Asian stocks fell on Thursday, taking cues from weak U.S. and European shares, as players cut positions heading into the year end with an Italian debt auction later in the day keeping markets nervous.
The euro extended losses against the dollar to near a one-year low, and a 10-year low against the yen, while the sell-off in stocks and the firm U.S. currency helped crude oil snap a six-session rally and kept gold prices near a three-month low.
The Nikkei fell as much as 1.1 percent, before recovering to be off 0.7 percent. The MSCI ex-Japan Asia Pacific index shed 0.6 percent, weighed down by energy and material stocks.
Everyone is holding onto their cash and people are not willing to invest in risk assets. With this kind of market sentiment, there's nowhere for the cash to go, said Hajime Nakajima, a sales trader at Cosmo Securities.
Italy's sale of up to 8.5 billion euros (7.1 billion pounds) later Thursday is seen as the first test of banks' willingness to buy longer-term sovereign debt with the nearly 500 billion euros they borrowed last week from the European Central Bank.
While Rome's short-term funding costs halved at an auction Wednesday, market players are worried that thin volumes prevalent across markets near the end of the year could complicate its efforts to sell longer-dated bonds.
U.S. stock indexes fell more than 1 percent in thin trading as investors feared what many expect to be a tough start to the year. The broad S&P 500 index erased its 2011 gains after just turning positive in last week's rally.
Wall Street's decline weighed on European stocks, which erased early gains. The FTSEurofirst 300 index of top European shares fell 0.71 percent to end at 983.32, after rising as much as 0.63 percent earlier in the session.
EURO, OIL, GOLD SLIP
The euro nursed heavy losses in Asia, having suffered a sudden drop overnight as moves were amplified in poor year-end liquidity after stop-losses were triggered.
The single currency hit $1.2887, moving closer to its 2011 trough of $1.2860 marked on January 10, nearly a year ago. Against the yen, the euro skidded to a 10-year trough around 100.70, before steadying at 100.88.
Crude oil, which had gained for six sessions on heightened supply worries after Iran threatened to block the Strait of Hormuz, eased as traders viewed the threat as rhetoric.
A big increase in U.S. crude oil stocks and the falling euro against the dollar are the main pressure points for the market at the moment, said Ken Hasegawa, a derivatives manager with brokerage Newedge in Tokyo.
We also had six consecutive days gaining in the oil market, so it is not strange to see some profit-taking from these sharp gains.
Brent eased three cents to $107.53 a barrel by 0207 GMT, adding to a loss of nearly $2 the day before.
Gold wallowed near a three-month low Thursday, remaining under pressure due to a firm dollar, while investors fretted over the Italian bond auction.
Spot gold edged down 0.3 percent to $1,550.90 an ounce by 0022 GMT, on course for an 11-percent decline in December. It hit a three-month low of $1,549.24 in the previous session.
(Additional eporting by Dominic Lau and Mari Saito in TOKYO, Randy Fabi in SINGAPORE; Editing by Richard Borsuk)