World stocks clawed back some recent losses and the euro steadied on Tuesday as investors paused from selling riskier assets in the face of the euro zone debt crisis and worries about Washington's debt ceiling fight.
Gold, however, continued to attract safe-haven investment flows, rising for the sixth session in a row to around $1,607 an ounce.
Italian and Spanish bonds, now in the maelstrom as euro zone debt problems spread, firmed slightly after 10-year yields vaulted six percent on Monday.
Investors were focusing on a euro zone summit to be held on Thursday, hoping it will complete a second bailout for Greece in an attempt to stop the sovereign debt crisis from seriously infecting larger countries, notably Italy and Spain.
Stakes are high with the scope for serious market ructions if Europe's leaders fail to provide a definitive plan.
Things are coming to a head. This is a political crisis just as much as a financial crisis. We need some real leadership, said Justin Urquhart Stewart, director at Seven Investment Management.
Risk aversion among investors has also been stoked by the approaching U.S. August 2 deadline on the federal borrowing limit. Political leaders in Washington are still at an impasse.
Investors for the most part appear to be assuming that the U.S. debt ceiling will be lifted and a default averted, with the 10-year Treasury yield camped comfortably below 3 percent.
World stocks as measured by MSCI <.MIWD00000PUS> were up 0.4 percent and still have gains of around 1.25 percent for the year despite a plethora of financial, political and natural crises from Japan to Europe, the United States and North Africa.
European shares rose, helped along by technology shares that got a boost from an upbeat statement from IBM
We can expect a relatively strong (stock) rebound if we get a political solution to the debt crisis on Thursday, a solution that would please the market, said Christophe Brule, president of Entheca Finance. Without an adequate solution, the market could drop another 10-15 percent.
Japan's Nikkei <.N225> closed down 0.85 percent.
The euro crept up against the dollar and other currencies, with investors torn between debt concerns on both sides of the Atlantic.
Euro/dollar is trapped between the euro zone debt crisis on one side and questions surrounding the U.S. debt ceiling on the other, and the market doesn't want to take on any major positions, said You-Na Park, currency strategist at Commerzbank in Frankfurt.
The euro was at $1.4141.
On euro zone bond markets themselves, safe-haven German bond prices fell and Italian and Spanish bonds prices rose slightly, with some profit taking on the core debt.
You can argue that the summit isn't really focusing on the matter in hand to a degree. There's a risk we could get some disappointment in terms of help for Spain and Italy if the crisis gets worse on Thursday, one bond trader said.
Spain especially is at very pronounced yield levels. Systemic risk is definitely the danger into the end of the week.
(Additional reporting by Kirsten Donovan, Naomi Tajitsu, Brian Gorman and Blaise Robinson; Written by Jeremy Gaunt, editing by Mike Peacock)