TOKYO (Reuters) – Asian shares fell and the euro slipped to a 3-week low on Thursday as another delay in cementing a crucial bailout for Greece underscored how far Europe is from resolving a debt crisis that threatens the stability of the financial system.

A three-hour teleconference between euro zone finance ministers failed to resolve all the issues surrounding a second aid package for Athens, putting off any decision on the matter until Monday at the earliest.

“It’s not clear whether Athens will be able to secure funds needed to redeem bonds on March 20,” said Sumino Kamei, senior analyst at Bank of Tokyo-Mitsubishi UFJ.

Financial bookmakers expected European stocks to follow Asian shares lower, with financial spreadbetters calling the main indexes in London (.FTSE), Paris (.FCHI) and Frankfurt (.GDAXI) to open down by 0.8 percent to 1 percent. (.EU) (.L)

U.S. Treasuries and the dollar edged up as investors sought safety, while riskier commodities lost ground.

“It … seems that the market is in review mode now after the strong gains in risk assets with investors re-assessing the risks/rewards and reviewing strategies,” said Chris Weston, an institutional dealer at IG Markets in Melbourne.

MSCI’s broadest index of Asia Pacific shares outside Japan (.MIAPJ0000PUS) fell 1.5 percent, more than wiping out all the gains made in the previous session, when riskier assets such as stocks and emerging Asian currencies rose broadly on hopes Athens would finally be granted the rescue funds.

Japan’s Nikkei (.N225) outperformed its Asian peers to record a six-month high, before losing steam to close down 0.2 percent. (.T)

The euro slid 0.4 percent to touch a 3-week low near $1.30 as uncertainty over the bailout package put the single currency under renewed pressure.

Reflecting deep-rooted mistrust of Greece’s commitment to deliver reforms in exchange for the rescue, several EU sources said on Wednesday that euro zone finance officials were examining ways of delaying part or even all of the second bailout program while still avoiding a disorderly default.

Delays could possibly last until after the country holds an election expected in April, they said.

A debt swap agreement between Greece and private-sector holders of Greek bonds, however, could go ahead, possibly allowing Greece to avoid missing the March 20 deadline to pay a 14.5 billion euro bond redemption payment.

Greece said it has met all the conditions set by the European Union and the International Monetary Fund for a 130-billion-euro rescue fund needed to meet the vital debt repayment date in March.

As well as hitting stocks, the jitters over Europe put other riskier assets under pressure. Copper lost more than 1.5 percent and oil also fell, while the commodity-linked Australian dollar edged down.

Asian credit markets weakened, another sign of faltering confidence, with the spreads on the iTraxx Asia ex-Japan investment grade index widening by about 5 basis points.

The safe-haven dollar rose 0.2 percent against a basket of major currencies (.DXY), while the yield on benchmark 10-year Treasury debt eased to 1.91 percent from 1.93 percent in late U.S. trade.

TIRED, NOT AFRAID

But while markets fell, the drop appeared to be limited.

“The weakness was neither intense nor broad-based enough to resemble a ‘risk-off’ event; markets seemed tired, but not afraid,” Barclays Capital said in a note.

Data on Wednesday showed the euro zone economy shrank at the end of 2011 and a mild recession was likely as the debt-stricken south reels under the weight of the sovereign debt crisis. Bigger economies France and Germany may remain resilient.

On Wall Street, the CBOE Volatility index VIX (.VIX) or “fear gauge,” while hovering near a 1-month high, appeared to be capped. The index measures expected volatility in the S&P 500 index (.SPX) over the next 30 days, and its rise is regarded as a sign of increased risk aversion.

Analysts say markets are vulnerable to some corrections after rising since the start of the year in a move largely due to global liquidity injections from central banks aimed at containing the debt crisis and supporting economic growth.

MSCI’s Asia ex-Japan stock index has risen nearly 14 percent this year, while the Nikkei has added 9.5 percent and the S&P 500 Index (.SPX) 7 percent.

