Tokyo - Asian shares fell and the euro hovered near a 16-month low against the dollar on Friday on worries that the eurozone debt crisis is crippling European banks, with players hoping US job data later in the day will help improve sentiment.
MSCI's broadest index of Asia Pacific shares outside Japan fell 1% and was set to end the first week of 2012 marginally higher, after shedding 18% last year.
Financials generally weakened as European woes hurt confidence, even though Asian banks are nowhere near as exposed to toxic eurozone assets as European banks.
Japan's Nikkei also fell 1%.
The euro was at $1.2790, just a touch above Thursday's low of around $1.2770, its weakest since September 2010. Against the yen, it stood at ¥98.70, hovering near an 11-year low of ¥98.45 it the previous session.
US shares and the dollar rose while European shares and the euro sank on Thursday, reflecting diverging sentiment for the United States and the eurozone, as data showed further improvement in the US economy while much of Europe appeared to be falling into recession.
"Euro area stresses remain elevated," said Standard Chartered in a research note. "Poor economic data, sovereign downgrades and weak demand for government bond issues remain key threats to the region."
The dollar steadied near one-year highs against a basket of major currencies, weighing on commodity currencies such as the Australian dollar and oil prices.
European shares and the euro are heavily undermined by deep-rooted concerns about a possible default by struggling countries such as Greece, expectations for credit downgrades of top-rated eurozone economies including France and worries over whether highly indebted countries such as Italy and Spain could successfully refinance their maturing debts.
US bank shares, in contrast, gained on Thursday on hopes for more growth in lending, after data suggested the battered labour market may recover further in 2012. Earnings reports in coming weeks will give further clues on the health of America's top companies.
Non-farm payrolls data due later on Friday are expected to show 150 000 jobs were added in December. If the figures come in as expected, near-term market sentiment could tip to positive.
"Europe's still the main determinant," said Simon Burge, portfolio manager at ATI Asset Management in Sydney. "It comes down to seeing some bottoming in these global growth expectations, which I don't know if we've seen yet," he said.
Banks under pressure
The Asian financial sector outside Japan fell but was not the hardest hit.
"Asian banks are in a better position - they never really had the systemic exposure to these toxic assets. Asian banks are just tied to regional growth momentum," said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.
"Europe is turning out to be a negative, but not a strong negative for the Asia region," he said, adding that despite the European risks, Asia was expected to grow 4.5% this year.
But there is a correlation to a strong global downdraft as seen in 2008, given too much leveraging in the system and exports being an important part of the underlying economy in Asia, he said.
European banks face strong market scrutiny as they strive to repair balance sheets hit by the plunging value of their huge eurozone debt holdings and boster their capital amid tightening requirements.
Shares of Italy's top bank, Unicredit, plunged 17.3% on Thursday, adding to a 14.5% fall on Wednesday, when it announced a massive discount on a rights issue.
It underscored the difficulty some European banks are facing to raise funds, and jitters that other banks may face similar problems unsettled the entire European banking sector.
A solid French government bond auction failed to relieve bearish sentiment as market players turned their eyes towards next week's debt sales by Spain and Italy, the two big economies seen as most at risk from the crisis that has already dragged down Greece, Ireland and Portugal.
As the vulnerable euro and the European shares whetted appetite for save haven assets, gold was on course for its best week in a month.
Asian credit markets remained cautious, with spreads on the iTraxx Asia ex-Japan investment grade index widening by a few basis points early on Friday.