Asian shares and the euro fell on Tuesday, as surging Spanish borrowing costs underscored the fading impact of the European Central Bank's bond purchases and stoked investor nervousness over euro zone debt woes, sapping their risk appetite.
Oil and the Australian dollar slipped while a firmer dollar dented appetite for safe-haven gold, which eased 0.3 percent to fall below a key technical level of $1,650 an ounce.
Spanish 10-year government bond yields rose above 6 percent on Monday for the first time since the beginning of December, fuelling concerns that Madrid could fail to meet deficit targets as the country acknowledged it has probably tipped into its second recession since 2009.
That would raise the risk of the euro zone's fourth largest economy being pushed into seeking an international bailout.
Spain, which has already completed almost half its debt issuance plans for this year, faces a fresh test of investor confidence when it sells 12- and 18-month Treasury bills later on Tuesday, ahead of more significant auctions of two- and 10-year bonds on Thursday.
Investors are beginning to question if Spain's fiscal austerity measures could be sustainable as its economy deteriorates, while sluggish growth would push housing prices lower and raise the risk of nonperforming loans ballooning, said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
The Spanish yields are rising but still well below critical levels, showing that investors are not yet convinced of a full-blown risk scenario developing.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> gave up small early gains and deepened losses to fall 0.7 percent, bringing most regional bourses into negative territory, including Japanese and Australian shares which had earlier bucked the negative trend.
Nikkei average <.N225> edged down 0.1 percent and Australian shares <.AXJO> fell 0.3 percent after failing to hold above a key technical level as commodities prices slid on worries over weak demand.
European shares were heading for a mixed start on Tuesday with financial spreadbetters predicting that major European markets <.FTSE> <.FCHI> <.GDAXI> would open 0.1 percent lower to 0.2 percent higher.
Indian shares <.BSESN> trimmed earlier gains after the central bank cut interest rates on Tuesday for the first time in three years by an unexpectedly sharp 50 basis points to boost the economy.
The euro was down 0.3 percent on the day at $1.3102, after hitting a two-month low around $1.2994 on Monday. The Australian dollar fell 0.3 percent to $1.0316.
If Spanish yields keep rising and pull other peripheral sovereign debt yields higher along the way, the European Central Bank will face growing pressure to resume its bond purchases after its last such step on February 29.
Spanish banks are by far are the biggest borrowers from the ECB.
We think the current amount of liquidity seems sufficient to cover funding needs in Italy and Spain, at least for now. That being said, the market may be asking for reassurance further out, Barclays Capital analysts said in a research note.
Germany's government bonds, viewed as the euro zone's safest debt, rallied strongly on Monday as Spanish yields soared and the cost of insuring Spanish debt against default hit a record high, while Italian 10-year yields remained elevated at almost 5.6 percent.
As pressure mounts for more support from authorities to calm market nervousness, a meeting of the International Monetary Fund later in the week will be a key focus for the markets. A plan to raise new resources for the global lender to contain the euro zone debt crisis tops the agenda.
Gold failed to benefit from its safe-haven appeal on Tuesday as investors turned to the U.S. dollar instead.
People may buy into the dollar as a safe haven, which causes some kind of neutral trade in gold, Lynette Tan, an analyst at Phillip Futures in Singapore, said.
Oil futures extended losses after falling more than 2 percent on Monday on news that a major pipeline reversal that will alleviate a large U.S. bottleneck may start ahead of schedule.
Brent crude was down 0.4 percent to $118.21 a barrel after settling down $2.53, while U.S. crude fell 0.1 percent to $102.90.
Euro zone concerns are affecting all risk assets at the moment, with the bearish zone suggesting that Greece was just the side show and Spain's the real game, said Ben Le Brun, market analyst at OptionsXpress.
Elsewhere the economic data is positive, but if something falls over in Spain and Italy, they're too big to fail and too big to bail and will likely create a domino effect.
U.S. retail sales rose 0.8 percent in March, above forecasts for a 0.3 percent increase, as Americans shrugged off high gasoline prices, indicating solid consumer spending which accounts for more than two-thirds of U.S. economic activity.
Asian credit markets firmed slightly, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 2 basis points.
(Additional reporting by Rujun Shen and Jessica Jaganathan in Singapore; Editing by Alex Richardson and Ramya Venugopal)