Gold has gained 10 percent and U.S. crude has climbed nearly 11 percent.

U.S. crude eased 0.3 percent to $101.48 a barrel on Thursday after gaining more than a dollar the day before. Brent crude was little changed around $118.90, after scaling an 8-month high on Wednesday on concerns over supply disruptions.

U.S. data showed a solid underpinning for the economic recovery on Wednesday, with U.S. manufacturing output rising in January, a gauge of factory activity in New York state hitting a 1-1/2-year high in February and optimism among home builders approaching a five-year high this month.

But U.S. stocks eased about half a percent after the Federal Reserve’s minutes from its January meeting showed some officials were concerned over high unemployment.

(Additional reporting by Mari Saito in Tokyo and Alex Richardson in Singapore; Editing by Richard Borsuk)

ATHENS/BRUSSELS (Reuters) – Greek political leaders clinched a long-stalled deal on Thursday on harsh austerity measures and reforms required to secure a second international bailout in two years but the country’s financial backers reacted skeptically.

European Union partners and the International Monetary Fund have been exasperated by a string of broken promises and weeks of wrangling over the terms of a 130 billion euro ($172 billion) bailout, with time running out to avoid a chaotic default.

Finance ministers of the 17-nation euro zone arriving for talks in Brussels warned there would be no immediate green light for the rescue package and said Athens must prove itself first.

“It’s up to the Greek government to provide concrete actions through legislation and other actions to convince its European partners that a second program can be made to work,” EU Economic and Monetary Affairs Commissioner Olli Rehn said.

German Finance Minister Wolfgang Schaeuble, whose country is Europe’s biggest paymaster, told reporters: “You don’t need to wait around because there will be no decision (tonight).”

Greek Finance Minister Evangelos Venizelos flew to Brussels after all-night talks involving Prime Minister Lucas Papademos, leaders of the three coalition parties and chief EU and IMF inspectors left one sensitive issue – pension cuts – unresolved.

A final 300 million-euro gap was bridged on Thursday in talks with the troika of the European Commission, the European Central Bank and the IMF, and endorsed by the party leaders.

The euro and European stocks rose briefly on the news, which appeared to remove – at least for now – the risk of a hard default by the euro zone’s most indebted country, facing a major bond redemption deadline on March 20.

The risk premium investors charge for holding Italian, Spanish and Belgian bonds fell.

“We need now the political endorsement of the Eurogroup for the final steps,” Venizelos told reporters.

But several ministers arriving for the meeting made clear they wanted firmer guarantees and practical action first.

“Greece has to implement what it has not implemented from the first program before we can decide on a second,” Germany’s Schaeuble said.

Venizelos said Athens also had an outline deal with private creditors on a bond swap in which they would give up some 70 percent of the value of their Greek bond holdings, reducing Athens’ 350 billion-euro debt pile by about 100 billion euros.

ECB President Mario Draghi said he was “quite confident” that all the components of a Greek debt deal would fall into place and hinted the central bank could provide indirect help without breaching a treaty ban on financing governments.

An IMF spokesman called the agreement “an important initial step” but said IMF managing director Christine Lagarde would seek assurances that Greece would stick to the agreed policies whatever the outcome of a general election likely in April.

The measures will mean a big fall in the living standards of many Greeks, now in the fifth year of a deep recession. Deputy Labour Minister Yannis Koutsoukos, a socialist, resigned over a package he said would be “painful for working people.”

Greece’s two major labour unions called a 48-hour strike for Friday and Saturday against the reforms.

“The painful measures that create misery for the youth, the unemployed and pensioners do not leave us much room,” secretary general of the ADEDY union, Ilias Iliopoulos, told Reuters.

“We won’t accept them. There will be a social uprising.”

