Financial markets regained some poise on Tuesday but recouped only a little ground from the battering inflicted a day earlier by fears that the euro zone debt crisis is heading for a new, more dangerous phase.

European shares edged higher, but were still in the red for the year, and the euro sat just above two-month lows versus the dollar, against which it has lost as much as 6.5 percent over three weeks.

World stocks as measured by MSCI were up 0.2 percent, but only after hitting two-month lows during Monday's sell off, wiping out a good portion of their spring rally.

The main driver behind Monday's shake-out was concern that a Greek default could put a new range of countries -- including Group of Eight member Italy -- into trouble.

It was triggered by another downgrading of Greece, a ratings outlook warning about Italy and a Spanish voter revolt against austerity.

Rating agency Moody's underlined the issue again on Tuesday, saying that a Greek debt default would have wide implication for others.

Moody's believes that a default is likely to have adverse credit rating implications for Greece, possibly some other stressed European sovereigns, and the Greek banks, regardless of the efforts made to achieve an 'orderly' outcome, it said in a statement.

Euro zone governments and central bankers are at loggerheads over what is needed to stave of default or restructuring in Greece, primarily over the precedent it would set for the currency bloc and the other highly indebted countries.

The huge storm of risk reduction will rip through markets if the focus turns to Spain and Italy. It's clear they don't have money to bail out these countries, said Ayako Sera, a market economist at Sumitomo Trust and Banking.

What we are seeing now could just be the beginning of it, she added.


As is often the case after a heavy market day, investors took something of a breather on Tuesday, but without any sign that the underlying issue has been dealt with.

The euro hovered above its two-month low against the dollar, capped by the contagion worries. It was up less than 0.1 percent on the day at $1.4060.

The amount of euro selling in the past few days has been huge. So I suspect a lot of euro long positions have been cleared. Some may probably be caught in short positions, said a trader at a U.S. bank.

European shares drifted higher, with the FTEurofirst 300 up 0.3 percent. The index fell 1.7 percent on Monday.

Analysts said longer-term outlook was positive, but short-term events could make equities volatile.

The global economy is still doing well. Companies are very healthy and have a lot of cash in their balance sheets. As long as they continue to deliver profits, that's going to be helpful for the market, said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

But I would caution people to be careful and take some money off the table and make sure they have some cash in hands.

German bonds opened slightly lower as investors cashed in on the previous day's rally of core euro zone debt.

(Additional reporting by Hideyuki Sano and Atul Prakash, editing by Mike Peacock)