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LONDON, Apr 5 (Reuters) Expectations that interest rates in the euro zone will soon rise further pushed the euro to a two-month peak against the dollar on Wednesday, while concerns about higher rates and valuations capped shares.

Wall Street was set to open flat a day after the Nasdaq Composite Index rose to a five-year peak and before the closely-watched U.S. ISM non-manufacturing index and U.S. oil inventories data.

Government bonds held near recent lows in Europe, helped little by data which showed growth in the euro zone services industry held steady at a five-year high last month.

The RBS/NTC euro zone services Purchasing Managers' Index came in at 58.2 for March, marginally lower than the 58.3 expected and unchanged from February.

The yield on 10-year government bonds was little changed at 4.85 percent, but down from a peak around 4.90 percent earlier this week.

''Maybe it is a little bit supportive for the market but I think there is no significant change in the view of the ECB to continue with the rate hikes,'' said Peter Mueller, interest rate strategist at Commerzbank Securities in Frankfurt.

The European Central Bank meets on Thursday, and while few expect rates to rise from 2.5 percent this time, a series of strong economic indicators in recent days has prompted markets to price in rate rises starting in May and reaching perhaps 3.5 percent by year-end.

In contrast, comments from U.S. Federal Reserve officials overnight were taken to suggest that the interest rate tightening cycle in the United States is almost complete.

Kansas City Fed chief Thomas Hoenig repeated his belief that benchmark rates are close to where they need to be -- as long as the economy follows the script -- while colleagues said U.S.

economic growth looked set to slow to a sustainable pace.

EURO FIRM The euro gained on those contrasting interest rate expectations, hitting a two-month high against the dollar at $1.2288.

Markets expect ECB President Jean-Claude Trichet to signal euro zone interest rates will rise at his post-meeting news conference on Thursday. ''It's really a question of how hawkish (he is), and not whether he is going to be hawkish,'' said Chris Turner, head of FX strategy at ING Financial Markets.

The euro touched a fresh all-time high against the yen at 144.34 yen, while the dollar was steady against the yen at 117.50.

The Icelandic crown fell to a 21-month low against the euro as markets aired further concern over the island's economy. The crown has fallen close to 20 percent versus the euro in six weeks as investors have bailed out of Icelandic assets amid fears of a meltdown.

''The attraction of carry trades is in decline. A lot of people will be wary of going into the Icelandic crown,'' said Calyon foreign exchange strategist Henrik Gullberg.

STOCKS VOLATILE European shares oscillated around break-even as declines in heavyweight drug and banking stocks offset further advances for mining stocks. The FTSEurofirst 300 index was flat at 1,375 points, close to last month's near-five-year high.

EADS came under pressure, falling 3.6 percent after French and German industrial shareholders Lagardere and DaimlerChrysler announced plans to cut their stakes in the world's second largest aerospace group.

Discount airline easyJet fell 10 percent after Icelandic investment group FL sold its 16.9 percent stake in the carrier, ending months of speculation that it was eyeing a takeover.

In Tokyo, the Nikkei average finished up 0.57 percent after earlier hitting its highest point since July 2000, while the TOPIX climbed to its highest level in nearly 15 years before ending down 0.2 percent.

NYMEX crude oil futures steadied around $66 a barrel before U.S. inventory data later in the day, which were expected to show a build-up in crude but a drop in fuel supplies.

Gold erased early losses to trade at $586.80/7.70, and was expected to challenge Monday's 25-year high of $591.50 an ounce.

REUTERS CS BS2053

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