Silver tumbled before finding a footing on Tuesday, dragging prices of gold and oil with it and subduing European shares, although investors were wary of taking strong positions ahead of a U.S. Federal Reserve policy meeting.

Spot silver prices exploded on Monday, soaring to within 17 cents of a 1980 record high as options sellers bought when key strike levels at $45 and $50 came under threat of exercise.

U.S. silver futures tumbled as much as 5.4 percent to $44.61 an ounce on Tuesday, before clawing back some lost ground to $46 by 0745 GMT.

The drop in silver, triggered by an options expiry later in the day, spread to gold and oil. U.S. crude futures shed more than a $1 after Saudi Aramco's chief executive said the kingdom was not comfortable with current oil prices.

Spot gold fell 0.6 percent to $1,499.60 an ounce, after a seven-day record-setting rally that pushed prices to $1,518.10 on Monday.

The impact from falling metals also spread to European shares <.FTEU3>, with mining companies taking a modest hit.

After a four-day Easter break, the FTSEurofirst 300 index of top European shares was up 0.2 percent at 1,145.24. Traders said risk appetite was shriveling ahead of a Federal Reserve meeting eyed for signs on the future of its ultra-loose monetary policy.

There are concerns that the Fed's loose monetary policy is going to lead to inflation. Investors are cautious ahead of the meeting, said Koen De Leus, strategist at KBC Securities, in Brussels.

Japan's Nikkei average <.N225> closed at a one-week low, losing 1.2 percent as exporters were hit by a stronger yen.

World stocks as measured by the MSCI All-Country World Index <.MIWD00000PUS> were barely changed at 350.30.

FED FOCUS

Investors are already transfixed by the Federal Reserve's meeting, which kicks off later on Tuesday, particularly since after its decision on Wednesday Ben Bernanke will give the first scheduled news briefing by a Fed chief in the bank's 97-year history.

The euro recovered against the dollar, helped by demand from sovereign investors, with expectations the Fed will keep policy accommodative likely to see it hover near recent peaks.

The euro was up 0.1 percent at $1.4595, not far from a 16-month high of $1.4649 hit last week. It gained from a session low of around $1.4494 on steady buying by Middle East investors and Asian central banks, traders said.

Any rise in the dollar is a good opportunity to sell it since it should remain weak unless the Fed signals it wants to tighten monetary policy, said Adam Myers, senior forex strategist at Credit Agricole. We do not see Bernanke doing that tomorrow.

While the Fed is still in the process of buying bonds with newly-printed money and not expected to tighten policy soon, the European Central Bank raised rates from a record low to 1.25 percent earlier this month and is expected to repeat the move before long.

Europe's single currency also remains prey to developments in the bloc's debt crisis.

Investors will watch Spain's sale of three- and six-month Treasury bills for signs of weakness after peripheral debt came under pressure across the board last week on growing talk that Greece would restructure its public debt.

The contagion effect we saw last week is, I think, going to be short-lived. Spain should be treated differently to the other three peripherals (Greece, Ireland and Portugal), said Nick Stamenkovic, strategist at RIA Capital Markets.

But the market is still very nervous about Greece so it's still very difficult to see any significant decline in yields there any time soon.

The premium investors demand to hold Greek government bonds rather than benchmark German Bunds rose to a new euro-era high as investors continued to price in a restructuring of its debt.

Greek credit default swaps also rose sharply to 1,340 bps, up 37 bps versus Monday's New York closing level.

(Editing by Patrick Graham)

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