Asian stocks held steady on Tuesday but may resume declines after the prior session's sell-off as fears about the euro zone's worsening debt problems and volatile commodity prices kept investors on edge.

MSCI's index of Asia-Pacific stocks outside Japan was nearly flat, as was Japan's benchmark Nikkei <.N225> which had earlier reached a fresh five-week low.

Seoul shares rebounded after sharp falls in their previous session and helped by techs and refiners, but continued foreign selling amid ongoing worries about euro zone debt and a weakening global economic backdrop weighed.

It appears that a lot of selling is coming from European funds, as worries about the region's debt issues deepens, said Kim Seong-hong, a market analyst at Samsung Securities.

Although the market is bouncing, momentum is pretty fragile. Direction can change anytime, Kim added.

The Korea Composite Stock Price Index <.KS11> was up 0.4 percent at 2,063.92 points as of 9:13 p.m. ET.

The dollar staged a broad recovery, hitting an eight-week high against the pound and edging closer to a 10-week high versus the euro, on worries that the euro zone's debt crisis could spread to heavyweights which investors had thought would be shielded from the contagion risk.

Standard & Poor's cut its outlook for Italy to negative from stable on Saturday, while a crushing defeat for Spain's ruling socialists in local elections raised worries about Prime Minister Jose Luiz Rodrigo Zapatero's ability to meet fiscal targets and highlighted difficulty in curtailing debt, as Madrid has been seen as an example of fiscal reform.

EUROPE WORRIES SPREAD

The huge storm of risk reduction will rip through markets if the focus turns to Spain and Italy. It's clear they don't have money to bail out these countries, said Ayako Sera, a market economist at Sumitomo Trust and Banking.

The euro fell 0.15 percent in early Tuesday trade to $1.4023 after having fallen to a two-month low of $1.3968 on Monday, where it had support from its 100-day moving average.

Against the Swiss franc, the euro fetched 1.2457 franc, off a record low of 1.2323 franc hit on Monday.

The euro has also been suffering from a lack of consensus among European policy-makers on how to deal with Greece, as many opposed the idea of debt restructuring while some market players think it is inevitable.

The euro may not stop falling until European policy-makers come up with a more reassuring stance on debt problems. Before that happens, the euro could fall to around $1.35, Sumitomo Trust's Sera said.

Gold rose to its highest level in almost two weeks on worries that Europe's debt crisis was spreading, sending euro-denominated bullion to a record above 1,081 euros an ounce.

Spot gold was at $1,517.99 an ounce, having hit an intraday high at $1,517.74 an ounce, its strongest since May 11.

U.S. crude oil fell by $1.05 to $96.65 per barrel in early Asian trade on a stronger dollar due to renewed concerns over euro zone debt.

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