(Updates for U.S. payrolls)
* Sterling plummets 10 percent, then recoups some losses
* U.S. jobs data underwhelm, cloud case for Fed hike
* S&P 500 futures little changed, European stocks fall
By Vikram Subhedar
LONDON, Oct 7 (Reuters) - A sterling plunge and underwhelming U.S. jobs data on Friday muddied the outlook for world financial markets, with investors left questioning central bank policy as a messier-than-expected Brexit fallout and U.S. presidential election loom.
Sterling recouped some losses after plunging almost 10 percent as growing fears of a "hard" exit by Britain from the European Union sent a shiver through world markets.
S&P 500 futures ESc1 pointed to a flat open on Wall Street, with its advance from recent lows having stalled this week.
U.S. employment growth unexpectedly slowed for the third straight month in September, which could make the Federal Reserve more cautious about raising interest rates.
have been dominated by a policy shift from the Bank of Japan last month, the resurgence in talk of the European Central Bank possibly tapering its bond buying programme, and the cloudy outlook for a Fed rate hike.
The sustainability of unconventional easing programmes conducted by the world's major central banks, and whether they may be counterproductive, are at the front of investors' minds, Goldman Sachs (NYSE:GS) analysts said in a note.
British Prime Minister Theresa May has this week set a March deadline for beginning the formal departure process from the EU, and stressed the bad side-effects of low rates and quantitative easing (QE).
A growing market belief that Britain is heading for a 'hard Brexit' outside the European Union's single market, which could hurt manufacturers and the vital financial services industry, has pummelled the pound this week.
Sterling slumped as much as 10 percent in Asia as it crashed through key support levels, triggering a wave of selling. It recovered in European trading but was still down 2.7 percent at $1.2271 GBP=D4 .
"This move has shaken things in sterling and a huge amount of any outstanding positioning will have been washed out, and we may be starting from a new, even more nervous footing," said Citi FX trader Sam Underwood.
While the FTSE 100 .FTSE , dominated by global, dividend-paying bluechips rose, the more domestically focused UK midcaps index .FTMC erased earlier gains and fell 0.5 percent in a sign of risk aversion among investors towards UK assets.
The STOXX 600 has fallen by around 7 percent since the start of 2016, with investors pulling funds from European equities for 35 straight weeks, the longest streak on record, according to Bank of America Merrill Lynch (NYSE:BAC).
British gilt yields also rose sharply.
The 10-year gilt yield GB10YT=RR was up 21 basis points this week at 0.96 percent and on track for the biggest one-week rise since August 2015.
"The pound used to be a relatively simple currency that used to trade on cyclical events and data, but now it has become a political and structural currency. This is a recipe for weakness given its twin (budget and current account) deficits," said David Bloom, global head of FX research at HSBC.
U.S. ELECTION NEARS
Friday's U.S. employment report was the last before the Fed's Nov. 1-2 policy meeting. Investors see almost no chance of a rate increase at that meeting given how close it is to the Nov. 8 presidential election.
Non-farm payrolls rose 156,000, down from a revised gain of 167,000 jobs in August, the Labor Department said. Economists polled by Reuters had expected employers to add 175,000 jobs last month.
A disorderly reaction to possible U.S. interest rate hikes could disrupt capital flows and heighten asset price volatility in Asia, the International Monetary Fund said on Thursday in currency markets, the dollar edged down 0.8 percent against the yen to 103.1 JPY= after hitting its highest level in a month on Thursday.
The euro rose 0.2 percent to $1.1177 EUR= , but was still poised to shed about 1 percent for the week.
Gold XAU= recovered from earlier losses and was up 0.63 percent. It last stood at $1,262.76.
Silver XAG= rose 1.6 percent, bouncing from a four-month low of $17.1525 per ounce.
Oil prices steadied after U.S. crude broke through $50 a barrel overnight, spurred by an informal meeting among the world's biggest producers on output cuts and falling U.S. crude inventories.
U.S. crude futures CLc1 gave up earlier gains and were down 0.4 percent at $50.47, just below Thursday's four-month high of $50.63. Brent LCOc1 fell 0.6 percent but is close to its highest levels this year.