(Reuters) - Asian shares moved in a narrow range Thursday after the previous day's rally as investors grew cautious ahead of a key Spanish bond sale that would test the market's risk appetite as concerns mounted over the euro zone's debt crisis.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was nearly flat while Japan's Nikkei average <.N225> opened down 0.9 percent, taking its cue from a fall in U.S. stocks on Wednesday.

A day after Wall Street's best gains in a month, uninspiring earnings from tech bellwethers IBM (IBM.N) and Intel (INTC.O) gave investors a reason to take profits.

Doubts over Europe's ability to stick to harsh measures to slash high public debts began to grow when Spain abruptly relaxed its deficit targets earlier this month, and Italy said on Wednesday its priority was now reviving economic growth, delaying by a year its budget balancing goal.

Bank of Spain data showed on Wednesday how sliding house prices and a looming recession adversely impacted the financial sector, with Spanish banks' bad loans rising to their highest level since October 1994 in February.

Lingering uncertainty in Spain and slowing policy dialogue in the euro zone with Franco-German co-operation on ice ahead of the French elections have prompted investors to narrow their sights and take things on a day-by-day basis, said Kim Seung-han, an analyst at HI Investment & Securities.

Spain faces a significant challenge, with an auction of two- and 10-year bonds later on Thursday. Its 10-year government bond yield shot above 6 percent earlier this week, raising fears that the country would not be able to manage its public financing and would have to turn to a global bailout.

The euro held steady around $1.3120. The yen also was stable around 81.29 after Japan posted a smaller than expected trade deficit of 82.6 billion yen in March.

With the full effects of rising unemployment, falling house prices and fiscal consolidation (about Spain) still to be felt, concerns about Spain are unlikely to go away anytime soon, Barclays Capital analysts said in a research note.

We are also pessimistic about Italy's chances of meeting its upwardly revised deficit target and believe additional austerity is likely to have a detrimental effect on domestic demand.


Markets were jittery about available support capacity for containing Spain's fiscal woes from spreading to vulnerable peripheral euro zone economies, with focus on the role the European Central Bank plays.

The ECB maintains that governments must act to tackle their fiscal reforms, not the central bank, a view reiterated by ECB policymaker Jens Weidmann in an interview with Reuters.

Europe urgently needs to bolster its fragile safety net as highly indebted euro zone nations struggle to implement fiscal austerity measures, and global finance ministers meeting in Washington later this week could agree on the amount to boost the International Monetary Fund's financial firepower to help supplement Europe's rescue scheme.

The United States, which will not spend any more money of its own, on Wednesday threw its support behind commitments by other nations to boost the IMF's financial resources, signaling greater satisfaction among Group of 20 nations with Europe's efforts to resolve its debt crisis.

Oil futures fell on Wednesday after data showed inventory continued to build in the United States and on worries that the euro zone debt crisis would curb economic growth and dampen demand for commodities including oil.

U.S. crude was up 0.1 percent after falling as low as $102.19 on Wednesday. Brent settled at $117.97 a barrel, dropping 81 cents, after hitting a session low of $116.70.

Asian credit markets weakened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening slightly by 2 basis points early on Thursday.

(Additional reporting by Joonhee Yu in Seoul; Editing by Muralikumar Anantharaman)