Uncertainty over the outcome of talks to restructure privately held Greek debt limited gains in European shares and the euro on Monday ahead of a finance ministers meeting to decide the terms of further aid for Greece.
Private creditors said on Sunday they had come to the limits of what losses they could concede in a Greek debt swap, putting the ball in the court of the EU and the IMF in a tense race against the clock to avoid a messy default.
It is uncertain what will happen with the restructuring of Greek debt, and after that there will be tough negotiations with the EU and the IMF about the next financing facility, said Niels Christensen, currency strategist at Nordea in Copenhagen.
The major risk to euro/dollar is to the downside, especially after the small bounce last week which took out some of the riskier short positions, he said.
The impasse gave a lift to safe haven German government bonds in early trade but European shares, which notched a fifth straight week of gains last week, managed further gains helped by demand for banks.
Activity in the earlier Asian session was subdued due to the Lunar New Year holiday which had closed markets in China, Hong Kong, Singapore and South Korea.
The pan-European FTSEurofirst 300 <.FTEU3> index of top shares was up 0.4 percent at around 1,044.16 points while the STOXX Europe 600 banking index rose 1.3 percent. The broader MSCI world equity index was barely changed.
Equity markets have been gaining on rising hopes that a slowdown in the global economy would not be as bad as many had feared after signs of solid economic growth in the U.S. where several big corporations, including IBM and Intel, have released strong earnings figures.
The euro held steady at about $1.2938, below a 2-1/2 week high around $1.2986 hit on Friday, which itself was up nearly 3 percent from a 17-month trough near $1.2624 plumbed on January 13.
Rising hopes for progress in the euro zone debt crisis and broader risks receding were also highlighted by fresh money flowing into Europe Bond and China Equity Funds. These posted their biggest weekly inflow in more than two years, according to EPFR Global fund data on Friday.
In commodity markets Brent crude futures held steady around $110 on Monday as traders wait to see if European Union governments will agree on new economic sanctions against Iran over its nuclear program, including plans to phase in an oil embargo.
Gold jumped to its highest in more than a month as result of the uncertainty over of the Greek debt outcome and the growing geopolitical tensions.
Gold has risen more than 6 percent so far this year, but at current levels of around $1,668 an ounce, is down from its high of $1,672.89 seen in Asian trading.
ECB bank borrowing/deposits: http://link.reuters.com/nyd85s
Euro zone liquidity levels: http://link.reuters.com/qeq25s
(Additional reporting by Jessica Mortimer)