* World stocks, emerging markets, Japan fall
* Europe up on BP results.
* Wall Street looks to open flat
* Dollar weaker after previous session's gains
By Jeremy Gaunt, European Investment Correspondent
LONDON, Oct 27 (Reuters) - Emerging market and Japanese shares fell sharply on Tuesday, but the retreat failed to boost the dollar which fell after the previous sessions' gains.
European stocks bucked the overall trend, rising on
better-than-expected earnings from BP
Investors are becoming jittery about both the extent of this year's global equity rally -- stocks have risen as much as 75 percent from a March low -- and the knowledge that authorities will eventually withdraw stimulus measures that have been a key factor in driving a global recovery.
The Wall Street sell off on Monday, for example, was prompted by fears U.S. lawmakers may let a federal home buyer tax credit expire.
The Chicago Board Options Exchange Volatility Index <.VIX>, investors' favourite barometer of investor sentiment, shot up to its highest level in four weeks, indicating worries about future losses.
This sentiment swept over into Tuesday trading with MSCI's all-country world stocks index <.MIWD00000PUS> down 0.5 percent, its emerging market sub-index <.MSCIEF> down 1.3 percent and Japan's Nikkei <.N225> closing down 1.45 percent.
"If you look at where markets have risen in recent months, possibly some sort of correction has become inevitable," said Julian Mayo, investment director at Charlemagne Capital.
Europe was different, partly as a result of oil heavyweight
BP's
The pan-European FTSEurofirst 300 <.FTEU3> index of top shares was up 0.2 percent.
"BP is ahead of expectations which is good news, but we have had a strong market environment which obviously helped," said Peter Dixon, economist at Commerzbank.
"Investors are still concerned about committing huge amounts of cash to equities, they are not sure whether there is going to be a bigger correction," he said.
WEAKER DOLLAR
The dollar weakened against a basket of major currencies despite the fall in stocks, which in recent months has tended to boost the currency.
It was partly a reaction to sharp gains on Monday, when the the euro had its steepest drop since early August, falling nearly 1 percent, and the dollar index posted its best daily gain since September.
On Tuesday, the dollar index <.DXY>, a measure of the greenback's performance against six other major currencies, fell 0.1 percent to 75.990, but above a 14-month low of 74.94 set last week.
The euro
Demand for euro zone government bonds rose with the two-year
yield