WRITTEN COMMITMENT SOUGHT

Panos Beglitis, spokesman for PASOK socialists who are in coalition along with the conservative New Democracy party and far-right LAOS, said the minimum wage would be cut by 22 percent as part of efforts to make the economy more competitive.

Asked how the differences over pension cuts had been resolved, a government official told Reuters: “There will be cuts in other areas of public spending and we will see how we will minimize reductions in pensions.”

International lenders are demanding that the party leaders commit themselves in writing to implement the full program of pay and pension cuts, structural and administrative reforms.

The leaders have been loath to accept the lenders’ tough conditions, which are certain to be unpopular with voters.

“In these difficult hours we have to look after the ordinary people, the pensioners,” New Democracy leader Antonis Samaras said.

“I haven’t got the right to not negotiate hard and I don’t care what other people think about that. We have to make sure that people will suffer less.”

Greek newspaper editorials criticized the harshness of the austerity measures demanded by foreign creditors, but said there was no option but to give in and agree.

“The memorandum seems, and in fact is, heavy and unbearable for the majority of the Greek people but unfortunately it is the only choice so that the country is not led over the cliff,” financial daily Imerisia said.

DEEPER RECESSION

Greece has fallen deeper into recession since it received a first bailout in May 2010. Latest unemployment figures showed the jobless rate hit a record 20.9 percent in November, with youth unemployment a staggering 48 percent.

Industrial output fell 11.3 percent in December, in further proof of the deep economic malaise.

The sharper-than-forecast contraction has opened a funding gap of about 15 billion euros in the bailout package agreed last October to bring Greece’s debt down to about 120 percent of gross domestic product from nearly 160 percent today.

Two sources said the government would promise spending cuts and tax rises worth 13 billion euros from 2012 to 2015, almost double the seven billion originally pledged.

Athens has urged the ECB to forego profits on its Greek bond holdings in a move that could raise 12 billion euros or more.

The bank’s 23-member Governing Council discussed the issue on Thursday but Draghi, who also attended the Brussels meeting, declined to say how Greek bonds held by the ECB and euro area national central banks would be treated.

Asked whether the ECB could forego profits on Greek bonds with a face value of about 50 billion euros which it bought at a discount in the market, he indicated it would have to pass on the profits to governments when they were realized.

“If the ECB distributes part of its profits to its member countries as part of the capital key, that’s not monetary financing,” Draghi said.

(Additional reporting by Lefteris Papadimas and Karolina Tagaris in Athens, Paul Carrel in Frankfurt, Jan Strupczewski and Claire Davenport in Brussels and Lesley Wroughton in Washington; Writing by Paul Taylor; editing by Andrew Roche)

ATHENS (Reuters) – Greek leaders clinched a long-stalled deal on reforms and austerity measures needed to secure a bailout and avoid a messy default, government sources said, hours before the country’s financial backers were to meet in Brussels on Thursday.

Athens’ partners in the European Union and the International Monetary Fund have been exasperated by a lack of agreement on the sacrifices they demanded in return for a 130 billion euro ($172 billion) bailout, with time running out for Greece before a major March 20 bond redemption.

Finance Minister Evangelos Venizelos set off for Brussels without a complete deal after all-night talks with leaders of the three Greek coalition parties and chief EU and IMF inspectors left one sensitive issue – pension cuts – unresolved.

But following further negotiation on Thursday, two government sources said an overall agreement had been reached.

“A few minutes ago, I got a call from the Prime Minister of Greece saying that an agreement had been reached and has been endorsed by the major parties,” European Central Bank President Mario Draghi told a news conference in Frankfurt in the first official confirmation.

The euro and European stocks strengthened on news of the breakthrough, which raised prospects of averting a chaotic hard default by the euro zone’s most indebted country within weeks, that could send tremors around the global economy.

The risk premium investors charge for holding Italian and Spanish bonds rather than safe-haven German Bunds fell back.

Euro zone officials say the full package must be agreed with Greece and approved by the EU, IMF and European Central Bank by February 15 so legal paperwork can be completed in time to avoid a chaotic default that may threaten the global economic recovery.

