Asian shares declined Wednesday ahead of a key meeting of European policymakers later in the session, as investors feared the effort to contain Europe's sovereign debt crisis could fall short.

Assets perceived as safe-haven such as gold and the yen firmed, and the euro steadied, but the growing financial strains dampened Asian credit markets.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.5 percent Wednesday, after rising to its highest point since Sept. 16 the day before. The index has risen 16 percent from its lows hit on Oct. 4.

The FTSEurofirst 300 <.FTEU3> index of top European shares also climbed 16 percent since hitting its lows in late September.

Sentiment has not turned to risk-on from risk-off despite recent gains, with investors now eyeing whether Europe can actually deliver its comprehensive package, said Hirokazu Yuihama, senior strategist at Daiwa Capital Markets.

Until investors are convinced that the sovereign debt crisis is shunned from contagion, money is unlikely to return to the markets fully. This uncertainty prompts profit taking from the recovery in stock markets which began in late September in Europe and early October in Asia, he said.

The EU summit remains scheduled for Wednesday but the gathering of finance ministers -- known as Ecofin -- was canceled because details of the meeting had not been finalized, sources told Reuters.

The leaders were expected to adopt a plan to reduce Greece's debt burden, recapitalize European banks to help absorb bond losses and strengthen the euro zone rescue fund, the European Financial Stability Facility, to stave off contagion in the bond market.

But there were divisions over the extent of losses that private holders of Greek bonds would have to incur and the size of a planned bank recapitalization, and the scope for leveraging the bailout fund remained uncertain.

FOCUS ON FUNDAMENTALS

The Nikkei fell 0.6 percent as the yen hit a record high against the dollar of 75.73 yen on Tuesday, fuelling concerns about its damage to corporate earnings.

MSCI's all-country world stock index <.MIWD00000PUS> fell 1.1 percent on Tuesday after earlier hitting its highest since early September on signs euro zone policymakers were close to an agreement.

The euro retreated from a six-week high of $1.3959, but the drop has been relatively shallow, with the single currency ticking up 0.1 percent to $1.3922 after finding initial support at the overnight low of $1.3847.

Since little is now expected out of today's summit, the market impact should be limited, analysts at BNP Paribas wrote in a note. In fact, given the recent price action and market reaction to mere speculation, a sheer commitment from policymakers may be enough to ignite a fresh risk rally. $1.4000 before the weekend remains viable.

The Australian dollar dropped half a cent as a tame consumer price data cleared the way for a cut in interest rates as early as next week. Australia has kept rates at the highest in the developed world for almost a year, as it worried about inflationary pressures amid a once-in-a-century mining boom.

The move may lend some support as Australia joins a number of countries seeing inflationary pressures falling under control, when concerns mount about a global slowdown on top of the euro zone risks.

U.S. consumer confidence unexpectedly fell to its lowest level in two-and-a-half years in October. House prices were unchanged at low levels in August, suggesting the consumer is still struggling but the economy was not headed for a recession.

On Tuesday, Hong Kong said its exports fell 3 percent in September, the first year-on-year contraction in almost two years as the impact of Europe's deepening debt crisis and a stalling U.S. economy weighed on demand for Asian exports.

These data will raise concerns about corporate earnings. As Europe makes progress in providing a direction to solving its debt crisis, market focus will gradually shift to fundamentals and earnings forecasts, Yuihama said.

JGB, GOLD PREFFERED

Worries about slower growth and European debt woes hurting corporate earnings sapped appetite for riskier assets, as investors sought safe havens such as gold, the yen and government bonds.

Gold rose 0.8 percent to $1,715 an ounce on Wednesday. It has been moving in tandem with riskier assets, but resumed its allure as stocks and the euro fell, posting its biggest one-day rise since early September on Tuesday.

The yield on 10-year cash Japanese government bonds fell 1.5 basis points to 1.000 percent. U.S. Treasury bond prices rallied on Tuesday, with benchmark 10-year notes up 1-1/32 in price for a yield of 2.12 percent.

As strains returned, the spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, widened by seven points.

The market has waited a long time for this summit but given the overnight headlines, one doesn't expect any resounding announcements later today so investors are happy to be sidelined, said a Hong Kong based trader at a European bank.

But the street is lightly positioned and inflows have turned positive, so unless equities dive I don't see credit capitulating.

Some issuers have tapped the region to raise funds in recent weeks, with the latest from Fortescue Metals Group (FMG.AX), which on Wednesday said it had raised $1.5 billion of senior unsecured notes to help fund its infrastructure expansion.

The offering was upsized to $1.5 billion from $1 billion due to strong demand, Australia's No. 3 iron ore producer said.

Signs of slower growth in China and India, and developed countries as well as turbulent European markets, are prompting cash-rich Japanese retail investors to steadily diversify their emerging-markets exposure to ASEAN nations.

Japanese investors pulled out an estimated $366 million from stock funds dedicated to popular India, China and Brazil in September, but invested $624 million last month in global emerging market equity funds, or about a tenth of the total assets of such funds, data from fund tracker Lipper showed.

(Additional reporting by Ian Chua in Sydney and Umesh Desai in Hong Kong; Editing by Kavita Chandran)

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