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Doubts also grew over the sustainability of a rise in U.S. stocks Tuesday after Federal Reserve Chairman Ben Bernanke promised more economic stimulus if needed, easing concerns over the damage to the U.S. economy from a possible Greek default.

"The market in Asia is testing Bernanke's resolve to be able to provide stimulus," said Jonathan Barratt, managing director of Commodity Broking Services.

"What the market wants to see is something definite, and it is losing faith in what Bernanke can deliver."

In credit markets, which have been showing increasing signs of strain in recent week, the iTraxx Asia ex-Japan investment grade index was steady, after a sharp widening earlier this week.

In the latest blow to be dealt to investor confidence by Europe's intractable crisis, Moody's lowered its rating on Italy's bonds by three notches Tuesday, saying it saw a "material increase" in funding risks for euro zone countries.

"They have to be continuously seen to be working on the problem," said Barratt, adding that European policymakers needed to show concrete action to convince the markets.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rose 0.3 percent, after rising as much as 0.9 percent earlier. It hit a two-year low the day before.

But Japanese and Korean shares were down, turning negative after an initial gain. The Nikkei .N225 fell 0.8 percent, after opening up 0.4 percent, as investors cautiously gauged the progress in Europe. .T

"There are now hopes that a worst-case scenario in Europe will be avoided, but because this plan is still under consideration and is not formally decided yet, plenty of risks remain," said Fumiyuki Nakanishi, a strategist at SMBC Friend Securities.

EURO FALTERS

As the euro slipped from highs, gold's rise was capped, while other commodities such as oil and copper struggled to extend gains on lingering concerns over global demand.

Brent crude was up 1.71 percent, but off an intraday high of $102.10 a barrel, as tighter U.S. crude stocks and promises by the Fed to launch new stimulus measures if necessary helped halt a sharp three-day sell-off.

U.S. crude traded up $2 at $77.67 a barrel. <O/R>

The euro eased 0.4 percent against the dollar, faltering after a brief rally that had lifted the single currency from a near nine-month trough against the dollar and a decade low versus the yen Tuesday. <USD/>

European finance ministers agreed Tuesday to safeguard their banks as doubts grew about whether a planned second bailout package for debt-laden Greece would go ahead.

A sense of urgency appeared to be heightening in Europe as French-Belgian municipal lender Dexia SA (DEXI.BR) became the first European bank to have to be bailed out due to the euro zone's sovereign debt crisis.

Tensions remained, however, as euro zone finance ministers postponed a crucial aid payment to Greece until mid-November, while European Union ministers said they were reviewing the size of private-sector involvement in a second bailout package for Athens.

Japan Wednesday offered its share of help, saying it would consider continuing its purchases of bonds issued by Europe's bailout fund.

(Additional reporting by Lisa Twaronite; Editing by Alex Richardson)

The agency downgraded Italy to A2 from Aa2, a lower rating than it holds on Estonia and on a par with Malta and kept a negative outlook on the rating.

The euro pared gains against the dollar and Japanese yen immediately following the announcement which comes after Moody's rival Standard and Poor's cut its rating on Italy by one notch to A/A-1 on September 19.

The cuts underline growing investor concern about the euro zone's third largest economy, which is now firmly at the center of the debt crisis and dependent on help from the European Central Bank to keep its borrowing costs under control.

"The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area," Moody's said in a statement.

"The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets," it said.

It added that Italy's rating could "transition to substantially lower rating levels" if there were long term uncertainty over the availability of external sources of liquidity support.

Italy's mix of chronically low growth, a public debt mountain amounting to 120 percent of gross domestic product and a struggling government coalition has caused mounting alarm in financial markets.

Moody's decision came as little surprise after the agency said on September 17 that it would finish a review for possible downgrade of its rating on Italy within a month.

But it highlights the growing vulnerability of the euro zone, which is already struggling to contain the crisis in the far smaller Greek economy and which would be overwhelmed by a crisis of a similar scale in Italy.

"It's not that unexpected but it doesn't help the situation at all," said Robbert Van Batenburg, Head of Equity Research at Louis Capital in New York.

"They have already traded as if there was somewhat of a downgrade in the works, so it will probably force Italian policymakers to embark on more austerity programs. It will put another fiscal strait-jacket on them."

VULNERABILITY

Moody's said the likelihood of a default by Italy was "remote" but it said the overall shift in sentiment on the euro area funding market implied a greater vulnerability to a loss of market access at affordable rates.

Italy's relatively modest budget deficit, conservative financial system and high level of private savings had kept it on the sidelines of the euro zone crisis while countries like Greece and Ireland were sucked down.

"Italy is being punished not because its finances suddenly deteriorated, but because investors have become more sensitive to its long-standing weaknesses," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

He said markets appeared to be focusing on the weakened center-right government's lack of progress in stimulating the stagnant economy, which many analysts expect to stall or even slip into recession next year.

"The bond markets are more concerned about Italy's ability to grow than its commitment to reducing a fiscal deficit that is already one of the smallest in the euro zone," he said.

Prime Minister Silvio Berlusconi shrugged off the downgrade immediately, saying the Moody's announcement had been expected and the government was committed to its public finance target, which sees the budget being balanced by 2013.

The government last month pushed through a 60 billion euro austerity package -- bringing forward its original balanced budget target by one year -- in return for support for its battered government bonds from the ECB.