“The financial survival of the country in the coming years depends on the new program … It is a time of responsibility for everyone,” Venizelos said.

Greece’s two major labor unions called a 48-hour strike for Friday and Saturday against the reforms that the party chiefs managed to agree on.

“The painful measures that create misery for the youth, the unemployed and pensioners do not leave us much room,” secretary general of the ADEDY union, Ilias Iliopoulos, told Reuters.

“We won’t accept them. There will be a social uprising.”

Venizelos should now be able to present to fellow euro zone finance ministers a fully-fledged new bailout plan, including a commitment for 3.3 billion euros in budget cuts this year, when they meet at 1700 GMT.

Before then, all eyes will be on what the ECB is willing to do to help Greece at its monthly policy meeting.

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WRITTEN COMMITMENT SOUGHT

After the overnight talks, a senior government official said the party chiefs had agreed on how to make about 90 percent of the promised savings, leaving a relatively small hole in the calculations.

Asked how the differences over pension cuts had been resolved, another government official told Reuters: “”There will be cuts in other areas of public spending and we will see how we will minimize reductions in pensions.”

International lenders are demanding that the party leaders commit themselves in writing to implement the program of pay and pension cuts, structural and administrative reforms.

The leaders have been loath to accept the lenders’ tough conditions, which are certain to be unpopular with voters. They face parliamentary elections possibly as early as April.

“In these difficult hours we have to look after the ordinary people, the pensioners,” conservative New Democracy leader Antonis Samaras said after the political leaders’ meeting.

“I haven’t got the right to not negotiate hard and I don’t care what other people think about that. We have to make sure that people will suffer less.”

Newspaper editorials criticized the harshness of the austerity measures demanded by Greece’s lenders, but said there was no other option but to give in and agree.

“The memorandum seems, and in fact is, heavy and unbearable for the majority of the Greek people but unfortunately it is the only choice so that the country is not led over the cliff,” financial daily Imerisia said.

Greece has been falling deeper into recession since it was rescued by a first bailout deal in May 2010, and latest unemployment data showed the country’s jobless rate rose to a new record of 20.9 percent in November.

Industrial output fell 11.3 percent in December, in further proof of the deep economic malaise.

ALMOST THERE

Prospects for a bailout deal had brightened when the finance ministers’ chairman Jean-Claude Juncker called the Brussels meeting – which IMF managing director Christine Lagarde will attend – to examine the bailout plan.

On offer from the EU and IMF is a package involving the new rescue funds and a bond swap with private creditors to ease the nation’s large debt burden.

Athens is also urging the ECB to forego profits on its Greek bond holdings in what could raise 12 billion euros or more. The bank’s 23-member Governing Council met on Thursday but Draghi declined to say how the Greek bonds held by the ECB and national central banks would be handled.

For the bailout, Athens must accept conditions requiring big cuts in many Greeks’ living standards. The smallest member of the coalition, the far-right LAOS party, was particularly uncomfortable with the measures.

Panos Beglitis, spokesman for PASOK which is in the coalition along with LAOS and the conservative New Democracy party, said the leaders had agreed to cut the minimum wage by 22 percent as part of efforts to make the economy more competitive. Plans to scrap holiday bonuses paid to private sector workers had been dropped.

Two sources said the government would promise spending cuts and tax rises worth 13 billion euros from 2012 to 2015, almost double the seven billion originally pledged.

Other elements of the deal have been gradually slotting into place, including the bond swap with private creditors to ease Greece’s debt burden by reducing the value of government bonds held by banks and insurers.

Private bondholders are expected to take real losses of about 70 percent on their holdings as part of the swap, under which they receive new, longer-dated Greek bonds to try to reduce Greece’s debt burden by about 100 billion euros.

