The euro retreated from a three-week high on Tuesday while Asian shares edged higher as crucial negotiations over Greek debt restructuring suffered another major setback, raising the spectre of default.
Activity was thin, however, with many Asian markets still closed for the Lunar New Year holiday.
The MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.2 percent, hovering near a 10-week high, lifted by Australian shares which rose on the back of firm gold and metal prices.
Japan's Nikkei average <.N225> inched up 0.3 percent on hopes that a Greek debt deal may still be salvaged.
U.S. stocks ended little changed overnight as investors took a breather from a recent rally and awaited earnings reports from bellwhethers such as Apple
Euro zone finance ministers on Monday rejected an offer made by private bondholders to help restructure Greece's debts, sending negotiators back to the drawing board.
The ministers also discussed efforts to enforce stricter budget rules for European Union states and steps to finalise the structure of a permanent euro zone bailout fund.
The fund is a key safety net to contain the euro zone debt crisis and Germany is playing a key role. Germany denied a report on Monday that it was ready to boost the combined firepower of the euro zone's rescue funds to 750 billion euros.
The outcome of PSI (Greek debt) discussions, good or bad, can hardly surprise market participants at this stage, said analysts at Barclays Capital in a research note.
However, stretched sentiment suggests that the risk asset rally (of recent weeks) may be losing steam and is temporarily vulnerable. Longer term, we expect a choppy grind higher in risk assets as political clarity gains traction, they said.
The euro eased from a three-week high hit on Monday near $1.3050 after the setback in the Greek debt talks, but stayed above $1.3000, keeping its distance from a 17-month trough near $1.2624 plumbed on January 13.
Investors for now may be focusing more on positive effects from the lifelines extended to the European financial system by the European Central Bank through its generous funding to avoid a credit crunch, overshadowing worries over an individual country's borrowing ability.
Ten-year Italian government bond yields fell 10 basis points at 6.17 percent on Monday, as European banks used ECB funding to buy more Spanish and Italian bonds. The yield was sharply off this month's high of 7.2 percent.
Receding concerns over Europe sapped safe-haven appetite for U.S. Treasuries, sending benchmark 10-year yields to a more than six-week high of 2.09 percent.
The rise in Treasury yields pulled 10-year Japanese government cash bond yield up to 1 percent on Tuesday, its highest since mid-December.
Reflecting stabilising market sentiment and receding fears of sharp market falls, the CBOE Volatility index VIX <.VIX>, which measures expected volatility in the S&P 500 over the next 30 days, was nearing a 2011 low of 14.30.
The VIX closed at 18.67 on Monday. Major 2011 lows around 14.30-15.25 have caused sizable rallies, so a move towards these support levels could open the way for a continuation of the risk rally.
Oil prices held steady after gaining on Monday as EU foreign ministers agreed to ban imports of Iranian oil from the start of July to pressure Iran over its nuclear ambitions, a move that renewed threats by Teheran to block a vital oil export route.
(Additional reporting by Reuters FX analyst Krishna Kumar; Editing by Kim Coghill)