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Italy, which has the euro zone's biggest debt pile in absolute terms, was hit by credit ratings agency Standard & Poor's decision on Saturday to cut its outlook to "negative" from "stable".

In an explanatory statement, S&P said it did not expect Rome to seek financial help from the EU or IMF due to the "absence of significant imbalances". The sheer size of its public debt effectively made it too big to bail out.

Government sources said Rome would bring forward to next month planned decrees to slice 35 to 40 billion euros ($50-$56 billion) off the budget deficit in 2013 and 2014, in an effort to reassure markets.

"We've kept things in order and the bases are all there for us to continue to do so," Economy Minister Giulio Tremonti said.

Fitch Ratings warned it may downgrade Belgium's AA+ credit rating if the caretaker government misses its deficit targets due to a lack of political consensus on a balanced budget. The country has not had a proper government since a general election last June but is enjoying an economic boom.

A weekend rout of Spain's ruling Socialists in regional and municipal elections raised fears of clashes over deficit curbs between central and local government as Madrid fights to avoid following Greece, Ireland and Portugal into a bailout.

The premiums charged by investors to hold Italian and Spanish 10-year bonds rather than safe-haven German bunds rose to their highest levels since January, at 186 and 261 basis points respectively, before easing slightly.

"The key point is that the crisis seems to be taking hold even of peripheral countries regarded as solid," said WestLB rate strategist Michael Leister.

"Sentiment is that there appears to be no end to it now Italy is being scrutinized by the ratings agencies."

The euro briefly fell below a key support level at $1.40, hitting a two-month low against the dollar. Similar concerns hit stocks, with the Milan exchange falling 3.3 percent and the broader FTSEurofirst 300 index losing 1.6 percent on the day.

The shared European currency has lost as much as 6.5 percent against the dollar over three weeks, mainly through debt worries and despite a favorable interest rate differential.

Indeed, investors are trimming their expectations of how aggressively the European Central Bank will raise rates as a result of spreading stress in the sovereign bond market, according to Euribor futures data.

NO SURRENDER

The Greek government launched a long-stalled privatization program and announced other deficit reduction measures in a drive to win disbursement of a crucial 12 billion euro EU/IMF aid tranche next month and cut its budget gap to 7.5 percent of gross domestic product this year.

Greece will sell its full stake in OTE telecoms immediately, and in Hellenic Postbank and the two main ports of Piraeus and Thessaloniki by the end of this year, raising up to 5.5 billion euros.

Earlier, stratospheric Greek debt yields rose still further, with 10-year bonds yielding more than 17 percent as investors worried about continued talk of "voluntary" debt reprofiling.

The Greek yields do not reflect Athens' real borrowing costs because the country is surviving on IMF/EU loans and trading in Greek bonds is thin, but they are a barometer of market anxiety about some form of restructuring.

"We are taking the necessary decisions to avoid the danger and to change the country," Prime Minister George Papandreou told the cabinet, according to a spokesman. "The battle goes on, and in this fight no cowardice is allowed."

Visiting inspectors from the European Commission, the European Central Bank and the International Monetary Fund are withholding judgment on Greece's compliance with its rescue program until they see progress on spending cuts, revenue increases and privatizations.

Among planned new belt-tightening measures were deeper cuts in public sector wages, more consumer tax increases and even the taboo issue of dismissing full-time civil servants.

Market sentiment has darkened due to public disputes among the IMF, the ECB and Jean-Claude Juncker, chairman of euro zone finance ministers, over whether some form of debt restructuring should be brought into the policy mix.

"CREDIT EVENT"?

The European Commission's top economic official, Olli Rehn, sought to play down talk by Juncker of a "soft restructuring" that scared markets after last week's Eurogroup meeting. Rehn said any relief from bondholders would be on a voluntary basis.

"A voluntary extension of loan maturities, so-called reprofiling or rescheduling on a voluntary basis, would also be examined on the condition that it would not create a credit event," Rehn told reporters.

Market experts say any attempt to modify debt maturities while avoiding a credit event that would trigger default insurance payouts and downgrades by ratings agencies would be likely to face legal challenge.

Austerity measures imposed under the IMF/EU bailouts or to avert a bailout are taking a high political toll on governments across Europe.

Spain's ruling Socialists suffered their worst election result since the restoration of democracy in 1978, slumping to 27 percent of the vote, 10 percentage points behind the conservative opposition Popular Party.

Italy's center-right government lost ground in local elections last week, and a weekend opinion poll in Greece showed that for the first time since Socialist Prime Minister George Papandreou took office in 2009, the center-right opposition New Democracy party has drawn level with the ruling Socialist party.

