* MSCI world equity index slips, Europe down
* Wall Street set for weak start
* German Ifo business climate index briefly lifts euro
* Oil slips; euro zone government bonds rise (Updates with euro erasing gains, Wall St set for weak open)
By Natsuko Waki
LONDON, Aug 26 (Reuters) - World stocks fell below this week's 10-month high and the dollar strengthened on Wednesday, with investors remaining cautious despite an improvement in German business morale.
The Ifo business climate index rose for a fifth month running to 90.5 in August, compared with an estimate for a rise to 88.9 and an upwardly revised 87.4 in July, suggesting Europe's largest economy was recovering.
The euro quickly erased gains and government bonds advanced, however, reflecting just how cautious investors are following a sharp rally in risky assets in recent weeks.
Wall Street also looked set for a weak start on Wednesday though many analysts say the rally in global stocks will continue, albeit with occasional blips.
"As each day passes, the thought that this rally is unsustainable becomes less and less valid. Whilst it is inevitable that we will have negative days along the way, more and more investors are buying in to the idea that this is not a blip," said Brian Myers, analyst at ODL Securities.
"Confidence is a fragile beast, but at the moment we should all be enjoying this return to bullishness." MSCI world equity index was down 0.3 percent after hitting a 10-month high on Tuesday. The index has risen more than 21 percent since January.
The FTSEurofirst 300 index lost 0.6 percent with chemical, oil and gas companies leading the way down.
"The (Ifo) figures are good. It confirms Germany is out of recession and things are turning up," a European trader said. "But the market is tired, pausing for breath and taking profit."
The euro rose to the day's high of $1.4349 before slipping to $1.4271.
The dollar gained 0.4 percent against a basket of major currencies.
Emerging stocks fell 0.7 percent.
Chinese stocks rose 1.8 percent after better-than-expected earnings from major companies. However, the index has lost around 13 percent so far in August.
U.S. crude oil fell 20 cents to $71.81 a barrel.
The September Bund future gained 26 ticks. (Additional reporting by Atul Prakash and Dominic Lau, editing by Mike Peacock and Lin Noueihed)