By Marc Jones
LONDON (Reuters) - Nerves over Greece's future in the euro and the conflict in Ukraine dragged on European markets on Tuesday, while bets on the likelihood of a U.S. interest rate hike nudged the dollar higher and oil prices held steady after a rebound.
European stocks fell 0.3 percent and the euro slipped towards $1.13 ahead of what is set to be a tense, Greece-dominated meeting of euro zone finance ministers on Wednesday.
The global disinflation/deflation story was also back on investors' radar as Chinese inflation fell below 1 percent to its lowest in five months, drawing talk of further easing from China's central bank, the PBOC.
That had sent shares in Shanghai up more than 1 percent, though other Asian stocks eased on more generalised risk aversion.
Commodity price-dependent currencies such as the Australian dollar and Norwegian crown got a lift from the talk of China stimulus, but for many traders the main focus remained the dollar as it nudged up again.
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"We are just wondering what the status is on this dollar move as U.S. rates (bond yields) rise," Saxo Bank's head of FX strategy, John Hardy, said.
"We had the big move on Friday after the strong jobs numbers but then yesterday everything went quiet so hopefully it will rally today to show that there is something behind it."
On the strains on the euro, Hardy pointed out that markets appear relatively pragmatic about a potential exit of Greece from the 19-member currency bloc.
Although Greek markets have been hit hard - benchmark Greek bond yields remain above 10.75 percent - the euro performed relatively well against currencies other than the dollar. There has been limited impact on Spanish and Italian bond markets.
Britain's finance minister George Osborne, however, warned on Tuesday that the risk of a "very bad outcome" was growing between Greece and the euro area. Britain is not a member but trades heavily with Europe.
STIMULUS, OIL
Asian share markets had ended mostly lower with Japan's Nikkei down 0.8 percent and shares in Australia and South Korea also off, leaving MSCI's broadest index of Asia-Pacific shares outside Japan down 0.25 percent.
Chinese inflation data had again shown signs of weakness in the world's No. 2 economy as consumer price inflation hit a five-year low of 0.8 percent year-on-year in January.
It adds to a huge global trend which is pressing central banks in many parts of the world to lower interest rates or turn to unconventional policy stimulus again.
"This will likely be the low point for CPI inflation given that oil is rebounding. Still, the data will increase rate cut expectations and we see a cut in March," Credit Agricole senior economist in Hong Kong, Dariusz Kowalczyk, said.
According to a draft communique from leaders of the Group of 20 (G20) countries meeting in Istanbul, they will pledge to act decisively on monetary and fiscal policy, if needed, to combat the risk of persistent stagnation.
The United States, however, strongly underlined at the meeting that countries should not to use their currencies to try to boost exports, one U.S. Treasury official said in a thinly veiled reference to what is fast becoming a global currency war.
The dollar rose 0.15 percent to 118.78 yen, having hit 119.23 on Friday in a rally triggered by robust U.S. non-farm payrolls. It was also up 0.3 percent against the top six world currencies.
Among commodities, safe-haven gold dipped and crude oil snapped three days of gains after a survey showed that U.S. commercial crude stockpiles hit a record high last week.
It jumped on Monday as OPEC forecast greater demand this year than previously thought and projected less supply from countries outside the producer group.
U.S. crude was down 1.3 percent at $52.45 a barrel after gaining 2.3 percent overnight. Brent was 0.6 percent lower at 57.97 percent.
(Editing by Louise Ireland)