TOKYO (Reuters) - Asian shares retreated from near 17-month highs on Thursday and commodities fell as negotiations to avert a U.S. fiscal crunch turned to personal taunts, putting at risk a timely solution as well as the health of the world's largest economy.
European shares will likely follow suit, with financial spreadbetters predicting London's FTSE 100 <.FTSE>, Paris's CAC-40 <.FCHI> and Frankfurt's DAX <.GDAXI> will open down as much as 0.4 percent. A weak Wall Street start was suggested by a 0.4 percent drop in U.S. stock futures. <.L><.EU><.N>
The yen firmed against the dollar and the euro in a kneejerk reaction as the Bank of Japan eased monetary policy on cue, expanding its asset-buying and lending programme by 10 trillion yen under intensifying pressure from incoming premier Shinzo Abe to confront chronic deflation.
Sentiment turned cautious towards risk assets in general, hurting commodities and commodity-linked currencies while keeping gold barely above its 3-1/2-month low hit earlier in the week. The dollar edged up 0.1 percent against a basket of major currencies <.DXY>.
"Negotiations are (not progressing) which is probably why we're seeing a sell-off today and the risk sentiment coming off," said Natalie Rampono, a commodities analyst at ANZ in Melbourne. "The markets are being directed by sentiment from the U.S. fiscal cliff talks and so that will have the biggest influence on prices at the moment."
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> eased 0.4 percent but held near its highest in nearly 17 months, tracking global stocks which retreated from 17-month peaks on Wednesday on U.S. budget concerns.
Hong Kong shares <.HSI> also fell 0.5 percent after hitting a near 17-month high the day before.
But Australian shares <.AXJO> defied the general bearish trend to add 0.4 percent to a 17-month high and Seoul shares <.KS11> ended up 0.3 percent on speculation conservative Park Geun-hye's victory in the presidential election would pave the way for fresh stimulus measures from the government.
The conflict over the stalled fiscal cliff talks grew heated Wednesday and threatened to become even more so Thursday when the action is expected to shift for the first time to the floor of the U.S. House of Representatives.
"If this discussion continues to go as it has gone today (Wednesday), watch for more selling off as hopelessness begins to take hold for many investors across all asset classes," said Neal Gilbert, market strategist at GFT Forex, in a note to clients.
The Nikkei stock average <.N225> ended down 1.2 percent on profit taking after closing Wednesday up 2.4 percent and above the key 10,000 level for the first time since April, as earnings prospects for exporters improved on the weak yen trend which gained momentum with mounting expectations for more monetary easing. <.T>
The dollar extended losses to fall 0.6 percent to 83.93 yen after the BOJ's decision from around 84.20 before the announcement. It hit a 20-month high of 84.62 yen on Wednesday.
The euro slid 0.6 percent against the yen to 110.94 yen, sharply retreating from a 16-month high of 112.59 yen reached on Wednesday.
On top of expanding stimulus for the third time in the past four months, the BOJ also said it would review its guidelines for medium- and long-term price stability at its next policy-setting meeting in January. The current range is zero to 2 percent consumer inflation.
Traders said the yen's firmness was likely due to position adjustments before the year-end holidays after the big event, the last BOJ meeting for 2012, and likely to be short-lived.
"Market consensus is that the BOJ will have no choice but to strengthen its accommodative stance, and expectations for easing will remain intact," said Masashi Murata, senior forex strategist at Brown Brothers Harriman in Tokyo. "The dollar/yen was choppy but it is likely that 84 yen level will prove to be a new support line," he said.
The euro inched down 0.1 percent to $1.3213, slipping from a 8-1/2-month high of $1.33085 hit on Wednesday after an Ifo Institute survey showed German business sentiment improving in December at its fastest rate in 2-1/2 years, boosting hopes Europe's largest economy will bounce back quickly after a weak end to 2012.
Data from the Investment Company Institute, a U.S. mutual fund trade organisation, on Wednesday showed investors in U.S.-based mutual funds pulled $8.48 billion from equity funds for the week ended December 12, reflecting nervousness caused by the uncertainty over the U.S. fiscal cliff.
U.S. crude fell 0.5 percent to $89.53 a barrel and Brent fell 0.5 percent to $109.83.
London copper was down 0.6 percent to $7,879 a tonne.
Gold has fallen prey to funds taking profits before the year-end book-closing but having held above a key technical level, the metal's downside may be limited.
Spot gold steadied around $1,667 an ounce, above a 3-1/2-month low of $1,661.01 hit on Tuesday and its 200-day moving average.
Lackluster equities slowed trading in Asian credit markets, widening the spreads on the iTraxx Asia ex-Japan investment-grade index by 1 basis point.
(Additional reporting by Jessica Jaganathan in Singapore and Takahiko Wada in Tokyo; Editing by Eric Meijer)
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