Asian shares fell on Monday as high oil prices raised concerns about global growth, while signs of fresh steps from major economies to contain the euro zone debt crisis and expectations for the European Central Bank's funding underpinned the euro.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.7 percent, led by a 1.5 percent drop in the materials sector <.MIAPJMT00PUS>. Chinese shares bucked the trend, with carmakers up after Beijing excluded foreign brands in an early list of models approved for state buying this year.
Japan's Nikkei average <.N225> pared early gains to stand barely changed, after touching a seven-month high as a weaker yen aided battered exporters.
Financial spreadbetters expected major European markets <.FTSE> <.FCHI> <.GDAXI> to open down 0.2 to 0.3 percent.
Oil prices held near a 10-month high on Monday due to supply concerns as tensions over Iran's disputed nuclear programme worsened, while the rise in oil weakened the outlook for industrial metals demand and pushed copper futures lower
A rise in oil prices drags the economy and weighs on growth around the world, said Bob Takai, general manager of Sumitomo Corp's energy division.
The rise in oil will have a wider global impact -- and a negative one -- and won't be contained to just the Middle East, while the European issue appears to be contained within the region, he said.
The Group of 20 leading economies urged Europe to strengthen a firewall to fight its debt crisis if it wants more help from the International Monetary Fund, putting pressure on Germany to drop its opposition to a bigger European bailout fund. Euro zone countries, on the other hand, pledged to reassess their bailout fund in March.
The affirmative nuance for beefing up the IMF's funding ability lit the fire on 'risk-on' trade, boosting the euro against the dollar and the yen, said Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyo.
The euro held steady around $1.3449. The single currency rose to its highest since early December of $1.3487 on Friday. Earlier on Monday, the euro jumped to near 110 yen to a four-month high, while the dollar hit a nine-month high against the yen of 81.66 yen, before profit-taking pulled both back from intraday highs.
GREECE LAUNCHES DEBT SWAP
Greece undertook scheduled steps after securing a much-needed bailout fund, formally launching the bond swap offer to private holders of its bonds on Friday and setting a March 8 deadline for investors to participate in its unprecedented bond swap.
Expectations for the European Central Bank's second refinacing operation set for Wednesday also supported the euro.
The ECB's first liquidity injection into the system in late December helped stabilise markets by removing concerns about a liquidity crunch in Europe.
Regardless of the outcome, the very existence of cheap ECB funds for 3 years has substantially reduced the risks around the European banking system, said Shane Oliver Head of Investment Strategy at AMP Capital Investors.
The spike in oil prices, driven by heightening tension between Iran and the West, has raised concerns about damage to the fragile global economy.
Speculators raised their bets on rising oil prices last week to the highest level since May, data showed on Friday, underscoring bullish market sentiment.
Brent crude was down 0.7 percent to $124.62 a barrel on Monday, after settling at $125.47 on Friday, its fifth day of gains. U.S. crude futures also fell 0.4 percent to $109.37 a barrel on Monday, after rallying nearly 2 percent on Friday to the highest settlement since May 3.
There seems to be some profit taking going on today, but prices are set to rise further as tensions over Iran don't look like they are going to subside anytime soon, said Ben Le Brun, a Sydney-based markets analyst at OptionsXpress.
London copper fell 0.6 percent to $8480.50 a tonne. Spot gold fell 0.3 percent to $1,775.66 an ounce but the rise in oil prices limited losses.
Asian credit markets turned cautious, with the spreads on the iTraxx Asia ex-Japan investment-grade index tightening by 1 basis point, compared to a tightening of about 3 basis points earlier.
(Additional reporting by Ian Chua in Sydney and Manash Goswami in Singapore; Editing by Richard Pullin)