Uncertainty over Spain's next move to tackle its funding problems and renewed worries about the global growth outlook capped moves in shares and the euro on Tuesday.
Investors have turned cautious after a strong rally in riskier assets which followed new policies unveiled earlier this month by the world's major central banks to stimulate growth and support efforts by Europe to resolve its debt crisis.
"The near term outlook is likely to remain one of caution until some progress in the euro zone is in evidence," said Mitul Kotecha, head of global FX strategy for Credit Agricole.
That next move is expected to come from Madrid where the government is due this week to present its draft budget for 2013, outline new structural reforms for the economy and release results of stress tests on the health of Spain's banks.
Jittery investors have also become nervous about the Greece, which is due to hear soon from the "troika" of international lenders – the IMF, ECB and European Commission – on the prospects of further loans to finance government outlays.
"Fears about Europe's situation remain among investors, with the focus mostly on Spain, but Greece is also still a concern," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
However, the euro was down only 0.1 percent at $1.2920 on Tuesday as it retraces gains which saw it hit a 4-1/2-month peak of $1.3173 last week after the U.S. Federal Reserve announced aggressive quantitative easing.
The rally in the single currency had also been supported by the European Central Bank's offer to provide bailout funds to indebted governments – if they seek its help and are willing to accept tough conditions.
Top European shares, which have surged in the third quarter due to the Fed's decision and the offer from the ECB, were largely unchanged in early trade on Tuesday. The FTSE Eurofirst 300 index of top European shares was down just 0.05 percent at 1115.15 points.
Several traders said the recent moves by the ECB and the Fed should ensure that any equity market pull-back would be relatively limited while some fund managers have taken the view that the latest moves are the start of major recovery in prices.
"The majority of central banks are in total, outspoken reflationary mode. That's a big story," said Didier Duret, chief investment officer at ABN Amro Private Banking.
"They are intervening actively for a very clear reasons: to support the economy in the U.S., to support the funding in Europe and to support also the economies in emerging markets."
But Duret admitted the timing of a renewed equity rally is highly dependent on signs the slowdown in the global economy has bottomed out; after surprisingly weak data from Germany on Monday, those signs have yet to appear.
GROWTH CONCERNS
In commodity markets, concerns about the global growth outlook sent prices sharply lower across the board on Monday and most markets were still struggling to recover.
Copper prices had hit a one-week bottom after the September reading on German business sentiment dropped for a fifth successive month to the lowest since 2010. They rebounded on Tuesday to be up 0.6 percent at $8,237.25 per tonne.
Spot gold was little changed at $1,765.10 an ounce, having dropped to a one-week low of $1,755.30 in the previous session.
November Brent crude oil futures were down 11 cents at $109.70 per barrel, with the market getting some support from the rise in tensions in the Middle East.
Washington on Monday cleared the path for tighter sanctions against Iran to curb its nuclear ambitions, while Tehran renewed its rhetoric against Israel, intensifying worries about a conflict between the two which could have an impact on crude supplies from the region.
