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LONDON (Reuters) - The euro and stocks stabilized on Monday after last week's sell-offs, but worries over Europe's banks and caution ahead of Italian and Spanish debt sales this week left riskier assets vulnerable to further losses.
U.S. stock index futures also pointed to a mixed open for equities on Wall Street on Monday.
Attention was focused on a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy later today, which is likely to keep pressure on the euro although market expectations of any new announcements are low.
"We would be surprised if we saw concrete proof of fundamental progress towards a solution today (at the Merkel/Sarkozy meeting)," Investec chief economist Philip Shaw said.
In positive economic news, German exports jumped in November, data showed on Monday, suggesting fourth quarter gross domestic product for Europe's bulwark economy may be stronger than expected, though its industrial output that month was subdued.
This follows Friday's jobs data in the U.S. which saw the jobless rate down to its lowest level in almost three years.
The euro, which fell to a 16-month low in Asian trade of $1.2666, recovered to be up around 0.5 percent at about $1.2760 in volatile trade as traders covered short positions.
In a sign of the investor nervousness, Germany was able to sell 3.9 billion euros of six-month treasury bills with a negative yield - the first time this has happened at an auction. Effectively, this meant buyers of the bills preferred to pay the German government to keep their money rather than receive interest.
Overnight deposits at the European Central Bank by commercial banks also hit a new record high of 464 billion euros, data showed, and traders said they could reach half a trillion euros by next week.
High deposits indicate banks prefer the safety of the central bank for their funds to higher rates they could get by lending to each other. The liquidity is also depressing rates in the inter-bank market.
Banks are awash with cash after taking an unprecedented 489 billion euros in the ECB's first-ever three-year liquidity operation late last month, and are mulling what to do with the money in the longer term.
The FTSEurofirst 300 .FTEU3 index of top European shares eased about 0.03 percent in choppy trading to be at 1,010.69 points, after rising 1.2 percent in the first week of 2012.
The MSCI world equity index .MIWD00000PUS held onto a slight gain of just 0.03 percent despite a weaker session on Asian markets.
Traders said some optimism about the imminent fourth-quarter U.S. earnings season was supporting equity markets. Banking heavyweight JP Morgan (JPM.N) is among those reporting later in the week.
In the debt market Italian and Spanish 10-year government bond yield spreads over German safe-haven benchmarks also narrowed on Monday with the market taking a breather after a surge in the two countries' borrowing costs last week.
A busy week of government bond issuance features triple-A issuers Germany, Netherlands and Austria, but most interest will be on sales by Spain and Italy on Thursday and Friday.
"The main focus is still the Italian and Spanish supply. While we've got that lurking over us I think the market is likely to still be a little bit wary," said Eric Wand, strategist at Lloyds Bank in London.
Italian 10-year paper yielded around 7.13 percent, firmly above the 7.0 percent level widely seen as unsustainable. Spanish equivalent bonds were at 5.74 percent.
Debt tensions took the shine off the improving economic picture, with a German magazine reporting on Saturday the International Monetary Fund was losing confidence in Greece's ability to clean up its public finances.
Also, an adviser to Germany's finance minister told a Greek newspaper a 50 percent writedown on Greek debt holdings - a key part of Greece's debt swap deal - was not enough to put the country's huge debt on a viable footing.
Germany's Merkel and International Monetary Fund chief Christine Lagarde also meet later on Monday and the German leader meets Italian Prime Minister Mario Monti on Wednesday.
Underscoring the bearish view on the euro, currency speculators boosted short positions in the currency to record levels in the week ended January 3, data from the Commodity Futures Trading Commission showed on Friday.
Investors also remained concerned about Hungary after Fitch downgraded the country's sovereign debt to "junk" status with a negative outlook, suggesting the investment climate was not going to get any better.
A stronger dollar tends to weigh on commodities that are priced in the currency, and both precious and industrial metals lost ground.
Copper slipped around 0.65 percent to $7,528.50 a tonne, while gold was little changed at around $1,620 an ounce.
German trade balance: link.reuters.com/wut34s</A1 >
U.S. payrolls: link.reuters.com/qyn85s
The euro zone crisis: r.reuters.com/xyt94s
Additional reporting by William James and Neal Armstrong; Editing by Stephen Nisbet