The euro steadied from recent falls and world stocks were becalmed on Monday with a Chinese warning about risks to global growth and a downgrade of Spain's credit heightening investor caution in holiday-thinned trade.
Europe's common currency inched up, recovering modest losses suffered after a cut to Spain's sovereign debt rating late on Friday, but the currency remained on the back foot as the downgrade served as a reminder about the euro zone debt crisis.
Fitch cut Spain's credit rating by one notch, saying its recovery will be more muted than the government forecast due to its austerity measures. The downgrade helped send Wall Street lower ahead of a three-day weekend.
Analysts said the move had largely been priced in and Fitch still rated it higher than fellow agency Standard & Poor's.
It's just a reminder that the euro zone crisis hasn't gone away. It's still lurking, said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin.
By 0920 GMT, the euro was little changed on the day at $1.2300, pulling back from the day's high of $1.2334 hit in early European trade.
The single currency looks set to end the month of May around 7.5 percent lower against the dollar as ongoing debt problems in euro zone countries have rocked confidence in the euro system.
A French government minister also said on Sunday keeping its top-notch credit rating would be a stretch without some tough budget decisions.
June Bund futures were trading at 128.62, up 12 ticks from Friday's settlement close. About 60,000 lots changed hands so far compared with a daily average of around one million lots seen this month.
German government bonds have been one of the main beneficiaries of investors seeking harbor from the euro zone debt crisis. The 10-year Spanish/German spread widened about 3 basis points to 160 bps.
With market holidays in London and New York, investors needed few excuses to trade with caution but China provided another one.
Chinese Premier Wen Jiabao warned that global economic growth remained vulnerable to sovereign debt risks and the possibility of a second downturn, but said his own nation's growth remained on track.
STOCKS STEADY AT END OF BAD MONTH
Global equities measured by the MSCI All-Country World Index <.MIWD00000PUS> were absolutely flat on the day but the index is down nearly 10 percent this month, heading for its worst monthly loss since February 2009.
European shares <.FTEU3> were up 0.2 percent with trading set to remain subdued.
BP's shares fell more than seven percent at one point in Frankfurt after U.S. government and BP officials warned that the blown-out oil well causing an environmental disaster on the Gulf Coast may not be stopped until August.
Japan's Nikkei average <.N225> inched up for a fourth straight day of gains -- ending 5.72 points higher.
There was little major market reaction to renewed political tension after Israeli commandos intercepted Gaza-bound aid ships on Monday and at least 10 pro-Palestinian activists on board were killed.
But Turkish stocks dropped nearly two percent. Some of the ships in the convoy were carrying Turkey's flag.
This is very serious, said Tera Brokers in a research note. We are not sure how bad things could get; the event is definitely not market friendly as Turkish-Israeli relations are now in uncharted territory.
Oil rose above $74 a barrel on Monday as the euro steadied, although worries about euro zone economic stability saw the commodity record its biggest monthly loss in 18 months.
(Editing by Stephen Nisbet)