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Stocks elsewhere in Asia failed to sustain a rebound from sharp falls in the previous session, but European shares were expected to eke out small gains.

Financial bookmakers predicted Europe's major indexes in London, Frankfurt, and Paris would open 0.3-0.5 percent higher.

Oil and copper made modest rebounds from a sell-off on Wednesday, when weak data from Europe, the United States and China stoked fears the global economy may be heading for a recession that would dull demand for industrial commodities.

Germany's bond sale on Wednesday had one of the worst results since the launch of the euro, raising concern about the price Berlin may pay for its role as paymaster to a region racked by a crisis that has toppled governments in Greece and Italy.

"If Germany has to pay higher costs for its borrowing, it's obvious it cannot help the entire euro zone," said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.

"If German bond yields keep rising, that could even be a trigger for break-up of the euro."

Tokyo's Nikkei share average fell 1.8 percent to their lowest close since March 2009. Japanese markets were closed for a holiday on Wednesday, when other Asian markets had tumbled.

MSCI's broadest index of Asia Pacific shares outside Japan spent much of the trading day in positive territory before running out of steam.

The earlier gains had been partly driven by expectations that a slowdown in China will prompt Beijing to take monetary policy easing steps such as cutting banks' reserve requirement ratios, allowing them to lend more of their deposits.

"Anticipation of policy loosening in China after the bad flash PMI yesterday is spurring some short-covering," said Linus Yip, strategist with First Shanghai Securities in Hong Kong.

Wall Street shares fell more than 2 percent on Wednesday, and world stocks fell to a six-week low, on data showing slowing factory output in manufacturing titans China and Germany and weak consumer spending in top consumer the United States.

U.S. markets will be closed on Thursday for the Thanksgiving holiday.

GERMAN GLOOM

Germany's bond sale added to the gloom, knocking the euro down 1 percent. Depressed yields in Europe's last safe haven played a part, but analysts warned it also signaled a broader shunning of the region's financial system.

"The other part is that market makers don't want to have a position because of the very distressed nature of financial markets as a whole," said Marc Ostwald, strategist at Monument Securities. "There's certainly a partial element of 'they would rather not have euros' in there."

The single currency tottered to around $1.3360, up a bit less than 0.2 percent on Thursday, having fallen as low as $1.3318 in the previous session.

Against the yen it fell around 0.2 percent to a six-week low just below 103.0.

The inexorably widening euro zone crisis -- which has pushed up risk premiums for Spanish, French, Italian and Belgian government bonds -- is making it increasingly hard for European banks to access dollar funding in the money markets.

The stresses pushed dollar LIBOR rates, the benchmark for banks lending to each other, up for the 103rd straight session on Wednesday and has driven the cost of swapping euros into dollars to the most expensive levels since the global financial crisis in 2008.

In Asian credit markets, the Asia ex-Japan iTraxx investment grade index saw spreads widen around 10 basis points, reflecting heightened risk aversion.

U.S. crude oil rose 0.3 percent to around $96.60 a barrel, following on from a 2 percent slide on Wednesday, and Brent crude rose 0.6 percent to around $107.60.

London Metal Exchange copper rose 0.2 percent to around $7,250 a tonne, rebounding from a drop of more than 1 percent earlier in the session that had seen it fall to a one-month low around $7,100.

"The demand outlook is deteriorating," said David Thurtell, director of commodity research at Citigroup in Singapore.

"With so much sovereign debt uncertainty and with Western European austerity measures kicking in, copper is likely to trade in the $6,500 to $9,500 range over the period to end-2012."

(Additional reporting by Hideyuki Sano in Tokyo, Ian Chua in Sydney, Manolo Serapio Jr in Singapore and Umesh Desai of IFR in Hong Kong; Editing by Kim Coghill)

A weak German bond sale sparked fears the debt crisis was even beginning to threaten Berlin, with the leaders of France and Germany still at odds over a longer-term structural solution.

