The euro fell on Wednesday driven by fears that Europe's debt woes can wreak havoc in its banks, though Asian stocks rebounded from nine-month lows as value investors hunted for bargains.

European shares were poised to open as much as 2.3 percent higher, financial bookmakers said, helped by a late-session rally on Wall Street where the big indexes finish largely unchanged.

Overall, investors continued to cut risk in their books because of ever more difficult financing conditions in the euro zone, tightening U.S. banking regulation and mounting antagonism between North and South Korea.

Since global equity markets peaked on April 15, $4.2 trillion in market value has been erased from the MSCI all-country world stocks index <.MIWD00000PUS>. Unless confidence builds around a solution to Europe's debt crisis, the rally in equities may prove fleeting.

Doubts and caution pervade the market. There are doubts whether southern European countries are the only ones with debt problems, said Suh Dong-pil, a market analyst at Hana Daetoo Securities in Seoul. Growing tensions with North Korea are also a negative.

The euro was down 0.8 percent on the day at $1.2270, creeping back to a four-year low near $1.2140 hit on May 14. It is on its way to its biggest monthly decline since January 2009.

Against the yen, the euro was down 1 percent to 110.67 yen, with support at 108.85 yen, an 8-1/2-year low struck on Tuesday.

The Australian dollar fell 0.7 percent to $0.8233, on track for the biggest monthly decline since October 2008.

STRESSED OUT

Stress in funding markets has brought back memories of the fallout from the Lehman Brothers failure in 2008 when a breakdown in trust of counterparties led to U.S. dollar hoarding and a lending freeze.

This time a combination of a rush out of euros and into U.S. dollars and fears that last weekend's takeover of a small Spanish savings bank by the country's central bank might be a sign of widespread trouble have pushed up short-term dollar financing costs.

Three-month dollar Libor fixed on Tuesday at 0.5362, the highest since July 2009, having more than doubled in the past three months.

A Reuters poll of money market traders showed the rate was expected to rise to 0.70 percent over the next month.

Japan's Nikkei share average rose 0.7 percent <.N225> after plumbing a six-month low on Tuesday, but was ultimately dependent on the direction of the euro.

We're likely to see short-covering and bargain-hunting today, given how far the Nikkei fell yesterday, said Toshiyuki Kanayama, a market analyst at Monex Inc in Tokyo. But there's still a lot of longer-term uncertainty and if the euro turns volatile the way it was yesterday, things could change.

VALUATIONS ARE NOT ENOUGH

The MSCI index of Asia Pacific stocks outside Japan was up 1.7 percent <.MIAPJ0000PUS>, helped by a bounce in resource-related and technology shares. Since April 15, Asian stocks have fallen 18 percent, just short of a 20 percent mark usually defining a bear market.

The index was trading at 11.8 times earnings expected in the next 12 months, the lowest since March 2009, Thomson Reuters I/B/E/S data showed.

Valuations have also tumbled in Japan, the United States and Europe to where they were at the start of the 2009 rally. With investors focused on economic and financial risks though, attractive prices may not be enough to support the market in the near term.

Ten-year U.S. Treasury note futures were down 0.2 percent after hitting a one-year high on Tuesday and as equities gained. The cash market was stable, with the benchmark 10-year yield at 3.18 percent compared with Tuesday's intraday low of 3.0642 percent.

U.S. crude for July delivery rallied 0.9 percent to $69.36 a barrel, after a report of a bigger-than-expected decline in gasoline inventories.

(Additional reporting by Jungyoun Park in SEOUL and Elaine Lies in TOKYO; Editing by Jan Dahinten)

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