European shares fell on Monday and the euro was stuck at 17-month lows against the dollar while German government bonds eased after early gains on fears that S&P's mass euro zone sovereign rating cuts and a Greek debt standoff would worsen the region's debt crisis.

Rating agency Standard & Poor's downgraded nine of the euro zone's 17 countries on Friday, with France and Austria losing their top-notch status, and said it would decide shortly whether to cut the euro zone's bailout fund from triple-A.

Adding to jitters, talks have stalled over a Greek bailout, putting Athens under strong pressure to complete a deal with private creditors to cut debt to more sustainable levels or risk default in March when 14.5 billion euros in repayments fall due.

I see very little upside for the euro in the coming weeks. There are still too many negatives and too many uncertainties, said Niels Christensen, currency strategist at Nordea in Copenhagen.

All the signals from S&P were that the crisis will get worse before it gets better and I struggle to find an argument for not being short of euro/dollar at the moment.

The euro dipped 0.2 percent to $1.2657 in early trade, near a 17-month low of $1.2624 hit last week, and well below an intraday high of $1.2879 that had been hit on Friday. Sentiment had improved last week after Madrid and Rome found investor support for their first debt sales of 2012.

The FTSEurofirst 300 <.FTEU3> index of top European shares was down 0.5 percent at 1,013.17 points. The broader MSCI world equity index <.MIWD00000PUS> fell around 0.3 percent after shares in Asia fell more than 1 percent in reaction to the S&P downgrades <.MIAPJ0000PUS>. U.S. markets are closed for a holiday on Monday.

A one-notch downgrade for France was completely priced in, so no negative surprise here, and quite logical after the United States got downgraded. But the question now is: how will this affect the EFSF rating?, said David Thebault, head of quantitative sales trading, at Global Equities.

GERMAN BONDS GAIN

Germany retained its top-grade rating, despite S&P warning last month it could be cut by one notch, which helped its safe haven bonds gain in price and is likely to widen the gap between its yields and those of riskier euro zone nations.

Bund futures were 9 ticks lower on the day at a session low of 139.85, having hit a record high of 140.23 on Friday. Ten-year cash yields were little changed at 1.773 percent.

Italian bond yields meanwhile were moving higher and yielding around 6.78 percent.

Investors will be on alert for European Central Bank forays into the secondary market, with the perception of its commitment to keep borrowing costs for Italy and Spain affordable seen as key to prevent a fast escalation of the crisis.

Italy takes a break from supply this week, but France will attempt to sell up to 8 billion euros of debt on Thursday and Spain comes to the market with sales of 2016, 2019 and 2022 bonds..

Worries that European financial troubles would and drag down global growth and sap appetite for commodities weighed on industrial metals such as copper, while a shift to perceived safe haven assets also boosted Japanese government bonds.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Euro-zone sovereign ratings: http://r.reuters.com/maf75s

Regional equity risk premium:http://link.reuters.com/mum95s

Real earnings vs trend: http://link.reuters.com/caq95s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

(Additional reporting by Jessica Mortimer and Blaise Robinson; Editing by Catherine Evans)

Germany