Asian shares edged down on Tuesday as rising Spanish bond yields stoked fears its tottering banking system is dragging Madrid deeper into crisis, snuffing out a relief rally that followed a win for mainstream parties in Greece's weekend election.
The euro halted its decline around $1.26, but remained a good distance off the high of $1.2748 scaled in early Asian trading on Monday, when markets were cheering a narrow victory for supporters of Greece's international bailout deal.
"We have dealt with one potential problem and as soon as we have, we move onto the next problem and that is the market dynamic at the moment," said Michael McCarthy, chief market strategist at CMC Markets in Sydney.
Tokyo's Nikkei share average <.N225> lost 0.3 percent, while MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> eased 0.1 percent. Both indexes had climbed more than 1.5 percent on Monday. <.T>
European equity markets gave up early gains to end down or flat on Monday and Wall Street stocks were subdued. U.S. index futures were flat-to-lower on Tuesday. <.EU> <.N>
Sunday's election result removed concerns that Greece could imminently be forced out of the euro zone, but it brought no relief to broader worries that the two-and-a-half-year-old debt crisis is spreading to some of the bloc's larger economies.
Yields on both Italian and Spanish bonds rose on Monday, with Spain's 10-year yield climbing to a euro-era high above the 7 percent mark that has already proved unsustainable for Greece, Portugal and Ireland.
European authorities have already agreed to a 100 billion euro rescue for Spain's troubled banks, and data showing bad loans in the sector had climbed to their highest since April 1994 heightened concerns that the euro zone's fourth largest economy could be driven to seek a full-blown bailout.
"Europe keeps disappointing, and any piece of good news is only having a short-lived impact," said Frances Cheung, senior strategist for Credit Agricole CIB in Hong Kong.
The euro traded around $1.2605 on Tuesday, up around 0.2 percent on the day but down around 0.4 percent from Friday's close.
Leaders from the Group of 20 countries meeting in Mexico will press Europe to take bold action to combat the region's debt crisis, according to a draft communiqué prepared for the two-day summit.
Commodities, which had raced higher on Monday in a broad rally of riskier assets, were mixed.
Brent crude slipped a few cents to just below $96 a barrel, but copper rose 0.3 percent to around $7,535 a metric tonne (1.1 ton). Gold was virtually unchanged around $1,628 an ounce.
Investors were reluctant to commit large bets ahead of a two-day Federal Reserve policy meeting starting on Tuesday, with attention focused on whether the U.S. central bank will unveil any more stimulus measures to support a flagging recovery.
The market consensus was that further quantitative easing - effectively creating money to purchase assets - was unlikely for now, but that recent disappointing economic data could prompt the Fed to extend its long-term bond-buying program, known as Operation Twist, by a few months from the current June deadline.
"I think we won't see a full-fledged QE 3, but an extension of Operation Twist is likely," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
(Additional reporting by Victoria Thieberger in Melbourne, Jongwoo Cheon in Seoul and Antoni Slodkowski in Tokyo; Editing by Eric Meijer)