* World stocks crawl higher, still nursing heavy losses
* European shares edge up from 22-month lows
* Focus turns to earnings season
* Dollar inches higher, yen slips from recent one-month highs
* Italy's cabinet approves expansionary budget
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Updates prices, ZEW, adds fresh comment)
By Dhara Ranasinghe
LONDON, Oct 16 (Reuters) - World stocks nudged higher on Tuesday, as focus turned to earnings season and a rebound in Italian assets helped battered equities find firmer ground for now.
European shares rallied 0.8 percent, pulling away from Monday's 22-month lows. That followed gains in some Asian markets, led by Japan's blue-chip Nikkei index, which closed 1.25 percent higher after a decline of nearly 2 percent the previous day.
The positive tone looked poised to extend into the U.S. session, with stock futures trading higher .
Gains in Italy's bond and stock markets after Italian Economy Minister Giovanni Tria defended the country's expansionary budget helped lift sentiment.
Calm in Italy -- a major source of turbulence in world markets in recent weeks -- helped explain the recovery in risk appetite on Tuesday, said Marchel Alexandrovich, European financial economist at Jefferies in London.
Stock market sentiment in Europe also got a boost from expectations that earnings season will deliver double-digit earnings growth for the third quarter.
About 6 percent of companies in the STOXX 600 index are due to report results this week, with the earnings season passing its mid-point during the first week of November.
Overall, third-quarter earnings for the index are expected to have risen 14 percent, according to Refinitiv I/B/E/S data, while euro zone earnings are seen up 12 percent. That compares with the 21.6 percent growth seen for U.S. companies.
"If you look at what's happening here and now, it is an improvement from what was happening a week ago," Alexandrovich said. "How long the stability lasts is anyone's guess."
Calmer equity markets took the shine off safe-haven assets.
Japan's yen was down a quarter of a percent against the dollar, the Swiss franc edged away from almost two-week highs against the greenback and gold dipped from Monday's 2 1/2-month high as tension between the West and Saudi Arabia triggered a fresh exit out of risk assets.
Signs that Saudi Arabia is preparing to acknowledge the death of Saudi journalist Jamal Khashoggi in a botched interrogation helped smooth edgy markets.
But given a rout in stock markets last week -- fuelled in part by concerns about higher U.S. interest rates, rising Treasury yields and world trade tensions -- some caution prevailed.
On Wall Street, the Dow has lost 4.5 percent this month, as long-term Treasury yields soared to their highest level since 2011. Higher yields make equities less attractive.
Chinese stocks closed lower on Tuesday after data showed factory-gate inflation had cooled for a third straight month in September amid weaker domestic demand, reflecting more pressure on the world's second-biggest economy.
"Looking forward, a couple of key points that may drive where markets go is the direction of U.S. Treasury yields and U.S. earnings season," said Investec economist Ryan Djajasaputra.
Meanwhile, German investor morale darkened more than expected in October, a survey showed on Tuesday, as concerns about an escalating Sino-U.S. trade dispute and Britain crashing out of the EU without a divorce deal clouded the outlook for Europe's largest economy.
Italian government bond yields fell as much as 15 basis points across the curve, narrowing the spread over German peers , after Italian Economy Minister Giovanni Tria defended the country's deficit-hiking budget.
"The most important reason (for the drop in yields) is that Tria is continuing to stick to the government and defending the budget," said DZ Bank strategist Christian Lenk. "This is taken positively by the market."
In currency markets, the dollar gained 0.25 percent to 112.03 yen after slipping to a one-month low of 111.625 overnight.
Switzerland's currency weakened to 0.9878 francs per dollar after advancing 0.5 percent the previous day.
The euro was steady at $1.15840, while sterling gained 0.5 percent against the dollar and the euro after British labour data beat expectations.
There was some focus was on the U.S. Treasury's semiannual currency report due this week, with investors waiting to see Washington's view on China after media reports last week that it has not labelled Beijing a currency manipulator.
Oil prices fell on evidence of higher U.S. oil production and increasing U.S. crude inventories, but reports of a fall in Iranian oil exports helped limit losses.O/R]
Brent crude futures were down 0.8 percent to $80.17 a barrel.
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Reporting by Dhara Ranasinghe; additional reporting by Shinichi Saoshiro in Tokyo and Abhinav Ramnarayan in London; editing by Larry King