Asian shares and the euro rose on Tuesday, but concerns over funding of euro zone sovereigns ahead of key auctions this week and of the debt crisis spilling over into the wider financial system kept investors cautious about taking riskier positions.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.6 percent following a modest gain in global stocks. The materials sector <.MIAPJMT00PUS> led the rise in Asia after Alcoa Inc , the largest U.S. aluminium producer, gave a positive outlook for global aluminium demand.

Alcoa on Monday posted a fourth quarter loss due to a steep plunge in aluminium prices, but its revenue beat expectations. Alcoa is perceived as a bellwether of broader economic growth because of aluminium's role in the production of many goods. Its shares edged higher in extended trading.

Japan's Nikkei <.N225> opened up 0.4 percent. <.T>

With European woes overshadowing recent positive economic data from the United States, market players will be seeking from Chinese trade data due later in the session signs of how the euro zone debt crisis is affecting Asian growth.

Chinese export growth is expected to slow to 13.5 percent in December, the weakest in two years, excluding February when the Lunar New Year holidays disrupted activity.

The euro was up 0.1 percent at $1.2773, lifted by a short squeeze after hitting 16-month lows of $1.2666 on Monday, as players pared extremely bearish bets against the single currency ahead of key events in Europe this week. But the single currency remained vulnerable given no fundamental reasons for its recovery.

EURUSD continues to trade below $1.2800, and prospects for EUR remain bleak, analysts at BNP Paribas said.

Italian and Spanish debt auctions this week are the focus of the market as the two big euro zone economies are seen as most at risk from the crisis.

A plunge in euro zone government bond prices on concern about financing ability eroded capital at European banks which own large amounts of such bonds. Problems faced by a top Italian bank only underscored the difficulty to recapitalise and raised fears about the debt crisis unsettling the financial system.

Shares of UniCredit , Italy's largest bank by assets, plunged again on Monday as it began a rights issue to bolster its capital. Its stock has lost 45 percent since it priced the cash call at a big discount last Wednesday and its market capitalisation has nearly halved.

The bank is the first big lender to tap the market to repair its balance sheet since new capital targets were imposed.

A meeting between German and French leaders on Monday also added to jitters, as Chancellor Angela Merkel and President Nicolas Sarkozy warned Greece it won't get more bailout funds until Athens agrees with creditor banks on a bond swap and pressed for an early deal to avert a potential default in the euro zone's most debt-stricken nation.

Merkel and Sarkozy also said they aimed to wrap up negotiations among euro zone countries this month on a new fiscal pact tightening budget discipline, to be signed at the latest on March 1.

Asian credit markets were on the defensive side on Tuesday, with spreads on the iTraxx Asia ex-Japan investment grade index sticking to late Monday levels.

In a sign of how investors are choosing safety over return, an auction of short-term German debt drew such strong demand that yields on the issue were negative for the first time ever.

Fears over the euro zone debt crisis also led commercial banks to put their money at the European Central Bank rather than lend to each other. Overnight deposits at the ECB hit a new record of 464 billion euros, figures on Monday showed.

(Additional reporting by Ian Chua in Sydney; Editing by Ed Lane)