Talks on the swap have dragged on for weeks, complicated by the position of hedge funds and demands that public creditors also chip in. Officials and bankers say the deal cannot be finalized until the rest of the rescue package is nailed down.

($1 = 0.7545 euros)

(Additional reporting by Renee Maltezou, Lefteris Papadimas and Karolina Tagaris in Athens and Paul Carrel in Frankfurt; Writing by David Stamp and Deepa Babington; editing by Elizabeth Piper)

LONDON (Reuters) – The euro was underpinned by hopes a way would be found to push through a second bailout deal for Greece, though poor results from some top European firms on Tuesday rekindled unease about the region’s debt crisis, sending shares lower.

Greece’s prime minister and the leaders of the country’s main political parties are set to resume talks today on new austerity measures demanded by the EU in return for a second bailout. The deal needs to be approved by February 15 if the money is to be available in time to meet a March 20 bond redemption.

“I think we are going to hear some news of an agreement. It may not be today, it may not be tomorrow, but the February 15 deadline is absolutely crucial,” said Peter Westaway, chief economist, Europe, for Vanguard Asset Management.

In early European trade the euro was virtually unchanged at $1.3127, easing back from initial gains of 0.1 percent and up from the an overnight low of $1.3026 in Asia.

“The euro is performing relatively well given the deadlines for Greece keep being extended. This suggests there’s more risks of a move to the topside should a deal be agreed,” said Adrian Schmidt, currency strategist at Lloyds Banking Group.

Bets by foreign exchange traders that the single currency will fall have been running a record levels according to data from the U.S. Commodity Futures Trading Commission, although the position were trimmed slightly in the latest week.

EARNINGS WORRIES KNOCK SHARES

European stocks, which have risen sharply on a flood of cash available to investors at the start of the new year, fell back as weak updates from the likes of Swiss bank UBS signaled the crisis will wreak further damage on the banking sector.

The FTSEurofirst 300 index of top European shares was down 0.6 percent at 1,069.00 points after opening unchanged.

Global stock markets were flat on the day having gained more than 7 percent already in 2012.

“Earnings season has been fairly mixed,” said Keith Bowman, equity analyst at Hargreaves Lansdown.

“We still have got difficulties with the banking sector and UBS results signify those concerns. The investment banking sector is a very tough place to be at the moment.”

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The Australian dollar jumped to a six-month high of $1.0812 after the Reserve Bank of Australia (RBA) confounded expectations of a rate cut. It is one of three central banks meeting this week, all of which have been acting to support an improving global economic outlook with easier monetary policy.

In commodity markets, Brent crude futures rose above $116 to a six-month high as fresh threats from Iran to ban exports to some European states stoked supply concerns, overshadowing the impact of the Greek debt crisis which is capping the gains.

Brent’s premium to U.S. oil stayed around $19 a barrel, near its highest since November, was also being boosted by a severe cold wave which has spread across Europe.

Spot gold gained half a percent, snapping two straight sessions of losses, as investors waited for the next development in Greece’s debt restructuring talks.

Most precious metal markets were subdued by the split among investors over whether the wrangling over Greece would eventually be resolved or trigger contagion across other vulnerable euro zone countries.

(Additional reporting by Neal Armstrong and Atul Prakash. Editing by Patrick Graham, John Stonestreet)

LONDON (Reuters) – The euro and European stock markets edged higher on Tuesday as traders grew hopeful a resolution could be found to enable a second bailout deal for Greece, although poor results for some top European firms rekindled fears about the impact of the crisis.

Greece’s prime minister and the leaders of the major political parties are set to resume talks today on new austerity measures demanded by the EU in return for a second bail-out. The deal needs to be approved by February 15 if the money is to be available in time to meet a March 20 bond redemption.

In early European trade the euro gained 0.2 percent to $1.3156, after hitting an overnight low of $1.3026, while European stocks turned up after a flat opening.

