Asian shares were subdued and the euro hovered near a 16-month low on Thursday as worries about euro zone sovereign funding kept investors risk-averse ahead of a Spanish debt sale that is seen as a key test of confidence.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> traded narrowly in a range between 0.2 percent down to 0.3 percent up, after briefly touching a one-month high, while Japan's Nikkei average <.N225> closed down 0.7 percent.

European shares were likely to rise, with financial spreadbetters forecasting Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> to climb around 0.2-0.5 percent.

Asia sought clues to the extent of the damage from the European debt crisis from Chinese inflation data, but it failed to give fresh incentives.

China's annual inflation eased to 4.1 percent in December, the lowest level in 15 months, raising the possibility of a shift in policy priorities away from containing price increases and towards supporting growth .

Hong Kong shares <.HSI> were slightly lower, stalled by chart resistance levels as it has risen 3 percent this year to near technically overbought territory on policy easing hopes.

The rally is starting to run out of steam today. Some investors had clearly got a little ahead of themselves in the last few days, said Jackson Wong, vice-president for equity sales at Tanrich Securities.

TIME FOR CHANGE

Market volatility since the collapse of Lehman Brothers in late 2008 has forced out many aggressive hedge funds, leaving fund managers to mostly stick to a cautious investment stance, but some see the potential for change this year.

Three factors were prominent in the past three years: hedge funds have become institutionalized to just big ones; the focus of investment strategy shifted to sentiment from fundamentals and short-term funds overshadowed long-term funds, said Goro Ohwada, president and CEO at Aino Investment Corp, a Japan-based fund of hedge funds.

This year may be the time when fund managers may rethink these trends -- think about the risk of having just the big hedge funds that survived the financial turmoil, and also turn their attention more to fundamentals than technicals, he said.

There are undervalued assets which have been overlooked as hedge funds have institutionalized and left nimble ones out of the market which would have invested in niche assets.

EURO LANGUISHES

The euro was up 0.1 percent at $1.2720, having fallen to a fresh 16-month low of $1.2661 on Wednesday.

Spain on Thursday will sell up to 5 billion euros of 2015 and 2016 paper. Italy offers up to 4.75 billion euros of five-year bonds on Friday.

Comments from Fitch about the risk of the euro's collapse and bankers expressing pessimistic views about progress on the Greek bailout on Wednesday heightened investor caution about the course of the debt crisis.

We see testing times ahead for the market, with uncertainty reverting higher, European currencies remaining under pressure, and safe haven assets such as the U.S. dollar getting fresh support, said analysts at Barclays capital in a research note.

The European Central Bank holds a policy meeting later on Thursday, and is expected to hold rates steady at a record-low 1 percent while pressing governments to strengthen their efforts on the crisis.

U.S. Treasury Secretary Timothy Geithner said during his visit to Tokyo on Thursday that Europe was making progress in resolving its two-year-old sovereign debt crisis, but creating a firewall around the euro zone to prevent the crisis from spreading was a crucial next step.

Safe-haven gold inched up to flirt near a one-month high of $1,646.90 hit on Wednesday.

Oil prices rose on Thursday as worries about possible supply disruptions offset pressures from high inventory build and euro zone woes.

Caution prevailed in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index nearly unchanged from Wednesday's levels.

(Additional reporting by Clement Tan and Vikram Subhedar in Hong Kong; Editing by Alex Richardson)