* Euro falls against dollar, European shares flat * Bunds extend gains; yield set for biggest fall since 1990 * Copper heads for first annual drop in three years * Risk aversion sets market tone going into 2012 By John Stonestreet LONDON, Dec 30 (Reuters) - European shares and the euro were set to end a tough year on the back foot on Friday while Bunds headed for their best performance in decades, reflecting a well-worn pattern of risk-averse trading that seems likely to extend well into 2012. The single currency, battered by a euro zone debt crisis that shows no signs of easing its stranglehold over market sentiment, fell 0.3 percent to $1.2916 in thin trade after breaking below key support levels. The euro has lost 13 percent to the greenback from a peak in early May, though it still remains some way above a multi-year low hit in mid-2010. With signs also growing that the European Central Bank could step up its policy response to the crisis by cutting interest rates for a third time early next year as inflation eases, the single currency looks primed for more losses. "The euro has moved in clear waves since the Lehman crisis (of 2008), so the only downside objective that makes sense for the year ahead is its 2010 low of $1.1876," said Teppei Ino, a currency analyst at the Bank of Tokyo-Mitsubishi UFJ. With the euro on the back foot, the dollar index stayed close to a one-year peak of 80.854 at 80.546. Against the yen, the dollar was flat at 77.61. With safe-haven investments and cash tipped to remain in favour early in 2012, German government bonds held steady, setting 10-year yields on course for their biggest annual fall since at least 1990. That trend was echoed in the U.S. debt market, where benchmark yields were poised for their biggest fall since 2008. U.S. 10-year Treasuries gave investors a return of about 17 percent in 2011 with Bunds returning 13 percent. Ten-year German yields have fallen almost 40 percent in 2011, according to Reuters data, eclipsing the rally seen in 2008 at the height of the financial crisis. Safe-haven paper is likely to remain supported early next year with concerns over Italy's cost of funding -- it faces around 100 billion euros of bond redemptions and coupon payments in the first four months of 2012 -- adding to pressure on the periphery. "At least in the first quarter we can see Bunds clearly outperforming their euro zone peers," said Commerzbank strategist David Schnautz. Italian bonds were steady on Friday after the ECB stepped into the secondary market on Thursday to stabilise yields in the wake of a disappointing bond auction. Spanish yields were also flat ahead of the unveiling of the new government's budget retrenchment plans. STOCKS UNDER THE COSH European shares hovered close to opening levels, with the pan-European FTSEurofirst 300 index of top shares up 0.2 percent at 995.06 points at 0921 GMT and on course to end the year around 11.3 percent lower. The MSCI global index inched up 0.13 percent while U.S. futures pointed to a flat opening on Wall Street later in the day. "The year has been characterised by the European debt crisis and going forward it will depend on policymakers and how they implement better fiscal integration in the euro zone to how markets will perform next year," Veronika Pechlaner, a fund manager on the Ashburton European equity fund, said. Going into 2012 she said she favoured dividend-rich energy stocks. Hit by a surprise rise on Thursday in U.S. stockpiles and a slowdown in output from Chinese factories in December , Brent crude fell 34 cents to 107.67 a barrel by 0927 GMT. It was set to end a year marked by widespread unrest in the Middle East up more than 13 percent. Copper headed for its first annual drop in three years, with increasing signs of life in a recently moribund U.S. economy only partly offsetting concerns about the euro zone and the slowing pace of growth in China. Amid expectations growth in demand for the bellwether industrial metal may slow in 2012, prices are down 20 percent this year, though three-month copper on the London Metal Exchange snapped two days of declines and climbed 1.2 percent to $7,515 a tonne by 0937 GMT. Spot gold, a traditional hedge against inflation, rallied 1 percent to $1,562.0 an ounce on Friday and was on course for an annual rise of about 10 percent - although it should also see its first quarterly loss in more than three years. Earlier, Asian stocks ended their first losing year in three having shed nearly a fifth of their value. As well as the debt crises in developed economies, investors there were spooked in 2011 by an earthquake and tsunami in Japan and floods in Thailand. "If you look around at all the asset classes, it really has been a year of safe-haven flows, it is about preserving your capital and returning your equity," said Chris Weston, institutional dealer at IG Markets in Melbourne.

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