Asian shares fell on Tuesday, as a rise in euro zone bond yields reflected lingering doubts about the ability of politicians in Italy and Greece to push through painful reforms to resolve their debt crises and win market confidence.
Jittery European credit markets also hurt sentiment in Asia, sharply widening the spreads on the iTraxx Asia ex-Japan investment grade index -- a gauge of investor appetite for risk. The spread was about 10 basis points wider on Tuesday.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.5 percent, tracking a drop in global equity markets the previous day, while Japan's Nikkei stock average <.N225> fell 0.4 percent.
Italy can't find buyers to finance its debt, as fears over high price volatility in Italian bonds and speculators hitting shares of banks with huge exposure to Italy have made European financial institutions, traditionally long-term investors, wary of purchases, said Takashi Nakagawa, a senior credit analyst at Daiwa Capital Markets.
Italy sold 3 billion euros ($4.1 billion) of five-year bonds at 6.29 percent on Monday, a euro-era record, fuelling worries the high borrowing costs would derail the country's efforts to slash its 1.9 trillion euro worth of debt.
Yields on benchmark Italian 10-year bonds climbed to 14-year highs of around 7.5 percent last week before Prime Minister Silvio Berlusconi stepped down.
Italy's 10-year bond yields rose to 6.76 percent on Monday, also pushing Spanish 10-year yields above 6 percent for the first time since the European Central Bank started to buy the country's bonds in August.
The spread, or interest rate gap, of Italian bonds over German government bonds remained just below 500 basis points.
Global financial markets are facing a key pivotal point, said Barclays Capital analysts in a research note.
A further escalation of the European debt crisis is putting at risk the nascent stabilization of global growth and the associated buoyancy of risky assets outside of Europe, they said, adding the European authorities could limit the damage through more involvement of the European Central Bank.
But Bundesbank President Jens Weidmann on Monday rebuffed such global pressure for the ECB to become a lender of last resort, saying it could undermine the central bank's hard-won credibility.
Sharp downturns in financial markets have raised the urgent need for recapitalization at banks, prompting them to sell assets to make up for losses elsewhere.
Hong Kong's Hang Seng index <.HSI> fell 0.7 percent, with China Construction Bank Corp <0939.HK> dragging the market lower. Shares in CCB fell 2 percent on Tuesday after Bank of America
There was better news in Chinese debt markets, with the city of Shanghai attracting very strong demand as it became the first local government to sell debt directly into the market, signaling keen investor interest in the new type of instrument.
After Shanghai's inaugural sale, the southern province of Guangdong plans to issue 6.9 billion yuan in bonds on Friday.
Financial market turmoil stemming from the euro zone sovereign debt crisis has taken a clear toll on the region's economy, with investors seeking clues over whether the euro zone could face a recession.
Later on Tuesday, the first estimate of euro-area gross domestic product for the third quarter will be published, following the region's industrial production data released on Monday, which showed a 2 percent decline in September.
The slide was the biggest fall since February 2009, and pointed to a sharp contraction toward the end of the year and a growing threat of a fall into recession.
Leadership changes in Italy and Greece failed to dispel market worries about their ability to resolve the debt crisis,
putting a firm cap on the single currency against the dollar.
The euro traded at $1.3626 on Tuesday, after falling as low as $1.3590 on Monday, when it broke below support at its 100-week moving average around $1.3638.
The currency was expected to find support around the low in September around $1.3360, while resistance was seen near $1.3870, a November high, technical analysts said.
(Editing by Alex Richardson)