The euro dropped on Monday and stocks fell on fears that a 110 billion euro bailout of Greece will face stiff political challenges, while fresh steps by China to cool its economy added to near-term uncertainty.

Major European stocks were expected to fall as much as 0.9 percent, with concerns about European sovereign debt, fears of more Chinese policy tightening and prospects of tougher banking regulations looming in front of investors.

The emergency aid for Greece, the most ever for a country, alleviated some fears of a near-term sovereign debt default, but the package still has to obtain parliamentary approvals and left open the question of which fiscally vulnerable country in Europe might be next.

Markets are deeply skeptical that Athens will be able to deliver on its latest promises for additional spending cuts and tax increases to reduce its budget gap to 3 percent of its economy by 2014, from more than 13 percent.

The longer-term sustainability of this level of austerity has got to be open to question, said Tony Morriss, senior currency strategist with ANZ Bank in Sydney.

The other issue is would this mean that the market will focus on the longer-term sustainability of countries like Portugal and Spain? Morriss said.

The euro was down 0.7 percent to $1.3245 by midafternoon in Asia after earlier sliding to as low as $1.32. A break below $1.3210 would encourage chart-focused traders to test the low of $1.3114 seen on April 28.

Investors also were uneasy about how government policies would affect the outlook for economic growth and company earnings.

News of a criminal investigation into Goldman Sachs hit U.S. stocks on Friday, and reports that British banks believe banking regulation could slice two percentage points from economic growth weighed on Hong Kong-listed shares of top European lender HSBC <0005.HK>.

Chinese bank shares in Hong Kong dropped after China on Sunday increased the amount that lenders must keep in reserve at the central bank as it struggles to temper inflationary pressures, its third such move this year.

In Australia, the government said it planned to slap a 40 percent tax on mining profits as commodity prices soar, sending shares of Rio Tinto and BHP Billiton down 4.3 percent and 3 percent, respectively.

The MSCI index of world stocks <.MIWD00000PUS> slipped 0.3 percent in Asian trade, taking its losses to nearly 4 percent since hitting a 19-month high on April 15.

The MSCI Asia ex-Japan index <.MIAPJ0000PUS> fell 1.2 percent.

Markets in Britain, China, Japan and Thailand were closed on Monday for public holidays.


The euro has lost around 12 percent since November as Greece's debt problems escalated. Investors have feared the crisis could spread to other fiscally weak euro zone members such as Portugal and Spain, or spill over into commercial debt markets.

Analysts say major near-term and structural risks remain, noting the fractious European Union has a long way to go to restore its credibility with financial markets after repeated delays and mis-steps in coming to Greece's aid.

Barclays Capital analysts were confident the Greece bailout will eventually win parliamentary approval from contributing countries, especially in Germany, where opposition to bailing out Athens has been fierce. But they said Greece will remain vulnerable for years.

Our economists are particularly concerned that the simultaneous contraction in private- and public-sector spending will lead to weak growth and the potential for Greece to fail to meet its obligations on the fiscal consolidation front, the bank said in a note.

The euro has fallen for five consecutive months, the longest string of losses since the worst of the financial crisis in 2008. Since December, the euro has lost 18 cents in value, with the Greek crisis calling into question the stability of the entire euro zone.

Cutting risk exposure was the order of the day, with South Korea's benchmark KOSPI equity index <.KS11> down 1.2 percent and Hong Kong's Hang Seng index <.HSI> down 1.5 percent.

Industrial and Commercial Bank of China <1398.HK>, the world's biggest lender by market value, saw its stock drop 1.6 percent after China's move on bank reserve requirements.

ICBC's shares have lost nearly 12 percent of their value so far this year, depressed by fears that China will take more aggressive steps to cool its racing economy, compared with a near 5 decline in the Hang Seng.

U.S. stock futures were up 0.3 percent, after Wall Street <.SPX> fell sharply on Friday as sources said U.S. investigators had launched a criminal probe into Goldman Sachs . <.N>

U.S. Treasury futures were down slightly after hitting a one-month high on Friday.

U.S. crude prices held above $86 a barrel, having slashed initial gains on relief about the Greece financial aid and as the euro slid. But oil remained within striking distance of a 18-month high reached on April 6.

Gold weakened slightly to $1,178 an ounce, also surrendering early gains.

It gained almost 6 percent in April as credit rating downgrades of Greece, Portugal and Spain prompted some investors to pull money out of riskier assets.

(Editing by Kim Coghill)