TOKYO (Reuters) - Asian shares extended losses on Friday, weighed down by worries over the risk of a recession in the world's largest economy as the United States faces a looming fiscal crisis and by uncertainty over a bailout for Greece, which kept sovereign bonds firmly bid.
Pressured by further losses on Wall Street, MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.2 percent, after sliding 1.3 percent on Thursday for its biggest one-day percentage drop in two months.
South Korean shares led the declines with a 0.7 percent drop, with blue-chips mostly down, while Shanghai shares were nearly flat.
Global stocks fell overnight on worries about Washington's ability to resolve the "fiscal cliff" in a timely manner before nearly $600 billion worth of spending cuts and tax increases kicks in early 2013 unless a compromise is reached to cut the deficit. There is also the issue of a debt ceiling, which needs to be raised to avoid a government shutdown.
A recession in the United States, which had recently defied a general trend in other parts of the world by showing signs of a modest recovery, could drag the global economy down further.
The Standard & Poor's 500 index dropped for a second day and closed below its 200-day moving average for the first time in five months on Thursday, signalling a weaker trend. It closed down more than 1 percent at its lowest since August 2.
Against the general bearish sentiment, China reports several pieces of data for October this session, including fixed-asset investment and industrial output, which will likely show the country recovering from its slowest period of growth since early 2009.
Annual October consumer inflation released earlier in the day eased to its slowest pace in nearly three years, giving policymakers scope to further looser monetary policy if needed.
"The focus has turned back to the economy after the U.S. election, with concerns over euro zone risk resurfacing while the fiscal cliff worries weigh on the local index," said Kim Soon-young, an analyst at IBK Securities, adding that Seoul shares could pare losses if China economic data is positive.
Japan's Nikkei average slipped 0.9 percent.
As investors reduced exposure to risk assets, safe-haven government bonds remained firm, with 10-year Japanese government bond yields hitting a fresh three-month low of 0.73 percent. Benchmark 10-year U.S. Treasury yield steadied around 1.635 percent, after touching a low of 1.618 percent on Thursday.
EURO OFF LOWS
The dollar was down 0.1 percent but hovered near a two-month high against a basket of major currencies of 81.001 hit on Thursday, benefiting from rising demand for Treasuries on the back of the looming U.S. fiscal crisis.
Gold rose to a three-week high of $1,735.05 an ounce and looked set for its biggest weekly rise since the end of August, supported by expectations for a continuation of ultra-easy U.S. monetary policy under President Barack Obama's second term, and on demand for safety due to concerns about the U.S. fiscal woes.
The euro recovered, up 0.2 percent to $1.2768, having fallen to a two-month low of $1.2717 on Thursday.
The euro was undermined after the European Central Bank kept rates on hold on Thursday, as expected, and its president, Mario Draghi, sounded downbeat on the euro zone economy and said he was ready to start new purchases of bonds.
"The euro zone policymakers are just trying to buy time, which is what they have been doing all along. So the euro faces downside risks. I think it could test $1.25," said a trader at a European bank.
More worrying signs about the European economy emerged after data showed German exports slid at their fastest pace since late last year, adding to evidence that the euro zone's debt crisis has begun to inflict a heavy toll on Europe's largest economy.
After winning parliamentary approval for a severe austerity package crucial to get an international aid, a coalition government in heavily indebted Greece still needs to pass the 2013 budget in a vote expected on Sunday.
Spain, on the other hand, on Thursday successfully sold long-term debt to complete its 2012 issuance programme, giving the government breathing room to hold out before requesting international aid.
U.S. crude rose 0.4 percent to $85.41 a barrel and Brent rose 0.3 percent to $107.58.
Sluggish equities kept sentiment weak in Asian credit markets, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 5 basis points.
(Additional reporting by Joyce Lee in Seoul and Hideyuki Saon in Tokyo; Editing by Chris Gallagher & Kim Coghill)
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