Asian shares, commodities and the euro fell Friday on growing doubts that European leaders could forge a credible plan to solve the euro zone's debt crisis at a summit later in the day.
Losses accelerated and the Australian dollar, a bellwether for investor appetite for risk, dived after EU diplomats said it had been agreed that a new permanent bailout fund would not have a banking license, meaning it would not be able to borrow from the European Central Bank.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> slid 2.2 percent, led by the risk-sensitive materials sector <.MIAPJMT00PUS>, while Japan's Nikkei stock average <.N225> dropped 1.4 percent.
The euro hit a session low of $1.3318 after the update from EU diplomats, having recovered from a one-week low of $1.3289 touched the day before, while Wall Street stock futures dipping 0.3 percent.
The knee-jerk was to the downside, even though we knew every single one of the headlines and there was nothing that we didn't know 24 hours ago, so I would expect a recovery in Asia, said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. What we can take away from this is that markets are very nervous.
EU diplomats, updating reporters after talks in Brussels on Thursday night had stretched on into the early hours of Friday morning, also said the leaders had failed to secure backing from all 27 countries to change the EU treaty, meaning any deal would now likely involve the 17 euro zone countries plus any others that wanted to join.
The summit, which concludes later on Friday, looked set to adopt a new system of fiscal discipline, but sentiment worsened after the ECB dashed hopes that it would serve as lender of last resort and as Germany rejected a long-term goal of issuing common euro zone bonds.
Markets won't be relieved by Europe agreeing to fiscal discipline alone, and sentiment will only improve if the ECB, the ultimate source of funds, agrees to step in, said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo.
It also remains unclear at this late stage if the EU summit could really deliver a rescue plan, which is only just one hurdle to solving the crisis, so the bias remains for investors to shun risk at least until the summit outcome.
Tanase said Chinese data due this session could also dictate Asian flows as weaker figures would further undermine confidence in the global economy, already hit by the European debt crisis.
China's annual inflation rate fell to 4.2 percent in November, falling below 5 percent for the first time since February, while producer price index in November tumbled to 2.7 percent from October's 5 percent rise, raising expectations of more easing to combat deteriorating growth.
China will release retail sales and industrial output data later in the day.
STAGNANT ON KEY ISSUE
Global stocks, commodities and the euro all fell on Thursday on European worries but, in a sign of resilience, the drop in U.S. stocks was far more muted than in recent months as investors pinned hopes on some promising economic data.
Data showed U.S. jobless claims slid to a nine-month low, signalling a recovering labour market and helping sentiment.
The ECB cut its key rate by 25 basis points to 1 percent, introduced ultra-long euro liquidity loans, and widened the collateral base in a bid to ease the strain in money markets.
Financial strains are likely to remain strong until a scheme for containing the debt crisis is firmly set in place, as banks, with huge exposures to euro zone sovereign bonds, refrain from lending in the markets.
European sovereign debt yields spiked on Thursday, pushing 10-year Italian yields up to 6.51 percent and Spanish 10-year yields up to 5.82 percent.
The risk-averse sentiment carried over to Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index widening by 8 basis points on Friday.
The markets were priced for perfection from the summit, it looks like we're not going to get it, said David Scutt, a trader at Arab Bank in Sydney.
Risk-aversion pushed down the 10-year Japanese government bond yield to 1.015 percent, the lowest since Nov. 25, while spot gold inched up 0.3 percent to $1,713.80 an ounce on the back of a fall in stocks.
Oil prices extended falls on Friday, with U.S. crude futures down 0.6 percent after settling down more than 2 percent the day before for its steepest single-day loss since November 17.
U.S. grain futures eased on Friday, with wheat extending losses in the Asian session.
(Additional reporting by Umesh Desai in Hong Kong, Lisa Twaronite in Tokyo and Ian Chua in Sydney)