Asian shares were capped on Tuesday after the previous day's deep losses as a surge in Spain's borrowing costs, to levels seen as unsustainable, triggered alarms indebted regions could push the euro zone's fourth-largest economy to seek a bailout.
The euro was not far from a two-year low against the dollar and a near 12-year low against the yen, as the single currency was undermined by Moody's Investors Service changing its ratings outlook to negative for Aaa-rated Germany, the Netherlands and Luxembourg amid Europe's ongoing debt crisis.
With market sentiment so fragile, the HSBC China July flash PMI due to be released at 0230 GMT could set the tone for risk appetite as investors look for signs of a stabilisation in the slowdown in the world's second-largest economy. Euro zone's manufacturing data is also due later on Tuesday.
Fears about Spain possibly needing a fully-fledged bailout, intensified investor flight to safety and pushed the 10-year US. Treasury yield down to a record low 1.3977% while five- and 10-year German government bond yields also set new lows on Monday.
In contrast, Spanish 10-year borrowing costs surged to a euro-era high above 7.5% on Monday.
Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York, said the flattening of the Spanish yield curve reflected how investors have grown increasingly concerned about perceived risks facing Spain.
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"Rising yields are in turn adding to a sense of crisis: If the regions ask for cash, how will the government fund itself? The brave Spanish matador appears to be pinned to the perimeter fence by the angry bull," Wilkinson said.
Spain faces a crucial litmus test later on Tuesday with its debt sale of 3 billion euros in 3- and 6-month bills.
MSCI's broadest index of Asia-Pacific shares outside Japan was steady, after tumbling 2.4% on Monday for its biggest one-day drop in about two months, while Japan's Nikkei stock average opened down 0.1% after slumping to a six-week low on Monday.
European stocks sank on Monday on Spanish jitters but a ban on short selling unveiled by the Italian and Spanish market authorities to discourage speculative trading helped limit the damage on local stocks.
The euro was at $1.2123, off a 25-month low of $1.2067 hit on Monday, and stood at 94.90 yen, barely above its lowest since November 2000 of around 94.23 yen marked on Monday.
Profit taking spared the euro from hitting record lows against the Australian and New Zealand dollars on Tuesday.
Hong Kong's stock market will delay its opening on Tuesday morning due to Typhoon Vicente.
Greece enters again
Greece, which only last month averted a crisis by having pro-bailout parties win an election, is scheduled on Tuesday to meet its troika of creditors -- the European Union, European Central Bank and the International Monetary Fund -- to renegotiate rescue payments which are crucial to keeping indebted Athens afloat and within the euro zone.
The uncertainty over whether Greece could convince creditors to secure the funds compounded fears Madrid's funding crisis could accelerate after Spain's central bank said on Monday the economy sank deeper into recession in the second quarter.
Various gauges for stress on Monday reflected mounting market nervousness about financial contagion from the fiscal woes in Spain and Greece.
The CBOE Volatility index, which measures expected volatility in the Standard & Poor's 500 index over the next 30 days, jumped 14.4% to close at 18.62.
Risk premiums in the dollar funding market also rose, widening the spread between the two-year US interest swap rate and two-year Treasuries, as well as the gap between the London interbank offered rate and the overnight indexed swap rate for three-month dollars.