The Australian dollar jumped to a six-month high of $1.0812 after the Reserve Bank of Australia (RBA) confounded expectations of a rate cut. It is one of three central banks meeting this week, all of which have been acting to support an improving global economic outlook with easier monetary policy.

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(Editing by Patrick Graham)

NEW YORK (Reuters) – Stock index futures pointed to a higher open on Wall Street on Wednesday, with futures for the S&P 500 up 0.6 percent, Dow Jones futures up 0.6 percent and Nasdaq 100 futures up 0.4 percent at 4:38 a.m. ET.

European stocks were up 1.3 percent in morning trade, led by buoyant banking shares such as Societe Generale (SOGN.PA) and UniCredit (CRDI.MI), helped by renewed expectation of a Greek debt deal and after better-than-expected Chinese data.

Amazon.com (AMZN.O) will be in the spotlight after it warned of a possible first-quarter operating loss following a sharp drop in fourth-quarter profit, a sign the online retailer will keep spending heavily on expansion at the expense of short-term returns. Amazon shares (AMZN.F) traded in Frankfurt were down 6.9 percent.

On the economic front on Wednesday, investors were awaiting the monthly ADP U.S. national employment report, due at 8:15 a.m. ET, seeking clues as to Friday’s key non-farm payroll report. Aside from that, January’s U.S. ISM report and December U.S. construction spending data will both be unveiled at 10 a.m. ET.

Facebook was expected to submit paperwork to regulators on Wednesday for a $5 billion initial public offering and has selected Morgan Stanley (MS.N) and four other bookrunners to handle the IPO, sources told IFR.

The U.S. Federal Reserve’s pledge to keep interest rates at rock-bottom levels until late 2014 undercut what little confidence Main Street investors had in the markets, Charles Schwab Corp’s (SCHW.N) chief executive said.

Broadcom (BRCM.O) posted quarterly adjusted earnings that beat Wall Street expectations and its first-quarter revenue forecast reassured investors who sent its shares up 3 percent in after-hours trading.

C.H. Robinson Worldwide (CHRW.O), a third-party provider of freight transport, posted a quarterly profit that narrowly missed estimates, hurt by lower margins at its trucking business.

Boston Properties (BXP.N), a real estate investment trust that owns high-end office buildings, posted earnings that nearly doubled when it recorded charges for the early extinguishment of debt and the repurchase of senior notes.

Hard-drive maker Seagate Technology (STX.O) said unit shipments should jump nearly a third this quarter, even though worldwide inventories remain squeezed as its suppliers’ factories recover from last year’s floods in Thailand.

Suncor Energy (SU.TO), Canada’s largest oil and gas producer, said fourth-quarter profit rose 10 percent, helped by higher oil prices.

Mitsubishi UFJ Financial Group (8306.T), Japan’s biggest bank by assets, posted a 39 percent fall in third-quarter net profit, hurt by a tax asset write-down and weak lending at home.

Fortinet (FTNT.O) posted better-than-expected quarterly results helped by strong sales of its network security products, sending its shares up 8 percent in after-market trading.

Wall Street closed its best month since October on a flat note on Tuesday as weaker-than-expected economic reports surprised investors after a stream of positive data in recent months.

The Dow Jones industrial average (.DJI) dropped 20.81 points, or 0.16 percent, to 12,632.91. The Standard & Poor’s 500 Index (.SPX) fell 0.60 points, or 0.05 percent, to 1,312.41. The Nasdaq Composite Index (.IXIC) gained 1.90 points, or 0.07 percent, to 2,813.84.

The S&P 500 triggered a bullish technical signal, known as a “golden cross,” as its 50-day average ticked above its 200-day average. The signal indicates a shift in mid-term momentum and usually means gains in the index six months down the road.

(Reporting by Blaise Robinson; Editing by Dan Lalor)

LONDON (Reuters) – The euro edged back from six week highs and global stocks were lower on Monday as investors turned cautious after U.S. growth figures on Friday that fell just short of expectations and ahead of more crisis talks among EU leaders.

