Euro, oil slide on European worries, shares flat

LONDON (Reuters) - The euro and oil fell on Tuesday while European shares were largely flat as renewed worries over political risks in the euro zone trimmed demand for riskier assets for a second day.

A rise in political uncertainty in Spain, where the prime minister is facing calls to resign, and in Italy, which holds a general election later this month, provoked a big sell off on Monday, ending a solid new year rally.

The euro, which has taken the brunt of the selling, had risen 2.3 percent against the U.S. dollar this year to a high of just over $1.37 on Friday, before the selloff began and was down 0.4 percent at $1.3460 in early European trade.

The broad FTSE Eurofirst 300 index <.fteu3> of top European shares dropped 1.5 percent to its lowest level of the year on Monday, steadied to open up 0.1 percent up. Across Europe London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were all recovering from the previous days sharp falls.

Most analysts see this week's selloff as a correction to a rally linked to signs of growing euro zone economic stability and an improving global outlook, which has been underpinned by the easier monetary policies of major central banks.

"What we are looking at, at the moment, is a correction, a consolidation or even a 'baby risk off', " said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

"Nevertheless our working hypothesis remains that after the correction the trends in place before will continue as the two main drivers are still there; namely central banks continuing to inject liquidity and more and more proof of an economic recovery," he said.

Bond markets have also stabilized after a sharp rise in yields on Spanish and Italian debt and growing demand for safe-haven German government bonds. This followed a narrowing of spreads this year between peripheral and core government debt.

"We had a very strong rally in peripheral markets, strong spread compression in January which was probably faster than fundamentals were favoring, so we are in a correction. It's not a new trend, it's just a correction," Patrick Jacq, European rate strategist at BNP Paribas said.

(Additional reporting by Ana Nicolaci da Costa and Atul Prakash.)

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