The poor demand for German government bonds showed that investors viewed investing in the euro zone as being too risky.

Debt problems plaguing Europe and the United States have pressured markets, knocking the S&P 500 down more than 7 percent over the last six sessions. World stocks hit their lowest in six weeks on Wednesday.

"A poor auction of German bonds added to recent worries that the risks from the debt mess are spreading to the core of the euro zone," said WhatsTrading.com options strategist Frederick Ruffy.

All 10 S&P 500 sectors were negative, with financials among the biggest decliners over concerns about exposure to European debt. JPMorgan Chase & Co (JPM.N) dropped 3.5 percent to $28.38 and Citigroup Inc (C.N) lost 3.9 percent to $23.51.

Economically sensitive stocks such as energy and commodity-related issues also slid. The PHLX oil service sector index .OSX dropped 3.7 percent and the S&P materials sector .GSPM fell 2.8 percent. Schlumberger Ltd (SLB.N) lost 3.6 percent to $66.50 and DuPont and Co (DD.N) shed 2.9 percent to $44.08.

The Dow Jones industrial average .DJI sank 236.17 points, or 2.05 percent, to 11,257.55 at the close. The Standard & Poor's 500 Index .SPX dropped 26.25 points, or 2.21 percent, to 1,161.79. The Nasdaq Composite Index .IXIC lost 61.20 points, or 2.43 percent, to 2,460.08.

The S&P 500's six-day decline is the longest such streak since a seven-day slide that ended August 2.

Reflecting heightened fears in the market, the CBOE Volatility Index, or VIX .VIX, Wall Street's so-called fear gauge, jumped 6.3 percent.

Volume was light ahead of the U.S. Thanksgiving holiday, when markets are closed. About 6.9 billion shares changed hands on the New York Stock Exchange, NYSE Amex and Nasdaq, below the current daily average of 8 billion shares.

"There is no buying demand, but this does not mean that there is a really strong offer, either. It just means that we might be working off the 'oversold-ness' with this choppy action, 1160-1180 on the S&P," said Joseph Cusick, senior market analyst at OptionsXpress Holdings Inc in Chicago.

One of the few bright spots was Deere & Co (DE.N), which climbed 3.9 percent to $74.72 after quarterly earnings beat expectations and sales shot up 20 percent.

Adding to market worries, data showed Chinese manufacturing shrank the most in 32 months in November, intensifying concerns about a global economic slowdown. U.S. crude oil fell 1.8 percent on fears of reduced demand from China, the world's No. 2 economy.

U.S. data painted a mixed picture and showed little reason for optimism. New jobless claims rose last week and consumer spending barely increased in October, while another report showed new orders for durable goods, which include long-lasting manufactured items such as refrigerators, rose.

(Reporting by Angela Moon; Editing by Jan Paschal)

Financial markets were also unnerved by newspaper reports that Belgium may be pressing France for an expansion of a 90 billion euro ($120 billion) bailout of failed bank Dexia.

On top of this, a special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances like a new downturn in growth or support for banks without endangering its cherished AAA credit status.

After one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the euro fell and European shares sank to 7-week lows.

The Bundesbank was forced to retain almost half of a sale of 6 billion euros due to a shortage of bids by investors. The result pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.

One senior ratings agency official said the rise in its own borrowing costs could even give Germany a pause to re-examine its refusal to embrace a broader solution to resolve the debt crisis.

"It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions in Germany," David Beers of Standard & Poor's told an economic conference in Dublin.

The new bond promised to pay out a 2.0 percent interest rate -- the lowest ever on an issue of German 10-year Bunds. The average yield at the auction was 1.98 percent, down from 2.09 percent at the last sale of the previous benchmark in October.

Signs that European banks are increasingly shut out of credit markets and reliant on the European Central Bank for funding have added to pressure for the bloc's leaders to find a broad and lasting solution to the crisis.