The lack of concrete progress in Greek debt talks, which officials have said are on the verge of a deal, kept markets on edge and for the single currency there was an element of profit-taking after its strongest week in more than three months.

The Greek deal is needed before agreement can be reached on a second bailout package which Greece needs to meet a 14.5 billion euro repayment on its debt due in mid-March. Otherwise Athens faces a messy default that could reverberate through European and world markets.

“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.”

The euro was down about 0.4 percent to $1.3160, after climbing to $1.3235 on Friday – its highest level since mid-December. But new data showed currency speculators have raised their net euro short positions – bets on the currency falling – to a fifth straight record high in the week ended January 24.

European stocks (.FTEU3) opened down around 0.4 percent 1036.06 though they remain up over three percent for the year to date on hopes an economic slowdown will be milder than expected. Financial stocks were among the early losers with Europe STOXX 600 bank index down around 1.5 percent.

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.

Against this backdrop, Italy will auction up to 8 billion euros of debt in the five and 10-year sectors, the first significant test of demand for these longer-dated securities this year.

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 have been falling, in part due to the extra liquidity provided to the banking system by the European Central Bank, and are currently under six percent

German government bond futures, used by investors as a safe haven in the crisis, were up slightly awaiting the outcome of the EU leaders’ summit with the front month contract up 39 ticks on the day at 139.28.

(Additional reporting by Joanne Frearson; editing by Patrick Graham)

LONDON (Reuters) – World stocks fell from a 5-1/2 month high on Friday as gains spurred by the Federal Reserve’s pledge of low interest rates gave way to concerns about Portugal, seen as the next domino in the euro zone crisis, and uncertainty over Greek debt talks.

Portuguese five- and 10-year government bond yields were set to remain under pressure after hitting euro-era highs on Thursday as fears grow that the country may follow Greece in requiring another bailout or seeking to restructure its debt.

Athens is locked in tough negotiations with its private creditors on a restructuring it needs quickly to avert a disorderly default when a major bond redemption falls due in March. Greece’s bondholders are demanding the European Central Bank contribute to a deal to put the country’s messy finances back on track.

“With all the focus on Greece, attention has also started to shift to Portugal, whose own bond yields are continuing to rise sharply, with 10-year yields pushing on towards 15 percent, as fears rise that it could well need a second bailout,” said Michael Hewson, market analyst at CMC Markets in London.

The MSCI world equity index fell a quarter percent, after hitting its highest since August on Thursday after the Federal Reserve pledged to keep interest rates near zero for the next three years.

European stocks lost 0.4 percent while emerging stocks rose 0.3 percent.

U.S. crude oil fell 0.1 percent to $99.56 a barrel.

Bund futures rose 30 ticks.

The dollar rose slightly against a basket of major currencies. The euro fell 0.1 percent to $1.3091.

After weeks of wrangling over the coupon that Greece will pay on new bonds it will swap for existing debt, the focus has shifted to whether the ECB and other public creditors will follow private bondholders in swallowing losses.

Euro zone members may have to increase their financial support for Greece if Athens and the private sector do their part to address the country’s debt crisis, Eurogroup head Jean-Claude Juncker told a newspaper.

Italy, on the other hand, has enjoyed a recent rapid decline in yields, mostly driven by demand from domestic banks awash with three-year loans taken out from the European Central Bank. Italy will sell 8 billion euros of six-month bills and 3 billion euros of 11-month bills on Friday after a successful short-term bond auction on Thursday and before a key sale of longer-dated debt next week.

“Italy has seen some relief,” Hewson said.

(Editing by Catherine Evans)

BERLIN/ATHENS (Reuters) – Standard & Poor’s was poised to downgrade the credit ratings of several euro zone countries on Friday, including France and Austria but not Germany or the Netherlands, rattling markets in the first blow of the new year for the troubled single currency.

In another potential setback, talks on a debt swap by private creditors seen as key to averting a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week.

