Asian shares fell and the euro hit a fresh 16-month low against the dollar on Friday on worries that the euro zone debt crisis is crippling European banks, with players hoping U.S. jobs data later in the day will improve sentiment.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 1.2 percent and was set to end the first week of 2012 only marginally higher, after shedding 18 percent last year.

Financials generally weakened as European woes hurt confidence, even though Asian banks are nowhere near as exposed to toxic euro zone assets as European banks.

Japan's Nikkei <.N225> also slipped 1.2 percent. <.T>

European markets are expected to open little changed, with financial spreadbetters expecting London's FTSE <.FTSE>, Frankfurt's DAX <.GDAXI> and Paris' CAC-40 <.FCHI> to open flat-to-0.1 percent lower.

The euro fell as low as $1.2763, its weakest since September 2010, and hovered near an 11-month low against the yen of 98.45 yen hit the previous session.

Sentiment has diverged as data showed further improvement in the U.S. economy while much of Europe appeared to be falling into recession as the debt crisis takes a toll.

Euro area stresses remain elevated, said Standard Chartered in a research note. Poor economic data, sovereign downgrades and weak demand for government bond issues remain key threats to the region.

The dollar stood near one-year highs against a basket of major currencies, weighing on commodity currencies such as the Australian dollar and oil prices.

KOREA WOBBLE

Reflecting the nervousness in the region since the death of Kim Jong-il in December, South Korea's currency and shares briefly fell sharply amid rumours of an incident at North Korea's nuclear facilities. Officials in Seoul and Tokyo said they were unaware of any incidents in North Korea.

European shares and the euro are heavily undermined by deep-rooted concerns about a possible default by struggling countries such as Greece, expectations for credit downgrades of top-rated euro zone economies including France and worries over whether highly-indebted countries such as Italy and Spain can successfully refinance their maturing debts.

U.S. bank shares, in contrast, gained on Thursday on hopes for more growth in lending, after data suggested the battered labour market may recover further in 2012. Earnings reports in coming weeks will give further clues on the health of America's top companies.

Non-farm payrolls data due later on Friday is expected to show 150,000 jobs were added in December. If the figures come in as expected, near-term market sentiment could tip to positive.

Europe's still the main determinant, said Simon Burge, portfolio manager at ATI Asset Management in Sydney. It comes down to seeing some bottoming in these global growth expectations, which I don't know if we've seen yet.

BANKS UNDER PRESSURE

The Asian financial sector outside Japan <.MIAPJFN00PUS> fell but was not the hardest hit.

Asian banks are in a better position -- they never really had the systemic exposure to these toxic assets. Asian banks are just tied to regional growth momentum, said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.

Europe is turning out to be a negative, but not a strong negative for the Asia region, he said, adding that despite the European risks, Asia was expected to grow 4.5 percent this year.

European banks are striving to repair balance sheets hit by the plunging value of their huge euro zone debt holdings and bolster their capital amid tightening requirements.

They have been unsettled by jitters over the difficulty some of them may face in raising funds after Unicredit announced a massive discount on a rights issue on Wednesday, sending its shares down 14.5 percent. The shares plunged 17.3 percent on Thursday.

A solid French government bond auction failed to relieve bearish sentiment as market players turned their eyes towards next week's debt sales by Spain and Italy, the two big economies seen as most at risk from the crisis that has already dragged down Greece, Ireland and Portugal.

As the vulnerable euro and the European shares whetted appetite for save-haven assets, gold was on course for its best week in a month.

Asian credit markets remained cautious, with spreads on the iTraxx Asia ex-Japan investment grade index widening by a few basis points on Friday.

(Additional reporting by Sonali Paul in Sydney; Editing by Kim Coghill)