LONDON (Reuters) - The euro slid on Wednesday as investors were disappointed over delays to fine-tuning a euro zone bailout fund, while bonds rallied as Portugal scrambled to approve tough budget cuts.
On the equity markets, renewed concern about the euro zone debt crisis undermined European banking stocks while S&P 500 futures were down 0.1 percent, indicating a weaker start on Wall Street.
Uncertainty over the longer-term impact of Japan's earthquake, tsunami and nuclear crisis boosted perceived safe havens such as gold, government bonds and the Swiss franc. The yen was steady but traders were wary of possible renewed intervention to keep the Japanese currency in check.
The premium investors demand to hold Portuguese debt rather than benchmark German bonds rose for a third day. The cost of insuring the country's 5-year debt against default hit two-month highs, reflecting the growing belief that Lisbon will follow Greece and Ireland in seeking emergency funding if parliament rejects a new series of austerity measures.
Prime Minister Jose Socrates has threatened to resign if the package is rejected in a vote on Wednesday, meaning his minority Socialist government could collapse a day before a key European summit.
"If these measures are not agreed, it seems more and more likely that Portugal will need some kind of support," said Charles Diebel, head of market strategy at Lloyds Bank.
"Is this already reflected in the price? To a large degree, yes it is, but there are also good causes for concern that this is not going to stop here."
Any hopes that this week's European summit would yield a decision on how to increase the effective capacity of the euro zone bailout fund were dashed after the release of a draft document prepared for the meeting.
Portugal's political crisis has knocked the euro from its recent 4-1/2 month highs against the dollar, although the slide is expected to be temporary, given the expectation for the European Central Bank to raise interest rates next month.
Five-year Portuguese credit default swaps (CDS) rose 8 basis points to 538 basis points, their highest since January 11, according to data monitor Markit.
YEN HOLDS STEADY
With the gap widening between peripheral euro zone yields and German yields, the euro fell 0.1 percent against the dollar to $1.41184 and 0.3 percent against the yen.
"Euro/dollar will be sensitive to news coming from Portugal and the rising possibility that Prime Minister Socrates is forced to resign," said Roberto Mialich, currency strategist at Unicredit in Milan.
"This will put the debt crisis story back under the spotlight, the day before the EU leaders meeting tomorrow. But (a likely) ECB rate hike in April should contain the negative news for the euro," he said, adding that the euro is unlikely to go any lower than $1.4050.
The yen held steady, hugging a tight range close to 81 per dollar, yet traders were wary that the Bank of Japan might step in again if the dollar fell below 80.50, following Friday's rare market intervention by major central banks to curb Japan's currency.
European shares pared gains after the draft conclusions to the EU summit showed leaders would not decide on how to strengthen the euro zone bailout fund until June. That pushed down banking stocks such as Bank of Ireland (BKIR.I), Societe Generale (SOGN.PA) and Santander (SAN.MC), leaving the FTSEurofirst 300 .FTEU3 flat.
The MSCI All-Country World index .MIWD00000PUS fell 0.2 percent, and remains more than 3.5 percent below February's 2-1/2 year highs.
Underlining the continuing risks in Japan, authorities advised against allowing infants to drink tap water in Tokyo due to raised radiation levels, and the United States became the first nation to block some food imports from Japan.
Oil prices retreated slightly but were expected to remain strong as violence in Libya and unrest in Yemen, which neighbors top producer Saudi Arabia, fueled worries of supply disruptions.
"While this transition is going on, it can only threaten oil supplies and increase uncertainty - both things that will keep oil prices strong," Christopher Bellew with Bache Commodities said. Brent crude was down 0.1 percent at $115.53 a barrel.
Spot gold was up 0.2 percent at $1,432.12 an ounce.
(Additional reporting by William James, Ikuko Kurahone and Jamie McGeever in London; Editing by Susan Fenton)
