(Reuters) - Asian shares fell steeply Friday after more signs emerged of growing instability among Spanish banks and political turmoil in Greece, with the latest sluggish economic data from the United States adding to the list of risks for investors.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was down 0.6 percent, after snapping a four-day losing streak on Thursday. The index slid more than 3 percent - its biggest one-day drop in six months - and hit a four-month low on Wednesday.
The index has shed about 9 percent in May.
Japan's Nikkei stock average <.N225> opened down 1.7 percent.
Global stocks fell for a fifth day Thursday, and the Standard & Poor's 500 <.SPX> index closed at a four-month low.
U.S. data showed manufacturing in the mid-Atlantic states unexpectedly contracted in May, and new claims for jobless benefits last week held at levels suggesting slow growth in hiring.
Concerns about growth plus Europe's worsening financial woes have given momentum to the flight to safety, boosting the yen to multi-month highs against the dollar and the euro on Thursday.
The euro inched up 0.2 percent to 100.81 yen on Friday, off its lowest since Feb. 7 of 100.54 yen which it touched on Thursday, while the dollar held at 79.36 yen, also above a three-month low of 79.13 yen hit on Thursday.
But the euro marked a fresh four-month low of $1.26661 early on Friday and was expected to stay under strong selling pressure.
Financial and asset market divergence in the euro zone is likely to make the EUR (euro) less attractive to reserve managers, in our view, Morgan Stanley said in a research note.
The shrinking pool of available higher-rated assets suitable for central bank reserves suggests that the EUR's weighting in reserves is likely to be questioned, it said.
That would imply that the motivation to buy the euro for purposes of diversification is declining, leaving the single currency increasingly vulnerable, Morgan Stanley said.
U.S. June crude oil inched up 0.1 percent to $92.65 a barrel after settling at the lowest level since November 2 as the U.S. data raised concerns over demand. Brent crude was down 0.4 percent at $107.10 a barrel, after sliding more than 2 percent on Thursday to settle at its lowest since Dec. 30 on concerns over turmoil in Greece.
Reflecting mounting risk aversion, the CBOE VIX Volatility index <.VIX>, a gauge of investor anxiety which measures expected volatility in the Standard & Poor's 500 index <.SPX> over the next 30 days, rose nearly 1 percent to close at a five-month high of 24.49 on Thursday.
High stress levels were carried over to Asian credit markets on Friday, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 6 basis points to its widest level since mid-January.
Financial instability in Spain deepened, with Moody's Investors Service cutting the long-term and deposit ratings of 16 Spanish banks, including Banco Santander (SAN.MC) late on Thursday.
The government's takeover of Bankia earlier this month has raised the prospect of more state bailouts for banks saddled with bad loans from a burst property bubble, lifting Spanish borrowing costs.
Also on Thursday, Fitch downgraded Greece deeper into junk territory, citing the risk that the heavily indebted country might leave the euro zone.
A poll on Thursday, the first conducted since talks to form a government collapsed and a new election was called for June 17, showed Greek voters are returning to the establishment parties that negotiated its bailout.
This projection offers some relief for European Union leaders who say that without the bailout, Greece would be headed for certain bankruptcy and ejection from the common currency, putting the euro zone on course for financial destruction.
(Editing by Daniel Magnowski)