Asian shares fell on Monday, as investors turned cautious about riding further on liquidity-driven optimism without seeing more evidence of firmer global growth and on concerns about the impact of a slowing Chinese economy.

Market sentiment has been improving since late last year as major central banks around the world flooded the financial system with ample funds to stave off fears of a credit crunch, allowing money to flow into a broad range of assets.

But while recent U.S. data suggesting a recovery has prompted investors to shift their focus towards economic fundamentals and away from long-running troubles in the euro zone, they remain watchful of developments in the debt crisis and also rising oil prices.

Markets seem to be in a holding pattern. Investors are waiting for the next catalyst before committing to fresh positions, said Stan Shamu, a market strategist at IG Markets.

The MSCI Asia Pacific ex-Japan <.MIAPJ0000PUS> fell 1.1 percent, with Chinese shares leading the decline on prospects of slower growth in the world's second largest economy. Shares in the world's third biggest economy, Japan's Nikkei <.N225>, fell 0.8 percent on profit-taking from the recent rally. <.T>

Financial spreadbetters expected major European markets <.FTSE> <.FCHI> <.GDAXI> to open around 0.2 percent lower. <.L>

In commodity markets, oil recovered from a near-2 percent drop on Friday after worries faded about supply disruptions from Saudi Arabia, the world's biggest crude exporter, which had boosted Brent crude to its highest level since July 2008.

Brent inched up 0.1 percent to $123.77 a barrel and U.S. crude edged up 0.2 percent to $106.90 a barrel.

U.S. President Barack Obama and Israeli Prime Minister Benjamin Netanyahu are set to meet later on Monday amid U.S. fears that Israel might opt to strike Iran on its own if it is not convinced of Washington's determination to do whatever is needed to rein in Tehran's nuclear ambitions.

Oil is underpinned by worries about escalating tension over Iran, and depending on what comes out of tonight's meeting, oil could advance further, said Masayo Kondo, president of research firm Commodity Intelligence in Tokyo.

It appears that ample liquidity has had its round in stocks and is now turning to commodities with more upside potential. If oil rises, it will drag other commodities higher, Kondo said.

Copper swung between positive and negative territory as market players debated whether rising stockpiles of the metal in top user China pointed to sluggish demand or a case of importers positioning for a recovery in consumption.

Uncertainty over demand from China also weighed on resource-reliant Australian shares.

SLOWING CHINA

Chinese Premier Wen Jiabao cut his nation's growth target to 7.5 percent for 2012 to give the economy more room to slow down if needed while the government carries out promised economic and welfare reforms ahead of a looming leadership transition. He spoke as China kicked off its annual parliamentary session.

Data showed on Monday that the HSBC China Services PMI ran at its fastest pace in four months in February, climbing to a seasonally adjusted 53.9 in February from 52.5 in January. The reading contrasted with an official report earlier suggesting the sector was shrinking.

The main risks to our cautiously constructive outlook continue to be Europe, weaker-than-expected Chinese data and higher oil prices, Barclays Capital analysts said.

The dollar index <.DXY> measured against a basket of major currencies rose to a two-week high of 79.500 on Monday. The euro hovered around $1.3200 and the yen stood near a nine-month low against the dollar of 81.873 hit on Friday.

A firmer dollar capped gold, which steadied around $1,712 an ounce after suffering its biggest one-week loss.

EUROPE ON RADAR

The recent risk-positive sentiment was dented on Friday when Spain set itself a softer budget target for 2012 than originally agreed under the euro zone's austerity drive, raising doubts over the credibility of the European Union's new fiscal pact.

Greece returns to the radar this week as it faces a deadline to complete a bond exchange with private holders, scheduled to close on March 8, before a second bailout is paid.

There is uncertainty over how much participation Greece will see for its bond swap, and a failure to agree on the swap would put the country back on the brink of a messy default.

Greece remains a big risk factor but it has increasingly become difficult to use as a strong market mover, partly because of the ECB and other central bank liquidity injections soothing sentiment, particularly in stock markets, said Mitsuru Sahara, chief FX manager at Bank of Tokyo Mitsubishi-UFJ in Tokyo.

Investors are starting to look at data following recent positive U.S. figures, and a weak showing from Europe could be a bigger market mover (than Greece), Sahara said.

The euro zone's services PMI will be released later in the day.

(Additional reporting by Ian Chua and Narayanan Somasundaram in Sydney; Editing by Alex Richardson)