Spanish Debt Fears Cap Asian Shares, Hurt Euro

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> edged up 0.1 percent, while Japan's Nikkei average <.N225> opened up 0.1 percent..T

The euro was down 0.1 percent at $1.3126, after hitting a two-month low around $1.2994 on Monday.

Spanish 10-year government bond yields rose above 6 percent on Monday for the first time since the beginning of December, fueling 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 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.

The market is holding its breath this week to see how much Spanish debt investors pick up and at what yields during Thursday's auction, said Rhoo Yong-suk, an analyst at Hyundai Securities.

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 Feb. 29.

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.

U.S. stocks ended mixed while European equities closed higher on Monday after better-than-expected U.S. retail sales data helped improve sentiment.

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 over two third of U.S. economic activity.

Oil futures tumbled over 2 percent on Monday after news that a major pipeline reversal that will alleviate a large U.S. bottleneck may start ahead of schedule sparked heavy spread trading.

Brent crude fell $2.53 to settle at $118.68 a barrel. U.S. crude was up 0.2 percent to $103.17 on Tuesday.

(Additional reporting by Joonhee Yu in Seoul; Editing by Richard Pullin)