GLOBAL MARKETS-Doubts over EU summit send shares, euro lower
* Investors sceptical over EU leaders' summit
* European shares fall over 1.5 pct, euro hits 21-month low
* Dollar index hits highest level since September 2010
By Richard Hubbard
LONDON, May 23 (Reuters) - World shares fell and Germany sold two-year bonds paying no interest on Wednesday as investors shunned riskier assets, doubting that any new measures to tackle the euro-zone debt crisis would emerge from a European leaders' summit.
U.S. stock index futures pointed to a lower open on Wall Street.
Speculation the latest EU summit will fail to reach any substantive agreement to resolve the crisis, or avert a Greek exit from the euro, sent the single currency to a 21-month low, put an end to a rally in European equities and lifted yields on Spanish and Italian bonds.
But investors bid strongly at an auction of safe-haven two-year German government bonds offering a zero percent coupon, resulting in a yield of just 0.07 percent, while the dollar, measured against other major currencies hit a high not seen since September 2010.
"Issuing a bond with a zero coupon is a clear demonstration of the massive dislocation we are seeing in Europe," said Eugene Philalithis, portfolio manager of Fidelity's Multi Asset Income Fund.
Europe's leaders are expected to discuss boosting growth at their meeting later on Wednesday, as well as the idea of a joint euro-zone bond. French President Francois Hollande supports the bond plan, but German Chancellor Angela Merkel opposes it.
"Most are expecting no concrete solution out of the meeting, just a few ideas discussed on how to boost growth with no real commitment to carry them out; while Angela Merkel is almost certain to reject any proposal by Francois Hollande in relation to euro bonds," Craig Erlam, market analyst at Alpari, said.
The single currency fell to $1.2615, its lowest level since August 2010, before it recovered to be down 0.2 percent at $1.2662, while the dollar index rose 0.25 percent to 81.69.
"The euro's downtrend is entrenched and we think there are too many risks of potentially nasty outcomes in the euro zone, especially with regard to what will happen to Greece," said Ned Rumpeltin, currency strategist at Standard Chartered.
Fears about a Greek exit from the euro were stoked by former Prime Minister Lucas Papademos, who said late on Tuesday Greece had no choice but to stick with a painful austerity programme or face a damaging exit from the euro zone.
"Markets seem to be extremely worried about yesterday's comments by Papademos, who suggested that some institutions might be preparing for an exit of Greece from the euro area," said Annalisa Piazza, market economist at Newedge.
The comments knocked Asian shares, leaving the MSCI world equity index down around 1 percent at 300.35 points.
The FTSE Eurofirst index of top European shares fell 1.7 percent to 977.05, while the euro zone's blue-chip Euro STOXX 50 index fell 1.6 percent to 2,258.91, after both recorded their biggest daily gain in a month on Tuesday.
In the debt markets, the strong German bond auction lifted June Bund futures 78 ticks at 143.88, with cash 10-year yields 5 basis points lower at 1.42 percent
U.S. Treasury yields also nudged lower in Europe, with the 10-year note yielding around 1.74 percent.
Germany's central bank the Bundesbank also ratcheted up the pressure on Greece, warning that the country was jeopardizing further financial aid by threatening not to implement agreed reforms.
In a toughly worded monthly report, the Bundesbank said Greece would have to bear the consequences of such a scenario, while the challenges that would arise for the euro zone would be "considerable but manageable".
Earlier the Bank of Japan decided to keep its monetary policy unchanged, as expected, to save its ammunition in case Europe's deepening debt crisis warranted further supportive action to shield the fragile economy.
The yen ticked up slightly to around 79.37 yen from around 79.81 just before the BoJ's policy announcement, reflecting disappointment among some speculators betting on an outside chance of a further easing, traders said.
In the oil markets, signs of a potential deal between Iran and the U.N.'s International Atomic Energy Agency to unblock investigations into suspected work on nuclear bombs in the oil-producing country, sent Brent crude down to near $107 a barrel.
Brent crude has fallen from a peak of $128.40 at the start of May and is down 12.9 percent this quarter, its biggest such drop since the fourth quarter of 2008.
Analysts said there was scope for fresh weakness.
"The Iranians seem to be softening their position and that could lead to an easing of sanctions," said Christopher Bellew at Jefferies Bache.
"If that were to happen, oil might fall below $100 while Saudi Arabia decides whether to cut production."
Gold fell towards $1,550 an ounce, extending sharp losses made in the previous session.
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