Four euro zone government sources said S&P would cut a number of the currency bloc’s sovereigns, making an announcement after New York markets close at 4 p.m. EDT (2100 GMT).

A euro zone official said France and Austria would lose their top-notch triple-A ratings, and Slovakia would also be affected. The Financial Times reported that France and Austria would each drop one notch to AA+.

There was no official comment in Paris but Reuters reporters saw Finance Minister Francois Baroin arrive at President Nicolas Sarkozy’s office in the late afternoon.

Government spokeswoman Valerie Pecresse told BFM television: “France today is a safe investment. It can repay its debt and the news concerning our deficit is better than expected.”

The euro fell by more than a cent to $1.2650 on the news. European stocks, which had been up on the day, turned negative. Safe-haven German 10-year bond futures rose to a new record high while the risk premium investors charge on French, Spanish and Belgian debt widened in reaction.

Greek negotiators who have repeatedly voiced confidence in a deal in which banks and insurers would accept voluntary losses of 50 percent of the face value of their bond holdings said they were now less hopeful, warning of “catastrophic consequences” for Greece and Europe if they failed.

Without a deal, a second Greek bailout package could fall apart, leaving Athens facing default in March when it must meet massive bond repayments.

“Yesterday we were cautious and confident. Today we are less optimistic,” a source close to the Greek task force in charge of the negotiations said.

The Institute for International Finance, negotiating on behalf of creditor banks, said in a statement: “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.

The double blow of the S&P news and the stalling of the Greek debt talks came after a brighter start to the year with Spain and Italy beginning their marathon debt rollover at lower borrowing costs this week.

The European Central Bank’s move last month to flood banks with cheap three-year liquidity helped ease a worsening credit crunch and provided funds which governments hope some will use to buy sovereign bonds.

RESCUE FUND WEAKENED

S&P declined comment on reports of an imminent downgrade, which several sources said would not affect the triple-A ratings of Germany or the Netherlands. There was no word of a threat to the euro zone’s other AAA states, Finland and Luxembourg.

France and Austria were both seen as being at greater risk because of their banks’ exposure to the debt of peripheral euro zone countries and Hungary respectively, and the weakening economic outlook for Europe.

S&P warned on December 5 that it was reviewing the ratings of 15 of the 17 euro zone members, including Germany and France, the region’s two biggest economies, for a possible mass downgrade due to rising “systemic stresses” in the currency area.

The agency said it would issue a decision within three months, but as soon as possible after a December 9 summit at which euro zone countries agreed to negotiate a fiscal pact with tougher enforcement of budget discipline.

A cut in France’s rating would be a serious setback for the centre-right Sarkozy’s chances of re-election in May and could weaken the euro zone’s rescue fund, reducing its ability to help countries in difficulty.

France is the second largest guarantor of the European Financial Stability Facility, which currently has a AAA rating. Preserving that status would require members to increase their guarantees, which could prove politically unpopular.

After vowing to do everything to preserve Paris’ top-notch standing, Sarkozy appeared to prepare voters last month for the likely loss of the prized status before the election.

“It would be one more difficulty, but not insurmountable,” he said in an interview with Le Monde.

France has the highest debt-to-gross-domestic-product ratio of the euro zone’s AAA-rated countries, and the government has refused to take further savings measures before the election, insisting it can meet its fiscal targets.

It was not clear how far a downgrade would increase France’s borrowing costs, since markets have already anticipated the prospect by raising the French risk premium over German Bunds.

“One notch is priced in but not more. The Franco-German spread can widen. It is about 130 basis points for the 10-year bond. The maximum level reached was 180 to 190 basis points and it can go back to this level,” said Alessandro Giansanti, senior rates strategist at ING in Amsterdam.

(Additional reporting by Annika Breidthardt in Berlin and Reuters euro zone bureaux; Writing by Paul Taylor, editing by Mike Peacock)