But Germany and France clashed again over whether the ECB should take bolder steps to ease the pressure on debt markets in Italy, Spain and others which is now at the heart of the crisis.

ECB MANDATE "CANNOT BE CHANGED"

In a forceful speech to the Bundestag lower house of parliament, Chancellor Angela Merkel issued one of her starkest warnings yet against fiddling with the central bank's strict inflation-fighting mandate. She also hit back at proposals from the European Commission on joint euro zone bond issuance, calling them "extraordinarily inappropriate."

"The European currency union is based, and this was a precondition for the creation of the union, on a central bank that has sole responsibility for monetary policy. This is its mandate. It is pursuing this. And we all need to be very careful about criticizing the European Central Bank," Merkel said.

"I am firmly convinced that the mandate of the European Central Bank cannot, absolutely cannot, be changed."

Shortly before she began speaking, French Finance Minister Francois Baroin offered a polar opposite view on the ECB's role, telling a conference in Paris that it was the central bank's responsibility to sustain activity in the currency bloc.

"The best response to avoid contagion in countries like Spain and Italy is, from the French viewpoint, an intervention (or) the possibility of intervention or announcement of intervention by a lender of last resort, which would be the European Central Bank," Baroin said.

"EXTRAORDINARILY INAPPROPRIATE"

The very public jousting underscores just how divided European leaders are on how to resolve the turmoil which has accelerated to engulf big countries like Italy and Spain, and pushed out leaders in Rome and Athens.

Baroin pointed to market intervention by the U.S. Federal Reserve, Swiss National Bank and Bank of England as a model for the ECB. But Merkel said it was impossible to compare the role of the ECB, which sets monetary policy for 17 countries, with those of national central banks.

With time running out for politicians to forge a crisis plan that is seen as credible by the markets, the European Commission presented a study on Wednesday of joint euro zone bonds as a way to stabilize debt markets.

Some leading European politicians, including Luxembourg Prime Minister Jean-Claude Juncker, support the bonds. But Berlin has rejected them outright as a near-term solution to the crisis, saying they would raise Germany's borrowing costs and reduce incentives for other euro zone countries to get their fiscal houses in order.

In her speech, Merkel pointed to repeated violations of the EU's Stability and Growth Pact in the currency area's first decade, saying they had damaged market faith in the bloc's ability and willingness to crack down on fiscal rule-breakers.

"And this is why I find it extraordinarily inappropriate that the European Commission is suggesting various options for euro bonds today -- as if they were saying we can overcome the shortcomings of the currency union's structure by collectivizing debt. This is precisely what will not work," Merkel said.

MERKEL WARNS GREECE

The German leader also sent a clear warning to Antonis Samaras, the leader of conservative New Democracy in Greece, who has resisted pressure to join other political parties and make a written commitment to painful austerity measures.

Merkel said Greece would not receive an 8 billion euro aid tranche it needs to avert a default next month unless Samaras signed the pledge.

Merkel raised pressure on the bloc to finalize plans for a "leveraging" of its rescue fund and a recapitalization of vulnerable banks, saying guidelines were needed by the time European finance ministers meet on November 29-30.

"The fact that we have been talking about (bank recapitalizations) for weeks but still have no clarity is not very reassuring, and yesterday we saw with the example of one German bank how fragile the banks themselves are," Merkel said.

Shares in Germany's second-biggest lender, Commerzbank, tumbled on Tuesday after people close to the bank told Reuters it needs considerably more capital than previously expected to meet the core capital targets demanded by the EU by mid-2012.

(Reporting by Stephen Brown, Noah Barkin, Natalia Drozdiak, Veronica Ek, Eva Kuehnen; editing by Patrick Graham and Peter Millership)

European stocks were expected to follow suit and the euro slipped, hit by market talk based on a Belgian press report that the Franco-Belgian bailout of Dexia bank (DEXI.BR) -- the first casualty of the euro zone sovereign debt crisis -- was unraveling and could undermine France's AAA credit rating.

