Shares and euro fall as debt fears rattle markets.

Asia stocks fell to multi-month lows, the euro slid and oil and higher yielding currencies weakened on Tuesday on fears that Europe's sovereign debt woes will trigger a renewed crisis in the continent's banking sector.

Heightened tensions and talk of war on the Korean peninsula also jangled investor nerves in East Asia.

Europe's fumbling response to a Greek debt crisis and bulging deficits in other euro zone countries have unnerved markets over the past six weeks, and the central bank takeover of a small Spanish lender at the weekend stoked fears of a wider meltdown.

"This situation with the Spanish bank makes investors nervous because it raises suspicions that something else may be smoldering behind the scenes," said Hiroichi Nishi, equity division general manager at Nikko Cordial Securities in Tokyo.

European stocks looked set to dive, with futures for the Stoxx Europe 50 down 3.5 percent.

Funding conditions for banks have been tightening, with institutions in the United States increasingly reluctant to deal with firms with large exposure to Europe.

"Investors are selling into every rally in the euro," said Jonathan Cavenagh, currency strategist at Australia's Westpac.

"Worries about the euro debt crisis are showing signs of spilling over to the banking sector with funding costs rising, albeit from very low levels. All this will only see more demand for U.S. dollars."

Money markets have seen an increasing reluctance to lend, particularly for longer terms, raising fears that dollar-funding strains could further hobble troubled banks.

Report that North Korean leader had told his military it may have to go to war -- but only if the South attacks -- also prompted foreign investors to sell.

A trader at a European brokerage house in Tokyo said the slide in equities was at odds with macroeconomic fundamentals and earnings trends, and was likely part of moves by investors to cut exposure to risk, with one market player's stop-loss selling forcing another to cut positions as well.

"I don't think things will get to the point of a financial crisis, but the price action is similar to what was seen after the Lehman shock," the trader said.
Credit markets seized up and stocks tumbled after the collapse of Lehman Brothers in September 2008, marking the most dangerous moment of the financial crisis that roiled the world's markets and economies in 2007-2009.