The unpopularity of rescuing euro zone debtors was reflected in another disastrous regional poll result for German Chancellor Angela Merkel's center-right coalition on Sunday.

Her Christian Democrats slumped to just 20 percent in Bremen, Germany's smallest federal state, while the liberal Free Democrats, junior partners in government, scored just 2.6 percent and lost their seats in the local assembly. (Additional reporting by Jeremy Gaunt and William James in London, Harry Papachristou and Dina Kyriakidou in Athens, Giuseppe Fonte and Stefano Bernabei in Rome, Judy Macinnes and Fiona Ortiz in Madrid, Peter Apps in London; Writing by Paul Taylor; Editing by Catherine Evans/Ruth Pitchford/Ron Askew)

Concerns lingered over possible debt restructuring in Greece and contagion for other euro zone countries after Fitch downgraded Greece's debt ratings on Friday and S&P cut the credit outlook for Italy to negative on Saturday.

Adding to the worries, Spain's ruling Socialists, reeling from losses in local elections, now face a balancing act between voter anger over sky-high unemployment and investor demands for strict austerity measures.

Commodity prices were pressured by a broad rise in the dollar, as appetite for riskier assets eased across the board.

On the economic front, the Chicago Fed national activity index for April is due at 8:30 a.m. EDT.

Campbell Soup CBP.N will release third-quarter results that are expected to show earnings per share (EPS) at $0.52 against $0.54 a year ago.

U.S. stocks fell on Friday on euro-zone debt worries, with retailers losing ground after a weak profit outlook from Gap.

U.S. retailer Wal-Mart Stores (WMT.N) is setting up a team in London to drive expansion into Europe, The Independent on Sunday newspaper reported.

Foxconn Technology Co Ltd (2354.TW) on Sunday confirmed that a third person has died following a large explosion at a plant in southwestern China on Friday that local media have linked to production of Apple's iPad 2.

In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares was down 1.5 percent at 1,118.66 points in early trade.

(Reporting by Harpreet Bhal; Editing by Will Waterman)

The euro came under renewed selling pressure after Fitch Ratings cut Greece's debt ratings by three notches on Friday, pushing the country deeper into junk, while rival Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday.

The stream of bad news coming out of the euro zone and the resultant weakening in U.S. stocks on Friday also took its toll on Asian stocks as waning investor appetite for risk, pushed the region's bourses into the red and sparking a rush into safe-haven assets like government debt.

"Sustained foreign selling following U.S. stocks' fall and caution about the global economic backdrop is weighing, and this is likely to continue until June," said Bae Sung-young, a market analyst at Hyundai Securities, adding the market still had relatively firm support at its 120-day moving average of 2,060 points.

Japan's Nikkei .N225 and Australia's benchmark index .AXJO fell more than 1 percent. Seoul shares .KS11 were down nearly two percent, led by declines in shares of Hyundai Motor (005380.KS) and Kia Motors (000270.KS) as a strike at one of their suppliers disrupted production.

Outside Japan, MSCI's index of Asia Pacific shares was down 1.7 percent after posting four consecutive weeks of declines.

The rush toward safe-haven assets helped 10-year U.S. Treasury notes build on Friday's gains. It was yielding 3.12 percent, down from 3.15 percent on late Friday.

EURO WOES WORSEN

The single currency breached support near 1.24 against the Swiss franc and hit a record low of 1.2345 francs on trading platform EBS but later trimmed its losses to stand at 1.2360.

Against the dollar, the euro slipped to $1.4095, having triggered some stop-loss selling near $1.4100. Some traders said the potential for further long liquidation suggested the euro could dip below that level in the near term.

The euro's worries seem to be far from over. Considerable net long positions in the single currency and a deteriorating technical picture along with a slew of bad news from the region may spell more losses for the euro, with the $1.35 handle eyed in the near term.

The euro's fortunes have turned around dramatically after hitting a peak of near $1.4940 in early May as investors have since swung from cheering the ECB's rate hikes to worrying about the impact of rising interest rates on peripheral countries.

"The prospect of ECB rate hikes is no longer sufficient reason to buy the single currency, and in fact it may become the case that rate hikes will be seen as EUR-negative should peripheral concerns intensify." Credit Agricole CIB strategists said in a daily note.

That sparked a safety bid toward the greenback with the dollar index .DXY - which measures its value against a basket of currencies - hovering near a six-week high of 76 hit last week and poised for more gains.

