* European stocks edge up, Asia falls with investors still nervous
* Slim chance of Fed hike next week reduced after Brainard
* Dollar index heads higher after falling last two days
* Oil down as IEA sees market oversupplied in first half of 2017
By Nigel Stephenson
LONDON, Sept 13 (Reuters) - European shares rose modestly and the dollar firmed on Tuesday after a Federal Reserve official argued against raising U.S. interest rates too quickly, though any sense of calm in markets looked fragile.
Fed Governor Lael Brainard's remarks on Monday saw already slim expectations of a rate hike this month reduced further, helping weaken the dollar and push U.S. stocks higher and yields on low-risk government bonds lower. Street was nevertheless set to open lower on Tuesday, according to index futures ESc1 1YMc1 , a day after the Dow Jones Industrial Average .DJI and the S&P 500 .SPX made their strongest gains since early July.
Brainard's words, the last from a Fed official before the U.S. central bank's September policy meeting, followed three volatile trading days in which bond yields soared and stocks racked up heavy losses, chiefly on concern the era of supercharged monetary stimulus could be coming to an end.
Futures traders cut the chances of a Fed rate hike at the Sept 20-21 meeting to just 15 percent from 21 percent, according to the CME Group's FedWatch tool.
"Risk sentiment is a bit more stable today but generally there is this doubt," said Manuel Oliveri, a strategist at Credit Agricole (PA:CAGR) in London.
"U.S. stocks futures are down in contrast to European markets. That is on the back of rising uncertainties about central banks' ability to stimulate their economies and of course the speculation that the Fed is getting closer to a rise in rates."
Another trigger for the turmoil of the last few days was disappointment that the European Central Bank did not signal an extension of its bond-buying stimulus programme at its meeting last Thursday. helped push up yields on government bonds in the euro zone, many of which were negative, as well as yields in Japan, the United States and elsewhere.
German 10-year yields DE10YT=TWEB , the euro zone benchmark, tuned positive on Monday for the first time since the day after Britain's June 23 vote to leave the European Union.
On Tuesday they fell back to zero and last stood at 0.012 percent, down 2.8 basis points on the day.
U.S. 10-year Treasury yields US10YT=RR dipped 1 bps to 1.66 percent.
European shares opened higher but quickly pared gains. The pan-European STOXX 600 index .STOXX was up less than 0.1 percent after losing almost 2.5 percent since Thursday.
"This rebound looks weak to me, and lacking in conviction. The economic environment in Europe is still not that good," said Terry Torrison, managing director at Monaco-based McLaren Securities.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dipped 0.2 percent, reversing earlier gains, though the fall was far less than Monday's 2.4 percent.
Japan's Nikkei .N225 closed up 0.3 percent.
Markets largely shrugged off data showing China's industrial output grew at its fastest rate in five months in August while retail sales and investment last month also beat forecasts.
Chinese shares .CSI300 .SSEC ended flat, with the upbeat figures seen making further economic stimulus unlikely.
DOLLAR INDEX
The dollar index .DXY , which measures the greenback against a basket of six major currencies, rose 0.2 percent. The euro EUR= was flat at $1.1233 while the yen JPY= fell 0.4 percent to 102.25 per dollar.
Sterling GBP= weakened 0.6 percent to $1.3249 after slightly softer-than-expected UK inflation data.
"We've had a number of supportive comments from the policy hawks, but they are still struggling to convince the market. The dollar is right in the middle of the recent ranges," said Neil Mellor, a strategist for Bank of New York Mellon (NYSE:BK) in London. "
Oil prices fell after the International Energy Agency said slower oil demand growth, ballooning inventories and rising output would keep the market oversupplied for the first half of 2017. Brent crude LCOc1 , the international benchmark, was down 82 cents a barrel at $47.50.
Gold XAU= slipped 0.2 percent to $1,325 per ounce.