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MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 0.4 percent on Friday, hovering near a seven-week low hit the day before. Japan's Nikkei .N225 opened down 0.3 percent on Friday, hitting a fresh two-and-a-half-year low, but was later trading flat.

European shares fell for the sixth consecutive session in low volume on Thursday while Wall Street was shut for the Thanksgiving holiday.

With European policymakers struggling to break out of the deadlock and no convincing progress in sight over the euro zone debt crisis, investors were shunning riskier assets and selling assets normally perceived as safe to raise cash or cover losses.

France and Germany agreed on Thursday to stop bickering openly over whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis, while expressing their backing for Italian Prime Minister Mario Monti in his task of overcoming the country's massive debt burden.

French President Nicolas Sarkozy also said Paris and Berlin would circulate joint proposals before a December 9 European Union summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.

But with market seeking actions rather than rhetoric, sentiment remained highly risk-averse as Germany stood firmly opposed to the creation of joint euro zone bonds or boosting the ECB's role in solving the fiscal problems of individual euro zone members.

"Disappointment that officials continue to tinker with the trivial rather than consider the bold pushed risk appetites lower and increased the downside risks to the outlook for the European sovereign debt crisis," said Besa Deda, chief economist at St. George Bank in Sydney.

Funding stresses for European banks escalated, with the cost of swapping euros into dollars in the currency swap market rising to fresh three-year highs of 148 basis points on Thursday.

The ECB is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy, people familiar with the matter say.

The euro hovered near a seven-week low against the dollar on Friday, trading at $1.3329, not far from Thursday's low of $1.3316.

Commodity currencies, a gauge of risk-taking, struggled, with the Australian dollar down 0.2 percent to $0.9705 and not far from a seven-week low of $0.9664 set earlier in the week.

A day after weak demand for a German bond auction shocked global markets and fueled fears the crisis may be hurting Europe's economic powerhouse, the closely-watched German Ifo business climate index on Thursday bucked expectations and showed a rise for November for the first time since June.

German government borrowing costs stayed elevated, with 10-year German government bond yields rising as high as 2.14 percent on Thursday to their highest in nearly a month.

The premium investors demand to hold Portuguese government bonds over German Bunds rose on Thursday after Fitch downgraded Portugal's rating to junk status.

Sentiment was cautious in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index little changed on Friday.

Japanese government bonds fell, with the benchmark 10-year yield rising 2 basis points to 1 percent. Spot gold fell 0.1 percent to $1,692.20 an ounce, after falling to a one-month low of $1,665.88 earlier this week.

(Additional reporting by Ian Chua in Sydney)

The telecommunications group and T-Mobile owner Deutsche Telekom, said they would continue to pursue anti-trust approval for the $39 billion takeover from the U.S. Department of Justice, but withdrew for now applications to the industry regulator.

"AT&T Inc and Deutsche Telekom AG are continuing to pursue the sale of Deutsche Telekom's U.S. wireless assets to AT&T," they said in a statement on Thursday, the Thanksgiving Day holiday in the United States.

AT&T declined to comment on the timing of the announcement beyond the statement.

Both the DOJ and telecoms watchdog the Federal Communications Commission oppose the deal, which would reduce the number of national mobile carriers to three while consumers are struggling to make ends meet and unemployment rises.

FCC approval would be meaningless if the DOJ blocked the transaction, and AT&T and Deutsche Telekom said they would return to the FCC process if they secured approval from the DOJ.

Analysts said the merger, badly needed by sub-scale T-Mobile USA -- the smallest of the four U.S. mobile operators -- looked less likely than ever to succeed.

Espirito Santo analysts said AT&T's decision to take the $4 billion charge this quarter showed the company's own assessment of the chances of success had fallen, causing its auditors to force the company to take the hit now.

"It tells us something about timing too -- suggesting that AT&T may decide to walk away at the first opportunity (March 20, 2012) rather than waiting for the ultimate September 20, 2012 deadline," they wrote in a note to clients.

