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LONDON (Reuters) - European shares fell and the euro eased to a 3-week low on Thursday as a delay in deciding on a crucial bailout for Greece unnerved investors and halted the rally for riskier assets like equities that has marked the start of 2012.
U.S. stock index futures also pointed to a lower open with the warning by ratings agency Moody's of a possible downgrade of several major Wall St banks adding to the worries over Greece.
Moody's said it may cut the credit ratings of 17 global and 114 European financial institutions in another sign the impact of the euro zone debt crisis was spreading. Among the banks listed were Morgan Stanley (MS.N), Goldman Sachs Group Inc (GS.N) and Bank of America Corp (BAC.N).
But it was fear that time is running out for Greece to avoid a potentially chaotic default that weighed on most markets, sending riskier assets like shares and commodities lower and lifting the U.S. dollar
Greece has said it must initiate a debt swap with its private bondholders by Friday to meet a March 20 deadline to repay 14.5 billion euros in debt.
Even if a deal is agreed on Monday, several sources have told Reuters euro zone finance officials are examining ways of delaying part or possibly all of the second bailout program, while still avoiding a disorderly default.
The market's confidence that negotiations would reach a successful conclusion has been undermined by growing public acrimony between Athens and its euro zone partners, led by Germany.
"Let's hope that this is sort of the final death throes of the negotiations and that the deal is about to be done," said Chris Turner, Head of FX Strategy at ING.
Turner said if no deal emerges by Monday the euro could test its mid-January lows, which were around $1.2625.
On Thursday the euro fell 0.5 percent to $1.2997 after hitting a session low of $1.2983, its weakest level since January 25.
"The market is probably pricing in a better than evens probability that a near-term deal will be reached on Greece and avoid a messy default, which suggests there are more risks to the downside for the euro if there is no deal on Monday," said Adam Cole, global head of currency strategy at RBC.
Investors moved into U.S. dollars seeking safety, pushing the dollar index .DXY to a three-week high of 80.078 before it settled some 0.5 percent higher around 80. The greenback also rose to a 3-1/2 month high of 78.79 yen.
European share markets retreated from Wednesday's six month highs as the Greek deal delay encouraged some investors to take profits, although a warning by Moody's that its downgrades may also affect 114 European financial institutions also hit sentiment.
The FTSEurofirst index of top European companies .FTEU3 opened down 0.6 percent at 1,068.56 points. After earlier falls in Asia, the MSCI world equity index .MIWD00000PUS was down 0.7 percent.
The deal's delay also sent Europe's main gauge of investor anxiety, the Euro STOXX 50 volatility index .V2TX or VSTOXX, up 4.3 percent to a one-month high.
The reverberations from the euro zone debt crisis and its impact on the global growth outlook continue to spread, with Sweden's central bank easing its monetary policy, citing the impact of the crisis on growth in the domestic economy.
In a widely expected move, the Riksbank cut its key interest rate by 25 basis points to 1.50 percent.
"The public-finance problems in the euro area in particular may become more serious and have more negative effects on the Swedish economy," the central bank said.
Since late December central banks in Europe, the United States, Britain and Japan have announced measures to effectively take a more supportive stance on policy, with the European Central Bank pumping nearly half a trillion euros into the banking system.
Swedish rates and inflation: link.reuters.com/jef24s
Euro zone debt crisis in graphics (package): r.reuters.com/hyb65p
China said on Thursday it was now working on detailed measures to support local exporters struggling to cope with weaker demand in major economies.
Debt markets have reflected the worries over the delays in the Greek deal by sending safe-haven German government bond yields down and those on the riskier debt of Spain and Italy up.
Spanish 10-year yields rose 4 basis points to 5.5 percent, the highest in a month, while equivalent Italian yields were up 9 basis points to 5.84 percent.
However, Spain found solid demand from euro zone banks flush with cheap ECB cash for its sale of 4.07 billion euros in new bonds. France also sold 8.45 billion euros of fresh debt to good demand.
In commodity markets the delay in the Greek deal sent copper to a three-week low, and spot gold prices down 0.5 percent to $1,718.19 an ounce.
The Brent crude oil price drifted down to around $119 a barrel but its fall were fall was limited by worries about supply disruptions from the Middle East and concerns over Iran's nuclear program.
Additional reporting by Jessica Mortimer; Editing by Ruth Pitchford