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Markets pause on caution as Greece debt talk eyed

(Reuters) - Asian shares and the euro paused from last week's rally on Monday as investors sweated on the progress of crucial Greek talks on a debt swap deal to avoid a default, while activity was subdued due to the Lunar New Year holiday in much of Asia.

Caution returned as Greece and private creditors struggled to reach an agreement vital for restoring confidence in Europe's refinancing ability, and mixed U.S. corporate earnings revived concerns over global growth prospects and weighed on sentiment.

The MSCI's broadest index of Asia-Pacific shares outside Japan was barely changed from Friday, when it touched its highest in more than two months to post a year-to-date rise of about 7.5 percent.

The pan-Asia index was dragged down by a sluggish Australian stock market, where uncertainty over Greece prompted investors to reassess positions after a 4.5 percent rally in the main share index so far this year. .AXJO

Japan's Nikkei average .N225 closed flat, after hitting a an 11-week high earlier on Monday. .T

Financial spreadbetters expected Britain's FTSE 100 .FTSE,

Germany's DAX .GDAXI and France's CAC-40 .FCHI to open around 0.1-0.3 percent higher. U.S. stock futures were down 0.3 percent.

A delay in the Greek debt deal helped U.S. Treasuries nudge up in Asia as investors sought safety, after optimism over Europe's funding problems had pushed the yield on 10-year U.S. notes to a two-week high of 2.035 percent on Friday. <US/T>

With many Asian markets, including China, Hong Kong, Singapore and South Korea, closed for the Lunar New Year holiday, the spotlight turned to the Tokyo Commodity Exchange's (TOCOM) gold futures.

A near 1 percent rise in the benchmark December TOCOM gold futures on Monday helped push cash gold up nearly 1 percent in thin trade, traders said.

"Japanese investors may have found an incentive to buy with the yen's rapid appreciation against the dollar taking a pause, increasing the value of their gold holdings in dollar terms," said Akira Doi, a vice president at commodity brokerage Daiichi Commodities Co in Tokyo.

The yen has stabilized around 77 yen since hitting a high of 76.30 versus the dollar on January 2, its highest since October 31, 2011, when the Japanese currency rose to a record high of 75.31 yen against the dollar.

Spot gold was up 0.9 percent to $1,672 an ounce.

EURO PRESSURED

The euro eased 0.3 percent to $1.2898, slipping from a 2- week high around $1.2986 hit on Friday, which was up nearly 3 percent from a 17-month trough near $1.2624 plumbed on January 13.

"There was no clear outcome on the talks about the restructuring of Greek debt over the weekend and that's probably pressured the euro lower," said Andrew Salter, strategist at ANZ in Sydney.

The single currency is likely to remain firmly capped as speculators boosted net euro shorts to a fourth straight record in the week ended January 17.

After several rounds of talks, Greece and private creditors are converging on a debt swap deal that would stave off bankruptcy for Athens, with investors shouldering losses of up to 70 percent. But many details were still unresolved and the plan must be approved by the International Monetary Fund and others.

Euro zone finance ministers will decide on Monday what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package for Athens.

Rising hopes for progress in the euro zone debt crisis and broader risks receding were highlighted by fresh money flowing into Europe Bond and China Equity Funds. These posted their biggest weekly inflow in more than two years, according to EPFR Global fund data on Friday. [ID:nL1E8CKCXN]

The CBOE Volatility index VIX .VIX, which measures expected volatility in the S&P 500 over the next 30 days, closed below 19 on Friday for the first time since July 22, as a stabilizing market reduced investor desire to seek protection in stock index options against future losses.

Euro zone interbank lending rates and money market rates continued their decline on Friday as a high level of liquidity injected by the European Central Bank kept downward pressure on market rates. But banks remained wary of lending to one another, choosing instead to park their excess funds at the ECB.

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