Deutsche Telekom shares were up 0.4 percent at 8.70 euros by afternoon.

JOB SITUATION

Thursday's decision follows a blow earlier this week when the FCC said it would try to send the deal to an administrative law judge for review.

The FCC said the merger would result in a massive loss of U.S. jobs and investment, and significantly diminish competition, while the DOJ said it would lead to higher wireless prices for consumers and businesses.

The DOJ has gone to court to block the deal and a trial in that case is due to begin on February 13. Any administrative hearing at the FCC, which is charged with evaluating the public-interest merits of the proposal, would begin after the anti-trust trial.

AllianceBernstein analysts said in a note that a pretrial settlement with the DOJ was not a "likely" prospect.

U.S. consumer spending growth slowed last month and business capital investment plans were weak, although first-time claims for jobless benefits remained in a range that hinted at improving labor-market conditions.

AT&T has 260,000 employees, mostly in the United States. Deutsche Telekom employs 36,000 at its U.S. unit.

AT&T argued that the T-Mobile merger could actually create tens of thousands of jobs during integration and network upgrades, and has pledged to bring back 5,000 jobs that it moved overseas -- but many observers are skeptical.

"I don't believe there's any politician in America who's interested in being associated with something that has a negative impact on the job situation in America," Denmark-based telecoms consultant John Strand of Strand Consult, told Reuters.

NO "PLAN B"

Acquiring T-Mobile would vault No. 2-ranked AT&T into the leading position in the U.S. wireless market, overtaking Verizon Wireless, a venture of Verizon Communications Inc and Vodafone Group Plc.

It would also solve a years-long problem for Deutsche Telekom, whose U.S. unit has long ceased being a source of growth and is in urgent need of investment.

Credit rating agency Moody's said it believed Deutsche Telekom would rather exit the U.S. market than go it alone.

"The options open to Deutsche Telekom if it were to stay in the U.S. market are much less palatable than if it were to exit," wrote Carlos Winzer, senior vice president at Moody's.

However, the ratings agency believes that Deutsche Telekom will fight aggressively alongside AT&T to salvage the sale process to improve its weak position in the United States.

A failure would throw Deutsche Telekom Chief Executive Rene Obermann's strategy into disarray and may force him to throw money at a business he thought he was rid of. Company officials have said there is no "Plan B".

The company faces a long delay at best and may be driven back into the arms of No. 3 U.S. carrier Sprint Nextel -- a less suitable partner for whom T-Mobile USA would not be worth nearly as much now as it was to AT&T in March.

A break-up fee of up to $6 billion, including some spectrum and roaming access, would provide some consolation and could allow Deutsche Telekom to sell the U.S. unit at a discount, Strand said.

Telecoms consultant Fred Huet of Greenwich Consulting said T-Mobile USA would immediately need to find ways to cut costs. "They need to find some way of sharing cost across operators," he told Reuters. "They need to have a better cost base, otherwise they're going to be in real trouble soon."

(Additional reporting by Chris Steitz and Maria Sheahan in Frankfurt and Phil Wahba in New York; Editing by Chris Wickham and Maureen Bavdek)

French officials hope Berlin will relent in its opposition to a greater crisis-fighting role for the ECB after Germany itself suffered a failed bond auction on Wednesday, highlighting how investors are now shunning even Europe's safest haven.

"There is urgency (for ECB intervention). We will talk about it today in Strasbourg," French Foreign Minister Alain Juppe said on France Inter radio, hours before the French, German and Italian leaders were due to meet in the eastern French city.

"I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence," Juppe said.

Sarkozy took a step toward Merkel this week by agreeing to amend the European Union's treaty to permit intrusive powers to change national budgets in euro area countries that go off the rails. But the German leader has so far maintained her line that the treaty forbids the ECB from acting as lender of last resort to buy euro zone bonds.

