(Reuters) - Asian shares and the euro struggled Thursday, as sentiment grew cautious after Greek political leaders failed to conclude a deal for a bailout package crucial to avoiding a messy debt default.
Discussions would continue with one issue left to be resolved, so a deal could be concluded before a meeting of euro zone finance ministers on Thursday, Prime Minister Lucas Papademos said in a statement.
The statement did not say what the sticking point was, but Greek officials said pensions cuts were the issue. Greek political leaders agreed to cut the minimum wage by 22 percent but managed to prevent holiday bonuses from being scrapped.
Failure to secure the 130 billion euro rescue package could push Greece into a disorderly default and threaten the stability of the entire euro zone.
Short-term plays are moving markets, with the underlying tone staying bearish because even after a deal is reached, it takes a long time to resolve Greece's fiscal problems given that there is no quick remedy for the structural issue, said Xiao Minjie, chief economist at FuNNeX Asset Management in Tokyo.
Markets will take cues from positive news supporting U.S. markets and negative news weighing on the euro zone, and the best risk hedge under such circumstances is to take profits when prices rise and hunt for bargains after they drop, he said.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.4 percent, after rising to its highest in more than five months the day before.
Japan's Nikkei <.N225> shed 0.6 percent, slipping from a three-month high above 9,000 reached on Wednesday. .T
The euro stood at $1.3261, hovering near an 8-week peak of $1.3289 reached on Wednesday.
A solution to the long-awaited Greek debt restructuring, after months of wrangling, could spur a rally but profit taking may follow because many markets were nearing key resistance.
Volatility was poised to pick up, suggesting the recent risk-positive sentiment may face a short-term pullback.
The CBOE Volatility index VIX <.VIX>, which measures expected volatility in Wall Street's S&P 500 over the next 30 days, closed at 18.16, near an upper limit of a technical range between 15.75 and 18.75. A fall towards the lower end would suggest a continuation of the risk rally, analysts say.
Asian credit markets were cautious, with the spreads on the iTraxx Asia ex-Japan investment grade index widening by 4 basis points on Thursday.
CHINA CPI, CENTRAL BANKS
Reaction was muted to data showing China's annual inflation rate accelerated to 4.5 percent in January, above a 4.1 percent rise forecast, as consumers ramped up spending during the Chinese Lunar New Year holiday season.
The number dampened expectations of an imminent move by the People's Bank of China to ease monetary policy by cutting banks' required reserve ratios (RRR), the level of cash they are required to hold in reserve.
This number will probably delay RRR cuts, in fact there's a lower chance of an RRR cut now. But inflation pressure is still there, especially since domestic oil prices are higher now. It's still a concern, said Hao Zhou, economist at ANZ in Shanghai.
Later in the day, the European Central Bank and the Bank of England both hold policy meetings, with the British central bank expected to add an extra 50 billion pounds ($79.09 billion) of stimulus via bond purchases.
Today's meeting of the Bank of England's MPC may provide another official boost to market sentiment and global financial liquidity, Barclays Capital said in a note.
The ECB is expected to hold rates steady but may signal it is ready to cut in March.
While recent data from the United States suggested the world's largest economy was on track for moderate recovery, indicators from the euro zone were lackluster, underscoring the effect the debt crisis was having on the region's growth.
Italy's gross domestic product may have fallen in the fourth quarter of last year, likely more steeply than the 0.2 percent in the third quarter, while Germany's exports dropped the steepest in nearly three years in December, and France saw no growth in the first quarter of 2012.
Oil remained supported by supply concerns. Brent was up 0.2 percent to $117.39 a barrel, after rising on Wednesday for a seventh straight gain. U.S. crude added 0.3 percent from Wednesday's gain to stand at $98.96 on Thursday.
(Additional reporting by Krishna Kumar in Sydney; Editing by Alex Richardson)