The euro fell on Tuesday after a two-notch downgrade of Portugal's sovereign debt rating and ahead of Greece's return to capital markets for the first time since late April.

World equities drifted lower after China said it had no plans to relax tougher property measures anytime soon, though stronger-than-expected quarterly profits at aluminum group Alcoa , which kicked off the U.S. earnings season, offered support.

Beijing said it would continue to rein in speculation in the country's booming property sector, dampening talk that it was relaxing credit controls.

The comments also weighed on the Australian dollar and copper prices, both seen as proxies of Chinese growth.

The euro fell 0.4 percent to $1.2531 after Moody's Investors Service cut Portugal's credit rating to A1 from Aa2 with a stable outlook, though the impact was limited as it was making up ground with rival agency Standard & Poor's. S&P rates Portugal at A-minus, two grades below where Moody's latest rating on Lisbon.

Investors were already cautious ahead of the sale of Greece's 1.25 billion euros ($1.57 billion) of six-month Treasury bills.

While the timing is always a little confusing, I don't think the material nature of the move is all that surprising, said Sean Maloney rate strategist at Nomura.

It doesn't have the same impact as it would if the likes of S&P were to downgrade, given the move only brings them in line with the lowest rating anyway.

The sale could prove to be a litmus test for the euro in the short term ahead of the results of the euro zone banks' stress tests next week, traders said.

The dollar was down 0.2 percent at 88.41 yen. Against a basket of major currencies, the greenback rose 0.3 percent <.DXY>.

Portugal's borrowing costs rose slightly, with the Portuguese/German 10-year yield spread widening to 290 basis points (bps), around 4 bps wider versus Monday's settlement.

The cost of protecting Portuguese government debt against default rose to 286 bps from 279.5 bps at the New York close on Monday, according to monitor CMA DataVision.

Bund futures erased losses, rising to a session high of 129.47, up 13 ticks on the day.

STOCKS EASE

World stocks measured by the MSCI All-Country World Index <.MIWD00000PUS> ticked 0.1 percent lower. It gained more than 5 percent last week to post its best weekly rise in a year, though it is still down 6.3 percent in 2010.

The index carried a one-year forward price-to-earnings of 11.13, falling to a level last seen in March 2009 and compared with its 10-year average of 15.41, according to Thomson Reuters DataStream.

In Asia, China's Shanghai composite index <.SSEC> dropped 1.6 percent, and Japan's Nikkei average <.N225> slipped 0.1 percent.

The FTSEurofirst 300 <.FTEU3> of leading European shares put on 0.9 percent, while Portugal's PSI 20 index <.PSI20> fell 0.1 percent.

We've seen a deterioration in the data points coming through from China ... so there are some concerns about a slowing of the prolific growth we've been seeing in China, which has been unnerving some investors, said Henk Potts, equity strategist at Barclays Wealth. Intel is due to unveil its quarterly results later in the day and JPMorgan Chase , Citigroup , Bank of America and General Electric will report later this week.

(Additional reporting by Will James, Jon Hopkins, George Matlock and Ian Chua; Editing by Hugh Lawson)

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