Asian shares were subdued and the euro hovered near a 16-month low on Thursday as worries about euro zone sovereign funding kept investors risk-averse ahead of a Spanish debt sale that is seen as a key test of confidence.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> retreated and was nearly unchanged after briefly touching a one-month high earlier. The index has risen about 3 percent this year.

Japan's Nikkei average <.N225> fell 0.7 percent. <.T>

U.S. stocks held near five-month highs on Wednesday, staying detached from global markets as firmer U.S. economic data raised hopes for better corporate earnings, while Asia sought to take cues from Chinese inflation data.

China's annual inflation eased to 4.1 percent December to the lowest level in 15 months, raising the possibility of a shift in policy priorities away from containing price increases and towards supporting growth.

Chinese shares fell, with the Hang Seng Index <.HSI> down 0.2 percent after having risen 3 percent this week to near technically overbought territory on policy easing hopes.

The month-on-month CPI was lower than the same month in the past few years. That means inflation is no longer a main concern for policymakers, said Zhiwei Zhang, economist at Nomura in Hong Kong. China is more worried about an economic slowdown now and will continue the policy easing cycle.

The euro was up 0.1 percent at $1.2720, having fallen to a fresh 16-month low of $1.2661 on Wednesday, which lifted the dollar index <.DXY>, measured against six key currencies, up to a 16-month peak of 81.493.

Comments from Fitch about the risk of the euro's collapse and bankers expressing a grim view over the Greek bailout on Wednesday heightened investor caution about the course of the debt crisis.

Spain on Thursday will sell up to 5 billion euros of 2015 and 2016 paper, just hours before the ECB's decision. Italy offers up to 4.75 billion euros of five-year bonds on Friday.

We see testing times ahead for the market, with uncertainty reverting higher, European currencies remaining under pressure, and safe haven assets such as the U.S. dollar getting fresh support, said analysts at Barclays capital in a research note.

The head of Fitch's sovereign ratings urged the European Central Bank to beef up its buying of euro zone debt to support Italy and prevent the euro's collapse.

The ECB holds its policy meeting later on Thursday, and is expected to hold rates steady at a record-low 1 percent while pressing governments to strengthen their efforts on the crisis.

Talks about private sector participation in a Greek bailout are going badly, senior euro zone bankers said on Wednesday, raising the prospect that European Union governments will have to increase their contribution.

While the ECB's unprecedented funding operations since late last year have somewhat eased tension in the money markets, banks remain reluctant to buy bonds issued by troubled euro zone countries, keeping their borrowing costs punishingly expensive and further burdening those already struggling with high debts.

Instead of seeking returns from lending, banks opted for safety, parking the funds at the ECB. Data on Wednesday showed commercial banks' overnight deposits at the ECB hit an all-time high for the fourth session running.

Gold was steady on Thursday, staying near a one-month high of $1,646.90 an ounce hit the day before, when sentiment was boosted by improved demand in India as the rupee rose against the dollar, and Chinese imports rose sharply.

U.S. crude futures rose on Thursday on worries about possible supply disruption sparked by a strike in Nigeria and mounting tension between Iran and the West, offsetting pressure from high inventory build and persisting eurozone debt woes.

Caution prevailed in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index nearly unchanged from Wednesday's levels.

(Editing by Alex Richardson)