* Worlds stocks sag after heavy sell-off on Thursday
* Investors await U.S. jobs data for Sept due later on Friday
* Treasury yields rise to 7-yr highs, yield curve steepen
* U.S. junk bond spread over Treasuries narrowest since '07
* Oil prices hover at 4-year high
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Marc Jones
LONDON, Oct 5 (Reuters) - World markets steadied ahead of U.S. jobs numbers on Friday, as a four-year high in oil prices and the biggest weekly jump in Treasury yields since February left investors wondering where to go next.
The usual drop in activity ahead of the monthly non-farm payrolls couldn't prevent Europe's main bourses following Asia into the red - but it wasn't the deep shade of crimson of the previous day.
Lingering worries about Italy's finances pushed Milan down 0.9 percent, while London's FTSE, Frankfurt's DAX and the CAC in Paris were off 0.6-0.8 percent and Wall Street futures were modestly weaker.
It was the bond and currency markets, though, where the attention was really trained.
The dollar barely budged against its main sparring partners the euro and the Japanese yen after testing a 10-week high, but rising bond yields - which drive the global cost of borrowing - were causing a headache again.
Benchmark U.S. Treasury yields were at a seven-year top and on their way to their biggest weekly yield rise since February while European yields were adding to their biggest rise in months as well.
And with talk of plenty more U.S. interest rate hikes growing louder, it put all the more focus on the U.S. jobs data later.
Eaton Vance portfolio manager Justin Bourgette said though there was too much hype around the payrolls figures, whichever way you approach it, the U.S. labour market is currently super strong.
The latest Reuters poll sees 185,000 new jobs and average hourly earnings increasing 0.3 percent in September after leaping 0.4 percent in August.
"Whatever the Fed's concept of the neutral interest rate is, it must be rising," Bourgette said. "And it is going to be trial and error to some degree (on how high rates go), because you just don't know where the choking point is."
Tied in with the rise in borrowing costs has been the latest spike in oil prices, as energy costs tend to have an outsized impact on inflation which is what most major central banks focus on when setting interest rates.
Brent crude futures gained 0.5 percent to $85.03 barrel, and U.S. crude rose 0.7 percent to $74.88 barrel. That kept both just under 4-year highs. They have also risen an staggering 15-20 percent since mid-August.
"Iranian exports could fall below 1 million barrels per day in November," U.S. bank Jefferies said, referring to looming U.S. sanctions on Tehran.
The investment bank said there was enough oil to meet demand, but "global spare capacity is dwindling to the lowest level that we can document ... meaning any further supply disruptions would be difficult for the market to manage - and could lead to spiking crude oil prices".
The painful combination of rising oil prices, borrowing costs and a climbing dollar have also been rocking emerging markets which tend to be vulnerable to all three.
MSCI's 24-country emerging market equity index was down 0.7 percent and headed for its worst week since February and plenty of currencies were carrying heavy losses too.
The Indian rupee fell to new record low after the central bank kept its interest rates on hold. The rupee has been hammered by higher oil prices, and is the worst performer in Asia this year.
Indian stocks also fell for a third straight session, dragged down by energy firms, a day after the government announced a cut in fuel prices.
That cut sparked fears of the country going back towards the regulated regime where the prices of diesel and petrol were controlled by the government. Petrol prices were regulated until 2012, while diesel prices remained so until 2014.
"In general, what's driving emerging market weakness is a stronger U.S. economy ... there is a lack of clarity on the effectiveness of rate hikes as a currency defence," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. (Additional reporting by Arnab Paul in Bengaluru; Editing by Hugh Lawson)