Asian shares fell on Tuesday, as a rise in euro zone bond yields reflected lingering doubts about the ability of politicians in Italy and Greece to push through painful reforms to resolve their debt crises and win market confidence.
Jittery European credit markets also hurt sentiment in Asia, sharply widening the spreads on the iTraxx Asia ex-Japan investment grade index -- a gauge of investor appetite for risk -- by about 10 basis points on Tuesday.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.8 percent, while Japan's Nikkei stock average <.N225> closed down 0.7 percent. <.T>
European shares were expected to fall for a second day in succession, with financial spreadbetters calling the FTSE 100 <.FTSE> index to open down 0.3 percent, Germany's DAX <.GDAXI> to fall 0.8 percent and France's CAC-40 <.FCHI> to lose about 0.6 percent.
Italy can't find buyers to finance its debt, as fears over high price volatility in Italian bonds and speculators hitting shares of banks with huge exposure to Italy have made European financial institutions, traditionally long-term investors, wary of purchases, said Takashi Nakagawa, a senior credit analyst at Daiwa Capital Markets.
Italy sold 3 billion euros of five-year bonds at 6.29 percent on Monday, a euro-era record, fuelling worries the high borrowing costs would derail the country's efforts to slash its 1.9 trillion euro worth of debt.
Yields on benchmark Italian 10-year bonds climbed to 14-year highs of around 7.5 percent last week before Prime Minister Silvio Berlusconi stepped down.
Italy's 10-year bond yields rose to 6.76 percent on Monday, also pushing Spanish 10-year yields above 6 percent for the first time since the European Central Bank started to buy the country's bonds in August.
The spread, or interest rate gap, of Italian bonds over German government bonds, or Bunds, remained elevated near 500 basis points, while the spread between European Financial Stability Facility bonds and Bunds has widened by some 65 basis points over the past month.
Global financial markets are facing a key pivotal point, said Barclays Capital analysts in a research note.
A further escalation of the European debt crisis is putting at risk the nascent stabilisation of global growth and the associated buoyancy of risky assets outside of Europe, they said, adding the European authorities could limit the damage through more involvement of the European Central Bank.
But Bundesbank President Jens Weidmann on Monday rebuffed such global pressure for the ECB to become a lender of last resort, saying it could undermine the central bank's hard-won credibility.
Sharp downturns in financial markets have raised the urgent need for recapitalisation at banks, prompting them to sell assets to make up for losses elsewhere.
Bank of America
Chinese debt markets fared better, with the city of Shanghai attracting very strong demand as it became the first local government to sell debt directly into the market, signalling keen investor interest in the new type of instrument.
After Shanghai's inaugural sale, the southern province of Guangdong plans to issue 6.9 billion yuan in bonds on Friday.
Japanese and U.S. government bonds drew safe-haven bids on Tuesday, with $31 billion (19 billion pounds) of 0.3 percent five-year JGBs fetching healthy demand and Treasuries extending their rally in Asia.
The first estimate of euro-area gross domestic product for the third quarter was due later on Tuesday, and should help investors gauge the toll that the financial market turmoil stemming from the debt crisis has taken on the region's economy.
Industrial production data, released on Monday, showed a 2 percent decline in September, the biggest fall since February 2009, and pointed to a sharp contraction towards the end of the year and a growing threat of a fall into recession.
Leadership changes in Italy and Greece failed to dispel market worries about their ability to resolve the debt crisis,
putting a firm cap on the single currency against the dollar.
The euro fell 0.2 percent to $1.3600 on Tuesday, barely above Monday's low of $1.3590. The currency was expected to find support around the September low of $1.3360 and face resistance near $1.3870, a November high.
(Editing by Alex Richardson)