Berlusconi's center-right coalition has been deeply divided over policy and personal issues and further distracted by an array of scandals surrounding the prime minister.

Opposition leaders have called repeatedly for the government to resign over its handling of the economy and there is widespread speculation that Berlusconi could be forced out of office before his term expires in 2013.

Italy's borrowing costs have soared over the past three months and have only been kept under control by the ECB support but in recent weeks they have begin to climb back to potentially dangerous levels.

An auction of long term bonds last month saw yields on 10 year BTPs rise to 5.86 percent, their highest level since the introduction of the euro more than a decade ago.

The center-right government has been under heavy pressure over its handling of the escalating crisis and recently cut its growth forecasts through 2013.

It is now expecting the economy to expand by just 0.6 percent next year, down from a previous projection of 1.3 percent.

Cook, an operations and supply-chain expert not known for pitching products, appeared at the event at Apple's headquarters in Silicon Valley, standing in for ailing co-founder Steve Jobs in his new role as chief executive.

A new iPhone would come at a critical juncture as Android phones by Samsung Electronics and other competitors close in on Apple's lead. Android phones dominate the U.S. market three years after Google Inc introduced the mobile software.

Cook, who said Apple controls 5 percent of the global smartphone market, is expected to introduce the latest iPhone later on Tuesday. Wall Street and industry insiders will scrutinize his performance to see if he can carry off a high-profile Apple launch.

Some shareholders and analysts expect a cameo appearance by Jobs, now chairman. The pancreatic cancer survivor, who handed the reins to Cook in August after taking his third medical leave, has not yet appeared.

Apple launches are some of the hottest events on the tech calendar. Tuesday's "Let's talk iPhone" show marked Cook's unofficial debut since taking over from Jobs in August.

The new iPhone, expected to be faster, thinner and equipped with a larger screen, is likely to come loaded with the updated iOS5 software that Apple unveiled in June. Some of the new features include improved notification functions and better Twitter integration.

The iPhone, which accounts for more than 40 percent of Apple's sales, has been a big success since it came out in 2007, making Apple into one of the world's leading consumer electronics companies.

The company also claims inroads into a corporate market dominated by Research in Motion. It said more than 90 percent of Fortune 500 companies are testing or using its iPhones and iPads.

RIM shares trading on the Nasdaq stock market were down nearly 3 percent. Apple's shares fell about 1 percent to $371.32, while Google shares fell 1.4 percent.

INTENSIFYING COMPETITION

The iPhone event took place this year at Apple Central -- at the same venue where the iPod first was introduced years ago -- versus the larger, splashier venues of more recent choice such as downtown San Francisco's Moscone center.

The restricted attendance may have triggered a surge in online viewership, which slowed or crashed live blogs run by websites such as Engadget, Wired and Gizmodo.

Interest is high with Google emerging as a formidable competitor after three years of rapid market expansion.

Apple would be launching the latest version of its iPhone at a time when the economy is slowing and competition is intensifying. More than 550,000 Android-based devices -- including tablets -- are activated each day.

Apple faces the challenge of sustaining the popularity of its iPhone 4, more than a year old. Apple sold more than 20 million units in the third quarter, which ended June 25.

Nielsen data shows the iPhone was No. 2 in the United States with a 28 percent market share, with Android at 43 percent.

Globally, iPhone shipments climbed 9.1 percent in the second quarter while Nokia's plummeted more than 30 percent, handing the top spot to Apple with a market share of 18.4 percent, according to IHS iSuppli.

But Samsung, whose shipments grew even faster, is coming on strong with a global market share of 17.8 percent.

Some on Wall Street also expect Apple to unveil later on Tuesday a cheaper phone for the fast-growing Asian market, one of the areas where Apple can accelerate its growth.

(Additional reporting by Noel Randewich. Writing by Edwin Chan. Editing by Phil Berlowitz and Robert MacMillan)

"The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability," Bernanke said.

Given anemic employment growth that has depressed consumer confidence, Bernanke urged lawmakers not to cut spending too quickly in the short term even as they grapple with trimming the budget deficit over the long term.

He said government belt-tightening was likely to prove a significant drag on the world's largest economy, which averaged less than 1 percent annualized growth in the first half of the year.

"An important objective is to avoid fiscal actions that could impede the ongoing economic recovery," he said,

Bernanke said European financial strains posed "ongoing risks" to U.S. economic growth, saying they had already dampened the mood of households and businesses.

A depressed housing sector and tight credit are other factors preventing a more robust expansion, Bernanke said, and he offered little prospect that the labor market would improve soon.

"Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead," he told the Joint Economic Committee of Congress.

Stressing that higher inflation earlier in the year had not become ingrained in the economy, Bernanke argued price pressures will remain subdued for the foreseeable future.

That backdrop made it easier for the Fed to launch a fresh monetary easing effort in September, when it announced it would be selling $400 billion in short-term Treasuries and use the proceeds to buy longer-dated ones.

The policy is expected to have a dampening effect on long-term interest rates, stimulating lending and investment. However, many economists have doubts about its effectiveness, arguing that the key underlying problem is a lack of demand rather than lack of credit.

In response to the financial crisis and recession of 2008-2009, the Fed slashed interest rates to effectively zero and more than tripled the size of its balance sheet to a record $2.9 trillion.

(Editing by James Dalgleish)