China stocks extend selloff, keep Asia in check

Shanghai Composite Index down 3.9% after diving nearly 7% on Thursday

Chinese share markets extended a bruising selloff on Friday after the previous day's plunge, while the dollar took a breather from a sharp run up this week.

The slide in China forced Asian markets off earlier gains, with the MSCI's broadest index of Asia-Pacific shares outside Japan flat. It shed more than 1% on Thursday. South Korean share gained 0.4% and Australian stocks rose 1.2%. Japan's Nikkei was flat.

In choppy trade, the Shanghai Composite Index was down 3.9% after diving nearly 7% on Thursday, when investors dumped stocks after more brokers tightened margin trading requirements and the central bank drained money to reduce flush liquidity in the financial system.

"Although numerous triggers have been proposed for Thursday's nearly 7% fall in the Shanghai Composite, none of these seem likely to have had a large enough impact on fundamentals to explain such a sizable move," economists at Capital Economics wrote.

"Instead, it was probably driven by a wild swing in sentiment. With valuations divorced from economic fundamentals, the heightened volatility we have seen is likely to continue."

Mixed signals from the ongoing Greek debt talks were another signal to investors to remain cautious.

Cash-strapped Athens said it aims to reach an agreement with lenders by Sunday, but its creditors did not share its optimism. Euro zone official said Greece won't receive any money if it does not agree on an outline of a reforms deal.

European shares dropped overnight, with Germany's DAX, France's CAC and Greek stocks falling, while periphery euro zone bond yields rose. The negative sentiment spilled over into North America, with the Dow and S&P edging lower.

The euro took a slightly more positive view of the Greek debt talks, and was up 0.1% at $1.0960 after pulling away from a one-month low of $1.0819.

The dollar retreated against the yen, fetching 123.75 yen after scaling 124.46 overnight, its highest since 2002. The greenback was knocked off the peak as Japanese government officials used stronger language to describe recent moves, with Finance Minister Taro Aso saying the yen's recent drop had been "rough."

The dollar index stood little changed at 96.918, pulling back from a one-month high of 97.775 struck on Wednesday.

In commodities crude oil extended gains after rebounding overnight thanks to data showing a fourth weekly drawdown in US crude stocks.

US crude was up 67 cents at $58.35 a barrel and Brent gained 55 cents to $63.13 a barrel.