Iran's threat to stop the flow of oil from the Gulf supported crude prices on Wednesday and put world shares on the back foot, while looming Italian debt auctions hampered the euro.
Tehran said on Tuesday it would stop oil transiting through the Strait of Hormuz if sanctions were imposed on its crude exports over its nuclear ambitions, a move that could conceivably trigger military conflict with economies dependent on Gulf oil.
Brent crude oil steadied above $109 a barrel after climbing more than a dollar in the previous session. Prices have surged over 5 percent since December 16.
European shares dropped 0.4 percent <.FTEU3> and Asian stocks also slipped, pushing the MSCI world equity index <.MIWD00000PUS> down 0.25 percent on the day.
The only way Iran would actually close Hormuz is when it is attacked and war breaks, but such a possibility appears low as no country would want to take the risk when growth worldwide was likely to slow down, said Naohiro Niimura, a partner at research and consulting firm Market Risk Advisory Co.
But he added the tensions would be a major source of volatility in 2012 along with the euro zone debt crisis. He expected Brent to trade between $105-$110 in 2012.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.9 percent, keeping it on course for a 2011 loss of 18 percent, underperforming a 12 percent decline in European shares <.FTEU3> and a 9 percent drop in world stocks.
Japan's Nikkei stock average <.N225> ended down 0.2 percent, on track for a 17.6 percent drop this year. <.T>
The euro held above an 11-month low against the dollar, with thin year-end trade set to keep the common currency subdued ahead of Italian debt sales.
Rome will sell up to 9 billion euros of six-month treasury bills and 2.5 billion euros of two-year zero coupon bonds later on Wednesday. Demand from domestic banks was expected to ensure a smooth auction, albeit at a high cost.
It faces the more difficult task of selling long-term debt on Thursday when there will be a greater reliance on international investors to buy 8.5 billion euros of paper with maturities of up to 10 years.
The euro stood at $1.3063, holding above its 11-month trough of $1.2945 hit earlier this month. Safe-haven German Bund futures were barely changed.
The euro zone must clear several hurdles including a wall of debt auctions, pressing on with tighter common fiscal standards and building a meaningful firewall around its bond market before it can hope to regain market confidence about its ability to contain the debt crisis.
Italy faces around 150 billion euros of debt refinancing in February-April alone.
Latest figures showed banks deposited a record 452 billion euros ($538 billion) at the European Central Bank, showing no sign that interbank lending is reviving.
In the United States, fresh data suggested the economy was on track for moderate recovery, with improving labor market conditions lifting U.S. consumer confidence to an eight-month high in December although U.S. single-family home prices fell more than expected in October.
Wall Street ended flat on Tuesday following a five percent rally last week. <.N>
Gold edged lower, tracking falls in industrial metals and equities.
There have been a couple of positive signs on the U.S. economy, but it's hard to be hung up on them too much, said a Singapore-based trader. The economic prospects are so dire that it seems to have taken people's appetite away from commodities, especially in industrial metals, late in this calendar year.
The 19-commodity Reuters-Jefferies CRB index <.CRB> -- largely influenced by U.S. crude oil -- is set for a 7 percent drop in 2011, faring slightly better than equities.
U.S. crude oil was among the best performers this year with a 10 percent increase, while gold gained 12 percent as a loss of confidence in key currencies such as the euro accelerated flight to bullion, traditionally seen as a safe haven.
(Editing by John Stonestreet)