(Reuters) - Asian shares rose to a one-month high and the euro clung near its strongest in a week Friday as strong demand in Spanish and Italian debt sales tempered risk aversion ahead of another auction from Rome later in the day.
Interbank lending rates fell in a sign that worries about a credit crunch may be easing, while Asian credit markets firmed, with primary market activity picking up.
Greater appetite for risk weighed on safe haven gold, pushing it down 0.4 percent to near $1,640 an ounce after it hit a one-month high on Thursday, but oil recovered from a sell-off in the previous session on a report that a proposed European Union embargo on Iranian crude imports would be delayed.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose as much as 0.7 percent to its highest since Dec. 8, poised for a second weekly gain. Japan's Nikkei average <.N225> gained 1 percent, drawing support from U.S. stocks which ended at a five-month high for a third day on Thursday.
The euro was nearly flat at $1.2820, not far from a one-week high of $1.2846 hit on Thursday.
The tide may turn around soon from extreme pessimism seen last year as people become less convinced the euro zone debt crisis would devastate global growth and wonder if it isn't time to start thinking positively, said Tetsu Emori, a fund manager with Astramax Co. in Tokyo.
Sentiment drives markets, so if more people become bullish, prices, particularly in equities and commodities, will rise. It's now just a matter of when you make the switch.
In a closely watched test of investor confidence, Spain sold double the targeted amount at its auction of a new three-year bond and two existing bonds maturing in 2016, while yields halved at an Italian T-bill sale on Thursday.
The successful sales raised hopes for a similarly positive result when Italy sells up to 4.75 billion euros of longer-dated bonds later on Friday.
The European Central Bank, which kept interest rates unchanged at a record low 1 percent on Thursday as expected, lent support as President Mario Draghi said that, while the bank's massive injection of euros into the euro zone banking system in December had helped avoid a credit crunch, there was still scope for further interest rates cuts.
But positive news from the ECB, the auctions and moderating inflation in China that raised the prospect of policy easing to support growth, were met with worries about talks breaking down on a second bailout for deeply indebted Greece, as well as weaker U.S. retail sales and rising claims for jobless benefits, which reminded investors of the fragility of the U.S. recovery.
Contrarian sentiment indicators suggest that investor optimism may have reached stretched levels and be more vulnerable to negative headline news in the near-term, said analysts at Barclays Capital in a research note.
Greece's prime minister held crunch talks on Thursday with the head of a group representing private sector banks who have warned that time is running short to clinch a deal on a voluntary debt exchange for Greece.
Euro zone sources said Athens might force reluctant investors to accept losses.
Data on Thursday showed euro zone industrial output fell in November on weakening consumer spending capability, pointing to a mild recession.
Interbank lending costs fell on Thursday as the successful debt auctions eased fears of an impending meltdown in the financial system, and there are signs returning stability due to the ample liquidity is encouraging issuers to tap markets.
Issuance of covered bonds, which are backed by assets that would be used to repay holders if a bank defaults, has risen in Europe in early 2012, with more than a dozen deals lifting optimism that the asset class will help banks meet their record 2012 funding needs.
Spreads on the iTraxx Asia ex-Japan investment grade index tightened by 6 basis points on Friday on improving sentiment, although a hefty pipeline in Asia kept investors wary after issuance volumes reached $10 billion in just the first two weeks of the year, after logging $76 billion for 2011.
Latest data from EPFR Global showed investors were still cautious, withdrawing $741 million from emerging market bond funds in the week to Jan. 11, compared with a gain of $162 million in the week before.
(Additional reporting by Umesh Desai in Hong Kong; Editing by Alex Richardson)