Asian stocks and the euro fell on Tuesday after ratings agency Standard & Poor's warned it might downgrade euro zone countries en masse if European leaders fail to produce a credible plan to solve the region's debt crisis at a summit later this week.
The unprecedented warning brought to a halt a rally in global equities that began last week and had continued on Monday, when the leaders of France and Germany agreed a plan aimed at guiding the region out of its two-year-old crisis.
European stocks were expected to fall back from a five-week high struck in the previous session, with major regional bourses seen opening as much as 0.8 percent lower.
We are entering a critical stage, said Kenichi Hirano, operating officer at Tachibana Securities in Tokyo.
There are high market expectations for positive developments out of the European leaders' meeting this week and if there are any indications that decisions will be pushed back it will have negative consequences for the market.
Oil and copper prices also retreated after the S&P statement, which came late in the U.S. trading day, while Wall Street index futures fell and U.S. Treasury yields edged down, indicating investors were seeking safety in the dollar.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 1.8 percent, with the heaviest losses in the growth-sensitive materials sector <.MIAPJMT00PUS>.
Tokyo's Nikkei share average <.N225> fell 1.4 percent, while S&P 500 futures eased 0.6 percent, pointing to a lower start for Wall Street after Monday's 1 percent gain. <.T> <.N>
Financial bookmakers called the FTSE 100 <.FTSE> to open down 0.8 percent, Germany's DAX <.GDAXI> to fall 0.7 percent and France's CAC-40 <.FCHI> to slip 0.5 percent. <.EU> <.L>
S&P said it had told 15 of the 17 euro zone countries, including Germany, France and four others with the top AAA credit rating, that it might downgrade them within 90 days, depending on the outcome of Friday's summit.
The warning took the sheen off a Franco-German agreement, to be put to other member states on Friday, to impose budget discipline across the currency area through European Union treaty changes.
The common currency eased around 0.2 percent to about $1.3370. It has steadily slipped from a peak around $1.3486 on Monday.
But traders were reluctant to sell the euro down too far at the start of a week heavy on major set-piece events, with the European Central Bank holding its final policy meeting of the year on Thursday and economists expecting an interest rate cut.
In addition to a 25-basis-point cut, with hints of further actions, we expect the ECB to provide additional support to banks in the form of a softening of collateral rules and more and longer liquidity operations, said Giuseppe Maraffino, strategist at BNP Paribas in London.
Such moves could support the battered euro, which has fallen from a 2011 high near $1.50 struck in May.
You can see that the EU leaders are trying to get their act together, but even if their plans are realised, it's not going to improve their dire finances overnight, said Koji Fukaya, chief FX strategist at Credit Suisse in Tokyo.
The risks posed from Europe were underlined by the Reserve Bank of Australia, which cited Europe's woes as one of the factors in its decision to cut interest rates by 25 basis points and leave the door open for more easing.
The RBA move put perceived riskier currencies under further pressure, with the Australian dollar itself falling nearly 1 percent to around $1.0170.
The dollar <.DXY> rose around 0.2 percent against a basket of major currencies, while the yield on 10-year U.S. Treasuries dipped to around 2.06 percent.
Commodities, particularly those most sensitive to industrial demand expectations, were mostly lower.
U.S. crude oil futures fell 0.5 percent to $100.50 a barrel, while Brent crude fell a similar percentage to around $109.26.
Prices had run up last week because traders have been positioning themselves for a possible resolution to the euro zone crisis, said Ric Spooner, chief market analyst with CMC Markets in Sydney.
And they've arrived at a level where any negative news like the S&P report will result in some tweaking of positions.
Copper lost 1.5 percent to around $7,820 a tonne and gold fell 0.5 percent to around $1,712 an ounce.
(Additional reporting by Mari Saito and Antoni Slodkowski in Tokyo and Ian Chua in Sydney; Editing by Kim Coghill)