

restrictions, aiming to reduce domestic technology companies'

dependence on U.S. products such as Nvidia's artificial

intelligence processors, the Financial Times reported on

Friday. Reuters could not immediately verify the report.

With the U.S. government still in shutdown mode, the yield

on the benchmark 10-year Treasury bond fell to 4.09%

compared with its U.S. close of 4.14%.

Traders expect the Federal Reserve will cut U.S. interest

rates again on October 29, with Fed funds futures pricing a

94.6% probability of a 25-basis-point rate cut, according to the

CME Group's FedWatch tool.

ALL THAT GLITTERS

Gold edged back up to $4,000-an-ounce in Europe, having

seen a brief bout of selling after topping the threshold for the

first time ever this week.

Silver, which has risen even more than gold this

year, was also back above the $50 mark that it breached for the

first time on Thursday.

Multiple factors aided the rally, including geopolitical

risks, robust central bank buying, exchange-traded fund inflows,

expectations of U.S. rate cuts, and trade-related uncertainties.

In energy markets, Brent crude slid 0.7% to $64.72 per

barrel, after Israel's government ratified a ceasefire with the

Palestinian militant group Hamas on Friday, clearing the way to

suspend hostilities in Gaza within 24 hours and free Israeli

hostages held there in days.

(Additional reporting by Gregor Stuart Hunter in Singapore;

Editing by Susan Fenton)