Still, chunky gains may be limited as the Fed nears the end of its quantitative easing program in June. Stocks, bonds, gold and the euro are expected to fall in the three months after the end of the $600 billion plan, according to a Reuters poll.

In the commodity markets, U.S. crude futures retreated further below $100 per barrel on expectations for lower oil demand from Europe as a volcanic eruption in Iceland threatens air travel.

Gold, which also benefited from the decreasing comfort with risky investments, extended gains to a two-week high.

CFO Masaru Kato will attend the briefing, the company said.

Sony is due to announce its full-year earnings on Thursday and its current forecast, issued before the March 11 earthquake, is for an annual operating profit of 200 billion yen ($2.4 billion).

An analysts' consensus, according to a SmartEstimate by Thomson Reuters I/B/E/S, is for a slightly lower operating profit of 197 billion yen. SmartEstimates place more weight on recent estimates by highly rated analysts.

The devastating earthquake and tsunami in March damaged Sony plants in northeastern Japan, snarled the supply chain and triggered a plunge in domestic consumption.

Many rival corporations, including Panasonic Corp, have yet to issue forecasts for the current financial year to March 2012, due to uncertainty following the disaster.

($1 = 81.710 Japanese Yen)

(Reporting by Isabel Reynolds; Editing by Michael Watson)

Pressure for a correction in the stock market has been building up in the past few weeks as the euro and oil prices fell in tandem, knocking down shares of energy companies and dollar-sensitive multinationals.

Still, investors have averted a broad sell-off by diving into shares of companies that are less vulnerable to the economic cycle, including well-known defensive sectors such as utilities and household products, but also large-cap companies with steady earnings performance.

That strategy may hold the market afloat for a little longer. But with the end of the Federal Reserve's easy money policies just around the corner, investors are becoming more sensitive to risk in general.

"There is good reason for a pause, there is good reason to be conservative in here, and there is good reason to raise some cash ahead of a summer correction and a better buying opportunity," said Richard Ross, global technical strategist with Auerbach Grayson in New York.

The sharp sell-off in commodities markets earlier this month was seen by many as the first warning sign of a coming market correction. The U.S. dollar has been strengthening since then, in another sign that appetite for risk is dwindling.

Next month's end of the Fed's massive bond-buying program, also known as quantitative easing, is expected to knock down the value of stocks, commodities and the euro, a recent Reuters poll of 64 analysts and fund managers found.

CONSUMER STAPLES BACK IN STYLE

Ross, who believes that a correction could come at any moment, warned that Wall Street remains close to multi-year highs as investors head into a traditional period of weak seasonality that stretches from May to November.

The Standard & Poor's 500 index .SPX has kept its year-to-date gain of 6 percent for the past two weeks, as defensive sectors such as utilities advanced while more volatile technology shares posted losses.

Despite the rotation between sectors, the S&P 500 has been trading in a narrow range between 1,330 and 1,340, indicating Wall Street's lack of direction. Most technical analysts agree that the market is poised to break out of that range soon -- either with a sell-off or a rally.

Robert Sluymer, an analyst with RBC Capital Markets, said there is no technical evidence that the current market cycle has peaked. He recommended investors keep building exposure to defensive themes, while getting out of cyclical stocks.

Among the defensive sectors favored in the current environment, Standard & Poor's Equity Strategy recommended the stocks in the S&P 500 Consumer Staples Index .GSPS. For the week, this index was up 0.6 percent.

With the earnings season coming to a close, Wall Street will have just a sprinkling of marquee names set to release quarterly results in the coming week. On tap are earnings from Campbell Soup (CPB.N), Costco Wholesale Corp (COST.O) and HJ Heinz Co (HNZ.N), whose stocks are in the S&P 500 Consumer Staples Index. Preppies, take note: Polo Ralph Lauren Corp (RL.N) and Tiffany & Co (TIF.N) are also set to release their results. These companies' outlooks could shed light on the

consumer's mindset and headwinds facing the retail sector.

As far as economic indicators are concerned, there's no data with overwhelming star power. The calendar includes new home sales for April, a second look at first-quarter gross domestic product, personal income and consumption for April and the final reading for May on consumer sentiment from the Thomson Reuters/University of Michigan Surveys of Consumers.

So investors could very well be at the mercy of the headlines from Europe, where fears about a possible debt restructuring by Greece are on the rise.

With the euro, commodities and stocks trading with extraordinary correlation, investors should look at the euro-dollar trade for direction, said Ross of Auerbach Grayson.

"If you continue to see the dollar strengthening," he said, "it should provide a headwind for commodities and for the S&P."

(Editing by Jan Paschal)