The euro hovered near a two-year low and world shares fell on Monday as the darkening global growth outlook combined with low hopes of progress in Europe's debt crisis at a key meeting of finance ministers to drive investors away from risk assets.
Yields on benchmark Spanish and Italian bonds were also moving up to unsustainable levels as the optimism raised by last month's EU deal to help indebted states and banks faded.
US stocks were poised to open lower with eyes on the start of the second-quarter earnings season, which is expected to see the slowdown in growth reflected in corporate profitability.
But it was a meeting of euro zone finance chiefs later on Monday which held centre stage, with doubts growing over whether they will make much progress on plans for a single euro zone bank regulator, or on how the region's new bailout fund can be used to reduce a country's borrowing costs.
“In terms of progress, we might actually see a bit more clarification on where we are, but I don't think progress is necessarily the word you use here,” said Rob Carnell, international economist at ING.
The single currency was off a low of $1.2225, which it hit in thin early trade, to be up 0.25 percent against the dollar at $1.2304.
“We don't expect any major decisions at the euro zone finance ministers' meeting, which is more to plan ahead, rather than to decide on further action,” Morgan Stanley told its clients in a note.
But time was looking to be running out for Spain, where 10-year government bond yields were 10 basis points higher at 7.08 percent, a borrowing cost widely regarded as unsustainable for any euro zone government.
The premium which investors demand to leave the safety of German debt to hold equivalent Spanish bonds was also growing and hit 577 basis points, nearing its all-time high.
Equivalent Italian debt followed the Spanish debt higher, rising a similar amount to 6.13 percent.
At the weekend, Spanish Prime Minister Mariano Rajoy promised to announce more austerity measures in the coming days but he also called on his euro zone partners for greater urgency to tackle the funding crisis.
European Union finance ministers looked set only to respond by granting Spain another year, until 2014, to reach its deficit target of 3 percent of GDP at their meeting, which concludes on Tuesday.
SHARES SINK
Weaker than expected Chinese inflation data, a record fall in Japan's machinery goods orders, which help gauge the strength of capital spending, and the disappointingly weak US jobs report on Friday were undermining sentiment in equity markets.
However, the losses were limited as the data was also seen boosting the prospects for stimulus from the world's major central banks.
Chinese Premier Wen Jiabao said on Sunday that more aggressive efforts to fine-tune economic policies were needed to support an economy still under downward pressure.
On Monday, Chicago Federal Reserve Bank President Charles Evans told a forum in Bangkok: “The economic circumstances warrant extremely strong accommodation.”
At the same conference, Boston Fed President Eric Rosengren said the weak jobs data meant it was possible that a third round of quantitative easing would be needed to help the US economy.
Neither man is a voting member of the Fed's policy setting committee this year, but both will be in 2013.
Top European shares hit one-week lows, extending their decline into a fourth session on Monday but only after a choppy session with the summer vacation season starting to take its toll on volumes. The FTSEurofirst 300 index was down 0.4 percent at 1,029.82 points.
The MSCI world index, hit by a weaker session in Asia, was down 0.4 percent at 309.85 points, a fourth straight day of declines.
In the United States, investors were braced for the release of Alcoa earnings after the Wall Street close. This will mark the official start of the next reporting season.
Corporate earnings as a whole are expected to grow 5.8 percent from the same quarter last year but this is largely due to Bank of America, which recorded a large loss in the year-ago quarter from its mortgage settlement.
Excluding Bank of America, the growth rate falls to 0.7 percent, which would be the worst growth since the last quarter of 2008 when the financial crisis was at its peak.
Guidance from companies ahead of their quarterly reports has also been largely negative with 95 downward revisions versus 29 positive statements, and 11 in-line with expectations.
This gives a negative to positive ratio of 3.3, which is also the most negative since the fourth quarter of 2008.
COMMODITIES TORN
Traders in commodity markets were being torn in opposite directions by the weaker outlook for demand as global growth slows markedly and by the prospects of inflation-boosting stimulus measures from central banks.
Gold dropped to its lowest in almost two weeks of $1,575.89 an ounce at one point, before edging back to be little changed $1,581.70 as investors battled to decide which direction to move in.
“The market is not sure where prices should go and the sentiment is fragile,” said Lynette Tan, an analyst at Phillip Futures.
Oil was rising clearly, however, as talks to resolve a strike in Norway failed over the weekend, causing supply worries to offset concerns about weaker demand from slowing growth.
Brent rose 99 cents to a high of $99.18 a barrel before easing back to trade around $98.90. US crude was up 45 cents at $84.89. - Reuters