The dollar rose broadly and U.S. Treasury 10-year note futures climbed to a seven-week high as investors scurried for the relative safety of the U.S. currency.

The steep fall in the HSBC flash purchasing managers' index (PMI) to 48 in November, a low not seen since March 2009, from 51 in October underscored Beijing's growing alarm over the health of the global economy.

"Though a less-than-50 figure was expected, it suggested that China is no exception and is being hit by the euro crisis and global uncertainty," said Conita Hung, head of equity research at Delta Asia Financial Group.

"The worst is yet to come. Companies involved in shipping, exports and even banking and finance will be affected."

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 2.2 percent, with the materials .MIAPJMT00PUS and technology .MIAPJIT00PUS sectors leading losses.

Spreadbetters predicted the FTSE 100 .FTSE would open down as much as 1.3 percent, and called Germany's DAX .GDAXI down 1.3 percent and France's CAC-40 .FCHI down 1.7 percent. .EU

Australia's heavyweight miners suffered a double blow, buffeted first by the lower house of parliament approving plans to impose a 30 percent tax on the iron ore and coal sectors and then by the data from China, a key source of commodities demand.

BHP Billiton (BHP.AX) fell 3.1 percent and Rio Tinto (RIO.AX) dropped 3.4 percent. The Australian dollar, also sensitive to expectations of demand for commodities, also fell around 0.6 percent.

In South Korea, tech giant Samsung Electronics (005930.KS), a big exporter to troubled Western economies, shed 2.9 percent. Tokyo markets were closed for a holiday.

Market volumes were low, with the twin threats of a flagging U.S. economy and Europe's inexorably worsening sovereign debt crisis heightening risk aversion.

"If it gets much thinner, it's going to stop," said Martin Angel, a dealer at Patersons Securities in Perth.

DOWNWARD REVISION

U.S. stocks had fallen around 0.5 percent on Tuesday, their fifth successive losing session, after data showed the economy grew at a 2 percent annual rate in the third quarter, below the initial estimate of 2.5 percent. .N

S&P 500 futures traded in Asia fell 1.1 percent, with losses accelerating after the HSBC flash PMI, suggesting more falls to come on the last day of Wall Street trading before the Thanksgiving holiday.

The euro fell 0.3 percent to around $1.3460, while the dollar rose a similar percentage against a basket of major currencies .DXY as investors sought safety.

Underlining the demand for the dollar, the yield on 10-year U.S. Treasuries fell to around 1.922 percent, from around 1.9239 late in New York. <US/T>

Reaction to the Dexia report reversed earlier gains the single currency had made after the International Monetary Fund said it was beefing up its lending instruments to help shield some smaller countries from the euro zone debt crisis. <FRX/>

"It's all about France taking a larger stake in Dexia -- if they do they run the risk of a sovereign downgrade," said a U.S.-based currency trader.

The spreading crisis -- which has pushed up risk premiums for Spanish, French, Italian and Belgian government bonds -- is making it increasingly hard for European banks to access dollar funding in the money markets.

The stresses pushed dollar LIBOR rates, the benchmark for banks lending to each other, up for the 102nd straight session on Tuesday to double the level since July.

Euro/dollar cross currency swaps, which measure the cost of swapping euros into dollars, are at the most expensive levels since 2008.

U.S. crude oil fell more than $1 a barrel to $96.74 on fears that a slowing growth will reduce demand. <O/R>

Copper edged up 0.3 percent, but pared bigger gains from earlier in the session after the HSBC flash PMI.

Some commodities market players took solace from the view that the China data may prompt Beijing shift its policy focus from supporting selective parts of the economy to broader measures, such as reducing bank reserve requirements nationwide or providing fiscal stimulus.

"The short-term reaction will be negative, but China will probably start monetary easing measures that will be positive for commodities in the medium term," ANZ analyst Natalie Robertson said.

(Editing by Kavita Chandran)