Asian shares and the euro steadied on Wednesday after sentiment improved on soothing economic data the day before, as focus returns to Europe with Portugal testing investor confidence in a debt sale and Greece resuming talks on its debt restructuring.

The MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS>, which rose more than 2 percent on Tuesday, touched a two-month high and then slipped to be flat on Wednesday.

Japan's Nikkei average <.N225> inched up 0.2 percent.<.T>

After yesterday's rally, investors now shift their focus to talks on Greece, with a lot being unresolved, said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.

Ahead of the Chinese new year in many places in Asia, investors will likely keep themselves on the sidelines, reluctant to take positions yet, especially given a lot of talk about an easing by China before the holidays, she said.

Analysts polled recently by Reuters forecast further cuts in 2012 in Beijing's required reserve ratio (RRR), with many banking on one in the run-up to the Lunar New Year holiday at the start of next week to ease anticipated liquidity squeezes as demand for cash soars.

International creditors said on Tuesday they were coming back to the negotiating table with Greece to resume talks that broke down last week on a debt swap plan crucial to Athens' chances of avoiding a messy bankruptcy.

Without the so-called PSI deal, which would see creditors voluntarily giving up chunks of their promised returns, Greece would not get international aid, putting it at risk of default.

As investors have largely sold euro zone government bonds to reduce exposure, further selling was likely to be smaller in relative terms, analysts at Barclays Capital said in a note.

The most significant event risk from here relates not to supply or further shifts in foreign ownership, as such, but to the upcoming Greek PSI, they said.

Caution prevailed in commodities, with London copper slipping 0.4 percent to around $8,166 a tonne after surging to its highest in more than two months on Tuesday, while gold paused after reaching one-month highs near $1,670 an ounce on Tuesday.

Hong Kong shares <.HSI> eased from a 4.5 percent jump on Tuesday and weaker commodities prices led resources-reliant Australian shares to retreat from Tuesday's five-week peak.

European equities hit their highest in more than five months while gains in U.S. stocks were pared on Tuesday after Citigroup Inc reported an 11 percent drop in quarterly profit, as the European crisis battered capital markets and hurt the bank's trading revenue and fee-generating deals.

Investor risk aversion softened on Tuesday as data from China, the United States and Germany suggested that the euro zone debt crisis has not dealt devastating damage to their activity. But at the same time, the data left scope for policy easing to underpin growth given the fragile state of economies.

EURO FUNDING EYED

The euro rose 0.3 percent to $1.2775 on short covering, after topping $1.2800 on Tuesday, holding off its lowest since late August 2010 of $1.2624 hit last week.

With the situation on Greece extremely fluid, recent euro gains on the crosses may potentially turn, leaving the euro once again vulnerable to further downside, BNP Paribas analysts wrote in a client note.

Investor risk appetite will be tested later on Wednesday when Portugal sells treasury bills in its biggest debt auction since last year's bailout. Germany also holds a debt auction on Wednesday.

Spain and France, both of which saw solid demand for their bill auctions early this week, will face a tougher challenge when they tap the market with longer-dated debts by Friday.

Interbank lending rates have been easing as the European Central Bank's aggressive liquidity pumping measure take some effect and alleviated fears of another global credit crunch.

Euro zone banks' demand for short-term loans may fall as the ECB is set to relax on Wednesday the cash buffers it requires banks to place with it.

On top of China's growth data, which slightly beat forecasts, manufacturing in New York State picked up in January to a nine-month high while Germany's ZEW investor sentiment survey posted its biggest-ever monthly improvement in January, although it remained in negative territory.

Asian credit markets were subdued, with spreads on the iTraxx Asia ex-Japan investment grade index barely changed from Tuesday.

(Additional reporting by Ian Chua in SYDNEY; Editing by Richard Borsuk)