Asia shares, euro fall on debt worry, FOMC eyed

By Chikako Mogi

Stocks wiped out all gains made during the huge relief rally last week that followed an announcement that European leaders had agreed a basic framework to help reduce Greece's huge debts, boost the region's bailout fund and strengthen banks.

Amid signs that the European turmoil is having an impact on sentiment as well as actual growth, investor focus was shifting to policy measures from central banks in the hope they will help soothe market jitters.

The U.S. Federal Reserve, which began its two-day policy meeting on Tuesday, could begin to prepare financial markets for further monetary easing, even if it refrains from any new stimulus just yet.

"European worries have re-emerged, which put pressure on U.S. stocks and will also pressure the market here," said Yumi Nishimura, senior technical analyst at Daiwa Securities.

MSCI's broadest index of Asia Pacific shares outside Japan fell 1.1 percent on Wednesday. Japan's Nikkei share average opened down 1.31 percent and extended losses to stand nearly 2 percent lower.

GREEK DRAMA

The Greek government faced possible collapse on Tuesday as ruling party lawmakers demanded Prime Minister George Papandreou resign for throwing the nation's euro membership into jeopardy with a shock call for a referendum on the deal.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package.

The MSCI world equity index fell on Tuesday, with the index also back to pre-rally levels which had pushed it up to its highest in nearly three months.

U.S. stocks tumbled more than 2.5 percent and European shares posted their biggest one-day loss in more than a month on Tuesday.

The flight to safety pushed up government bonds on Tuesday, with German Bund futures jumping to the highest level in nearly a month, while the yield on benchmark 10-year Treasury notes fell to 1.95 percent, the lowest in nearly a month.

Asian credit markets remained weak, with the retreat from risk pushing the spreads on the iTraxx Asia ex-Japan investment grade index wider by 5 basis points on Wednesday.

The euro was near three-week lows against the dollar, having suffered its biggest two-day fall since May on uncertainty about the euro zone debt deal.

But the single currency may get some respite in the short term as market focus shifts to the Fed's policy meeting. The dollar index was at 77.361, near Tuesday's peak of 77.676.

(Additional reporting by Lisa Twaronite)