After a Sunday vote in France put President Nicolas Sarkozy's future in doubt, Dutch Prime Minister Mark Rutte on Monday tendered his government's resignation in a crisis over budget cuts, creating a political vacuum in one of the euro zone's most stable nations.
U.S. stocks fell more than 1 percent and European equities plunged to a three-month low on Monday, hurt by data showing the euro zone's business slump deepened at a far faster pace than expected in April.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> inched down 0.2 percent Tuesday, while Japan's Nikkei average <.N225> opened down 0.8 percent.
Fragmented euro zone politics over austerity implementation is quickly becoming the disorder of the day, said Ashraf Laidi, chief global strategist at City Index.
Eurozone's political cracks remind us of May 2005, when the euro was knocked off that year by 10 percent. In late May 2005, France rejected a referendum for closer integration with the EU. Three days later, the Netherlands rejected the same treaty establishing a single European constitution, he noted.
The euro inched down 0.1 percent at $1.3147, slipping further away from a two-week high of $1.3225 reached on Friday. The yen held firm against the dollar at around 81.10 yen.
Riskier currencies such as the Australian dollar eased. The Aussie inched down 0.1 percent at $1.0306, already pressured on Monday after producer inflation data surprised on the downside, raising the risk that consumer prices due at 0130 GMT will do the same.
Overall, currency markets are in 'risk off' mode. That is to say, while the euro has not weakened that much (bearing in mind it is at the centre of the problem), the yen is stronger and higher-beta currencies softer across the board, Societe Generale said in a research note.
With concerns over the sovereign debt restructuring rising, Dutch and peripheral euro zone bonds sold off on Monday, driving Spanish yields back above 6 percent and taking the spread of Dutch bonds over German benchmarks to the highest in three years.
As investors sought safety, the yield on five-year Japanese government bonds fell below 0.265 percent to a 18-month low early on Tuesday.
U.S. crude prices were steady on Tuesday, trading at just over $103 a barrel, as renewed fears about the health of the euro zone economies and political uncertainty countered concerns over a production stoppage in the North Sea and potential disruptions Of Iran supply. Brent June crude settled down 5 cents at $118.71 a barrel.
Asian credit markets were sluggish early on Tuesday, with the spread on the iTraxx Asia ex-Japan investment-grade index wider by about 5 basis points.
(Editing by Richard Pullin)