Japanese stocks hit a two-and-a-half-year low and the euro struggled on Thursday after a disappointing German bond sale raised alarm that Europe's ever-worsening sovereign debt crisis is starting to affect even the continent's economic powerhouse.
Stocks elsewhere in Asia failed to sustain a rebound from sharp falls in the previous session, but European shares were expected to eke out small gains.
Financial bookmakers predicted Europe's major indexes in London, Frankfurt, and Paris would open 0.3-0.5 percent higher.
Oil and copper made modest rebounds from a sell-off on Wednesday, when weak data from Europe, the United States and China stoked fears the global economy may be heading for a recession that would dull demand for industrial commodities.
Germany's bond sale on Wednesday had one of the worst results since the launch of the euro, raising concern about the price Berlin may pay for its role as paymaster to a region racked by a crisis that has toppled governments in Greece and Italy.
If Germany has to pay higher costs for its borrowing, it's obvious it cannot help the entire euro zone, said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.
If German bond yields keep rising, that could even be a trigger for break-up of the euro.
Tokyo's Nikkei share average fell 1.8 percent to their lowest close since March 2009. Japanese markets were closed for a holiday on Wednesday, when other Asian markets had tumbled.
MSCI's broadest index of Asia Pacific shares outside Japan spent much of the trading day in positive territory before running out of steam.
The earlier gains had been partly driven by expectations that a slowdown in China will prompt Beijing to take monetary policy easing steps such as cutting banks' reserve requirement ratios, allowing them to lend more of their deposits.
Anticipation of policy loosening in China after the bad flash PMI yesterday is spurring some short-covering, said Linus Yip, strategist with First Shanghai Securities in Hong Kong.
Wall Street shares fell more than 2 percent on Wednesday, and world stocks fell to a six-week low, on data showing slowing factory output in manufacturing titans China and Germany and weak consumer spending in top consumer the United States.
U.S. markets will be closed on Thursday for the Thanksgiving holiday.
Germany's bond sale added to the gloom, knocking the euro down 1 percent. Depressed yields in Europe's last safe haven played a part, but analysts warned it also signaled a broader shunning of the region's financial system.
The other part is that market makers don't want to have a position because of the very distressed nature of financial markets as a whole, said Marc Ostwald, strategist at Monument Securities. There's certainly a partial element of 'they would rather not have euros' in there.
The single currency tottered to around $1.3360, up a bit less than 0.2 percent on Thursday, having fallen as low as $1.3318 in the previous session.
Against the yen it fell around 0.2 percent to a six-week low just below 103.0.
The inexorably widening euro zone crisis -- which has pushed up risk premiums for Spanish, French, Italian and Belgian government bonds -- is making it increasingly hard for European banks to access dollar funding in the money markets.
The stresses pushed dollar LIBOR rates, the benchmark for banks lending to each other, up for the 103rd straight session on Wednesday and has driven the cost of swapping euros into dollars to the most expensive levels since the global financial crisis in 2008.
In Asian credit markets, the Asia ex-Japan iTraxx investment grade index saw spreads widen around 10 basis points, reflecting heightened risk aversion.
U.S. crude oil rose 0.3 percent to around $96.60 a barrel, following on from a 2 percent slide on Wednesday, and Brent crude rose 0.6 percent to around $107.60.
London Metal Exchange copper rose 0.2 percent to around $7,250 a tonne, rebounding from a drop of more than 1 percent earlier in the session that had seen it fall to a one-month low around $7,100.
The demand outlook is deteriorating, said David Thurtell, director of commodity research at Citigroup in Singapore.
With so much sovereign debt uncertainty and with Western European austerity measures kicking in, copper is likely to trade in the $6,500 to $9,500 range over the period to end-2012.
(Additional reporting by Hideyuki Sano in Tokyo, Ian Chua in Sydney, Manolo Serapio Jr in Singapore and Umesh Desai of IFR in Hong Kong; Editing by Kim Coghill)