The euro slipped on Tuesday after Germany demanded painful new austerity measures from Greece in return for badly needed financial aid, with investors likely set to push high risk European sovereign bond yields up further.
Chinese stocks were down more than 2 percent and the Shanghai composite dropped to a 6-month low, leading declines in the region on fears banks in China may be preparing for a round of heavy fundraising.
Major European stock markets slipped in early trade, with Greece's fiscal crisis, soft commodity prices and U.S. bank reform seen weighing on sentiment.
Greece could become the first euro zone country to be bailed out because of its weak finances, having already asked the International Monetary Fund and European Union for 45 billion euros to survive.
But investors have begun to wonder if that amount is enough to avert a Greek default and if other countries with high debts and low growth could fall like dominoes, jeopardizing Europe's economic recovery and threatening financial markets.
For now, the situation is viewed as a European affair, with asset markets outside Europe largely unfazed by the intense selloff in not just Greek but Portuguese bonds overnight.
Many investors are still more focused on solid signs of global recovery, underlined by strong earnings reports and sales forecasts from heavy machinery maker Caterpillar Inc and appliance maker Whirlpool Corp overnight. <.N>
Indeed, German consumer sentiment will likely hit a six-month high based on brighter views on the economy and income.
EYE ON ATHENS
But traders are keeping a watchful eye on Athens, which needs to pay back or refinance 9 billion euros of debt by May 19.
The Greek situation is looking very shaky indeed and the clock is ticking, said Robert Rennie, chief currency strategist at Westpac Bank in Sydney.
Technically, the $1.34-1.3450 area (for the euro) is very crucial and a break above that level will mean the euro will start looking better in the short term.
The euro fell 0.2 percent to $1.3368 after being unable to secure a hold above $1.34. Buying of euros against yen by institutional investors appeared dried up just below 126 yen. The euro was down 0.4 percent to 125.38 yen.
German demands on Greece have shrouded the market in uncertainty on the aid. However, clarity by policymakers could pave the way for a short-term technical rebound in the currency.
If policymakers provide some reassurance to the market, the euro could stage a very strong short covering rally given the underlying economic fundamentals and its grossly oversold technical status, Boris Schlossberg, director of FX research at GFT in New York, said in a note.
The Australian dollar slid 0.3 percent to $US0.9245, falling as selling in Chinese equity markets accelerated.
Japan's Nikkei share average was the outlier in the region, rising 0.4 percent <.N225>.
So far this year, the Nikkei is up 5.2 percent compared with a 3.3 percent decline in Europe <.FTEU3>
The MSCI Asia Pacific index of stocks outside Japan was down 0.7 percent, led by the utilities and healthcare sectors.
ASIA INDEX UNDERPERFORMS
The Asia index continued to underperform world stocks on a year-to-date basis.
The Shanghai composite <.SSEC> was down 3 percent to the lowest since early October. Shares of China Construction Bank <0939.HK> were down 1.9 percent in Hong Kong after a report said the world's second-biggest bank by market value may raise up to 70 billion yuan ($10.25 billion) in new shares in Shanghai and Hong Kong.
U.S. stocks edged lower overnight as bank shares fell on fears financial reforms would curb profits, though losses were capped by strong company results.
U.S. crude futures were down 0.6 percent to $83.66 a barrel, ahead of U.S. oil stockpiles data expected to show soft demand in the world's top oil consuming nation.
(Additional reporting by Anirban Nag in SYDNEY; Editing by Jerry Norton)