With contagion spreading fast, a majority of 20 leading economists polled by Reuters predicted that the euro zone was unlikely to survive the crisis in its current form, with some envisaging a "core" group that would exclude Greece.

In signs of public resistance to austerity in the currency area's troubled south, riot police clashed with workers at Greece's biggest power producer protesting against a new property tax, and Portuguese workers staged a one-day general strike.

Wednesday's auction, in which the German debt agency found no buyers for half of a 6 billion euro 10-year bond offering at a record low 2.0 percent interest rate, sent Bund futures down to their lowest level in nearly a month on Thursday as confidence in German debt continued to be shaken.

Bond investors are effectively on strike, interbank lending to euro area banks is freezing up, ever more banks are dependent on the ECB for funding, and depositors are withdrawing increasing amounts from southern European banks.

Investors are also unnerved by reports that Belgium is leaning on France to pay more into emergency support for failed lender Dexia under a 90-billion-euro ($120-billion) rescue deal that had appeared done and dusted.

A special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances, such as a new downturn in growth or support for banks, without endangering its triple-A credit status.

Merkel, Sarkozy and new Italian Prime Minister Mario Monti were also expected to discuss the reforms planned by Italy's new government of technocrats marking Rome's return to grace in Europe after the era of scandal-plagued former Italian prime minister Silvio Berlusconi, who resigned this month.

The German bond auction 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.

GERMAN EXPOSURE

Finance Minister Wolfgang Schaeuble's spokesman said the auction did not mean the government had refinancing problems and few on financial markets disagreed. Some analysts said Berlin just needed to offer a more attractive yield.

But it was a sign that, as the bloc's paymaster, Germany may face creeping pressure as the crisis continues to deepen. One senior ratings agency official said it could give Berlin cause to re-examine its refusal to embrace a broader solution.

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

Merkel showed no sign on Wednesday of bending to calls, most notably from France, to allow the ECB to act more decisively.

In a forceful speech to the Bundestag, the lower house of the German parliament, she warned against fiddling with the 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."

Merkel has said the EU treaty bars the ECB from acting as a lender of last resort and printing money to buy government debt. She rejected joint "euro bonds," dismissed a proposal to mutualise the euro zone's debt stock, and rebuffed attempts to allow the bloc's rescue fund to borrow from the ECB or the IMF.

Yet at the same time, she has declared that the only answer to the crisis was "more Europe" and won endorsement from her party to press for a fully fledged European political union based around the euro zone.

The borrowing costs of almost all euro zone states, even those previously seen as safe such as France, Austria and the Netherlands, have spiked in the last two weeks as panicky investors dumped paper no longer seen as risk-free.

"Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.

The crux of an acceleration of the crisis in the past month is Italian bond yields' jump to levels around 7 percent widely seen as unbearable in the long term, despite intervention by the European Central Bank to buy limited quantities.

STABILITY BOND

Bank of England policymaker David Miles said in an interview broadcast on ITV late on Wednesday there is a risk that one of the euro zone's 17 member states could leave the currency bloc.

"I don't think any of us can feel confident one way or another about whether all the countries that are currently in the euro zone will still be in it," he said.

In a Reuters poll conducted over the last 10 days, 14 out of 20 prominent academics, former policymakers and independent thinkers agreed the euro zone's make-up would change.

A new "core" euro zone with fewer members received qualified backing from 10 economists as a possible solution, with seven of them saying Greece should be excluded from it.

"The euro zone can and should survive, but it will not survive on the current trajectory," said Jeffrey Sachs, Director of the Earth Institute at Columbia University in New York.

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.

European Commission President Jose Manuel Barroso unveiled proposals for much more intrusive oversight of euro zone countries' budgets and efforts to meet macroeconomic targets, and set out the options for introducing common euro zone bonds.

(Reporting by Stephen Brown, Noah Barkin, Natalia Drozdiak, Veronica Ek, Eva Kuehnen; Writing by Paul Taylor, editing by Mike Peacock)