Euro zone funding fears hang over world stocks

Concern about the appetite for euro zone sovereign debt pushed European stocks lower and hit the single currency on Thursday, with the first French bond auction of 2012 set to test how much progress policymakers have made in easing tensions.

The price France has to pay to sell 7 to 8 billion euros of longer-term bonds will measure how much relief markets have taken from the EU leaders' December plan for resolving the crisis and the near half-trillion euros pumped into the region's banks by the European Central Bank.

Markets have been bracing for France to lose its current AAA rating after ratings agency Standard & Poor's warned in early December of a mass downgrade due to concerns about the bloc's two-year old debt crisis.

"Whilst France currently clings to its AAA credit rating at the moment, the chorus of warnings from credit agencies about imminent downgrades could deter investors," Capital Spreads trader Jonathan Sudaria said.

France is seen at a greater risk of contagion from the euro zone debt crisis than Germany, but the real test comes next week with Spain and Italy, the two big economies seen as most at risk from the crisis that has already dragged down Greece, Ireland and Portugal, due to issue bonds.

Germany saw subdued demand at its first auction of the year on Wednesday.

The euro eased 0.1% to around $1.2930 on Thursday, nearing a 2011 low of around $1.2856 hit on December 29. A break below that would take it back to levels not seen since September 2010.

"Euro zone debt worries persist and the euro is basically on a declining trend, while undergoing short-term swings depending on the degree of risks," said Tomoko Fujii, FX strategist at Bank of America Merrill Lynch in Tokyo.

The FTSEurofirst 300 index of top European shares fell in early trade, down 0.3% at 1018.03 points after hitting a five-month high on Tuesday.

European shares fell on Wednesday after Italy's UniCredit SpA launched a 7.5 billion euro rights issue at a huge discount, reflecting the difficulty some European lenders are facing in raising capital to repair their weakened balance sheet.

The MSCI world equity index edged down 0.4% after weakness in Asian stock markets earlier.

Brent crude moved over $114 barrel on Thursday as fears of Iranian supply disruption after the European Union agreed to cut off oil imports from the No. 2 OPEC producer.

Brent crude was up about 0.4% $114.16, after advancing nearly 6% in the past two sessions to close at the highest since November 11 on Wednesday.