Dampened optimism about the global economic picture and the absence of a Greek debt deal pushed the euro off six-week highs and sent world stocks lower on Monday with investors cautious ahead of an EU leaders summit.
The euro also drew profit taking after its strongest weekly rally in more than three months last week as the lack of concrete progress in the Greek debt talks, which officials have said is expected later in the week, kept markets on edge.
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European shares were down nearly 1 percent and U.S. stock index futures pointed to a lower open on Wall Street.
Data showing business confidence in the euro zone strengthened in January for the first time since early 2011, had little initial impact.
"We expect the recession in the euro zone will end in the spring," said Christoph Weil, an economist at Commerzbank. "But we can also see that the divergence in the euro zone is increasing and that is of great concern."
Markets were still absorbing Friday's news that the U.S. economy grew 2.8 percent in the fourth quarter, falling just short of expectations.
The euro was down 0.8 percent to $1.3113, after climbing to $1.3235 on Friday - its highest level since mid-December. But data showing currency speculators raised their bets on the single currency to a fifth straight record high in the week ended Jan. 24 weighed on sentiment.
"It is all pretty negative, Greece is still trying to get a deal and there are worries about contagion," said Joe Rundle, head of trading at ETX Capital.
"Euro zone leaders still need to come up with a solution and all the negative news is not good for consumer confidence and could lead to a snowball effect, spending could slow down and hit company earnings."
A Greek debt restructuring deal with private creditors is needed before agreement can be reached on a second bailout package which Athens needs to meet a 14.5 billion euro repayment on its debt due in mid-March. Otherwise Greece faces a messy default that could reverberate through European and world markets.
The pan-European FTSEurofirst 300 index of top shares was down about 0.8 percent at 1,031.96 points after posting its first weekly loss since mid-December on Friday following the lower-than-expected U.S. GDP figures.
Financial stocks were among the early losers with Europe's STOXX 600 bank index down around 2.4 percent.
The MSCI world equity index was down 0.5 percent to 316.20, having weakened in Asian trade. The benchmark index hit its highest level since August last week after the Federal Reserve pledged to keep interest rates near zero for the next three years.
ITALY PASSES DEBT TEST
In a further reminder of the euro zone's problems, Fitch downgraded the sovereign credit ratings of Italy, Belgium, Cyprus, Slovenia and Spain on Friday, indicating there was a 1-in-2 chance of further cuts in the next two years.
After the downgrade the cost of insuring Italian and Spanish debt against default rose but Italy was still able to successfully auction nearly 7.5 billion euros ($9.85 billion) of fresh debt in the five and 10-year sectors, near the top end of its target amount.
Italy needs foreign investors to help it refinance some 90 billion euros of bonds falling due between February and April.
Its 10-year bond yields, which moved up ahead of the auction, gained further after the result to 6.2 percent.
But German government bond futures, used by investors as a safe haven in the crisis, were little changed by the outcome with the front month contract up 52 ticks on the day at 139.41.
Portuguese debt was coming under renewed pressure from investors after an earlier rating downgrade meant index-linked investors had to sell their holdings, and with many looking at Greece's efforts to restructure its debt as a template for similar action in Portugal.
Oil prices were also in retreat on Monday, dipping below $111 a barrel after an expected Iranian vote to suspend crude exports to Europe was postponed and markets continued to wait for a deal on Greek debt.
Brent crude futures were down 55 cents to $110.91 a barrel and U.S. crude was down 75 cents at $98.81 a barrel. Both contracts gained more than 1 percent last week.
Gold ticked lower having earlier hit a seven-week high, as investors await the outcome of Greek debt talks, but was still supported as a safe haven by the slower-than-expected U.S. fourth-quarter growth data.
Gold hit a high of $1,739 an ounce at one point, its strongest since Dec. 8, but then edged down to $1,730.05 an ounce. Bullion, which struck a record high $1,920 last September on concerns about a worsening euro zone debt crisis, is on track for a gain of more than 10 percent this month.