Asian shares eased on Friday as markets consolidated gains from a three-day rally, while the euro remained underpinned after European Union leaders took a big step towards deeper integration with a deal to set up a single banking supervisor.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> dropped 0.5 percent, having risen 1 percent to reach a seven-month high on Thursday, its biggest daily gain in three weeks. The index looked set for a weekly gain of 1.4 percent, the most since mid-September.
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South Korean shares <.KS11> led the decline with a 0.9 percent fall as worries about corporate earnings due out next week returned to the fore. Hong Kong , though, beat its peers with a 0.2 percent rise.
Shares in Australia inched down 0.1 percent, off Thursday's 15-month high, while its currency, which serves as a gauge for risk appetite, steadied around $1.0370, after touching a near three-week high of $1.0412 overnight.
Japan's Nikkei average <.N225> lost 0.1 percent, after jumping 2 percent to a three-week high on Thursday after China reported third quarter economic growth in line with forecasts.
"Investors have confirmed the lows for markets and while caution remains, optimism has emerged," said Naohiro Niimura, a partner at research and consulting firm Market Risk Advisory.
European Union leaders advanced towards establishing a single banking supervisor for the euro zone, agreeing it would enter into force next year, opening the way for the bloc's rescue fund to inject capital directly into ailing banks.
French and EU officials said all 6,000 banks in the single currency area would gradually come under European Central Central Bank supervision by 2014, starting with banks receiving state aid, then large cross-border institutions.
Creating an effective banking union, for which this deal was a first step, is regarded by the International Monetary Fund and market economists as a key component in overcoming the euro zone's three-year-old debt crisis.
EASING EUROPEAN RISKS
The euro was resilient, trading at $1.3073 near a one-month high of $1.3140 hit on Wednesday. The single currency edged 0.1 percent higher against the yen to 103.72 yen, having touched a five-month high of 104.13 overnight.
"The downside risk for the euro is looking weaker near-term and while it will likely remain in a recent broad range, momentum is gaining for the market to want to test its upside," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.
The EU summit continues through Friday, and currency traders said they will keep an eye on the event although no surprises were expected.
The euro has also been supported by hopes highly-indebted Spain will ask for aid in coming weeks, triggering the ECB to start buying Spanish bonds to relieve Madrid's borrowing costs.
Ten-year Spanish bonds yields fell to a 6-1/2 month low of 5.35 percent on Thursday after a successful bond sale which mirrored improving investor appetite towards the country after Moody's kept its investment grade credit rating.
Italy, also mired in piles of debts, broke records with a bumper sale of its retail bonds and said it will reduce the amount of debt it issues from now to until the end of the year.
Diminishing risk aversion kept upward pressures on benchmark 10-year Treasury yields, which rose to 1.83 percent on Thursday from 1.66 percent last Friday and were set for the biggest four-day gain since mid-March.
The dollar rose 0.1 percent against the yen to 79.35, below a two-month high of 79.47 yen hit on Thursday.
Asian credit markets were only marginally softer, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 1 basis point.
Spot gold was sluggish, slipping 0.2 percent to $1,737.59 an ounce, as rising U.S. Treasury yields on the back of recent positive data supported the dollar and reduced appetite for bullion, which serves as a safe-haven just like the dollar but also an alternative to the dollar.
U.S. crude inched down 0.1 percent to $92.01 a barrel while Brent steadied at $112.42.
(Editing by Sanjeev Miglani)