Concerns that rising oil prices could prevent an economic recovery sent European shares and the euro lower on Monday, undermining market optimism about the European Central Bank's second offer of cheap funds to euro zone banks.
A weekend meeting of twenty finance ministers from the world's major economies failed to reach an agreement on making more funds available to Europe to fight its debt crisis.
But investors took little notice, focusing instead on whether the German parliament will endorse the Greek bailout on Monday. The vote is expected to be tight but lawmakers will almost certainly support the package.
Up until now higher oil prices were seen as a sign of improving growth, but oil is reaching levels where it will have a negative impact, said Richard Falkenhall, currency strategist at SEB in Stockholm.
March Brent crude futures were down about $1.20 to $124.25 a barrel in early European trade as some traders took profits after the recent gains. The contract is up nearly 16 percent this year due to supply concerns related to worsening tensions over Iran's disputed nuclear program.
Oil may also have pared gains as Saudi Arabia increased exports sharply in the past week and because the Obama administration is looking to see what circumstances could warrant a tap of U.S. strategic oil reserves.
At a time when the global economy is generally struggling, higher oil costs tend to weaken demand for industrial metals and this has pushed copper futures lower.
The FTSEurofirst 300 .FTEU3 index of top European shares fall 0.8 percent to 1,068.54 points and down from a seven-month high last week as investors worried that oil prices would hurt Europe's economy just as it needs growth to help it overcome its debt crisis.
ECB TENDER KEY TO EURO
The euro stood at $1.3427, down 0.2 percent on the day but not far off a 2-1/2 month high of $1.3486 set on Friday.
More gains in the single currency were possible ahead of the ECB's second offering of cheap, unlimited three-year loans to European banks on Wednesday.
Banks are expected to borrow around half a trillion euros at the tender, in line with the amount borrowed at a similar auction in December which was widely credited with easing the credit crisis in the region's financial system.
However, the latest euro zone M3 money supply data - a general measure of cash in the economy - shows more needs to be done. Money supply growth accelerated in January but the growth of loans to the private sector in the euro zone steadied.
The question is whether the money from the first (ECB tender) is being lent to the real economy. The answer so far appears to be no, said Thomas Costerg, European economist at Standard Chartered Bank.
Funds from the tender may also support heavy debt issuance by euro zone governments this week. Spain, Italy, Germany, France and Belgium all hold auctions this week.
Yields on Spanish and Italian 10-year bonds were both 2 basis points higher on Monday at 5.075 percent and 5.51 percent respectively.
German government debt futures made a steady start to the week, trading in a tight range as the growth concerns kept investor risk appetite subdued and investors awaited the ECB loan tender.
Bund futures - the bellwether of investor sentiment towards the euro zone - were 3 ticks higher on the day at 139.06.