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By Lisa Twaronite
TOKYO (Reuters) - Asian shares sagged on Friday and a drop in Treasury bond yields put pressure on the dollar after the downing of a Malaysian Airlines passenger plane over Ukraine sent investors scurrying into defensive assets.
The shadow was expected to fall over the European opening as well, with financial spreadbetters predicting Britain's FTSE 100 would open down 0.5 percent, Germany's DAX as much as 0.7 percent lower and France's CAC 40 down 0.8 percent.
Some market participants felt European losses would be contained, however.
"Asian markets are off their lows and U.S. index futures seem to be paring some of their losses so the initial sell-off could be short-lived," Jonathan Sudaria, a dealer at Capital Spreads, said in a note to clients.
World leaders demanded an international investigation into the shooting down of the airliner over eastern Ukraine. All 298 people on board were killed in a tragedy that could further heighten tensions between Russia and the West.
Russia's rouble-traded MICEX dropped 1.9 percent in the first minute after trading began.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2 percent but was still poised to eke out a modest weekly gain.
Japan's Nikkei stock average tumbled 1 percent after dropping by as much as 1.7 percent earlier in the session. The Nikkei still managed a 0.3 percent rise on the week.
"This geopolitical concern can cloud such optimism in the mid-term," said Hiromitsu Kamata, head of the Japanese equity target department at Amundi Japan.
He said the plane disaster might be perceived as an isolated event for financial markets but also cautioned it had the potential to lead to greater turmoil.
Even before the news from Ukraine broke, market sentiment had been fragile after weak U.S. housing starts for June.
Wall Street had its worst day since April on Thursday with losses deepening in the last hour of trading after Israeli Prime Minister Benjamin Netanyahu instructed the military to begin a ground offensive in Gaza.
S&P 500 E-Mini futures were flat, suggesting some measure of stability might return to U.S. markets on Friday.
U.S. Treasury bond prices steadied in Asia after soaring as investors sought safety. The benchmark 10-year Treasury yield stood at 2.480 percent, not far from its U.S. close of 2.475 percent, after a seven-week low of 2.441 percent earlier on Thursday.
The dollar edged up about 0.2 percent to 101.34 yen, clawing back some of its slide of nearly 0.5 percent overnight, its biggest one-day loss since early April. A break below 101.06 yen would take the greenback to a two-month low.
"Put simply, U.S. Treasury yields declined on heightened geopolitical woes and hurt dollar/yen, which has a high correlation with yields," said Masafumi Yamamoto, a market strategist at Praevidentia Strategy in Tokyo.
The euro, which has lost roughly 0.9 percent against the yen this week, traded at 137.05 yen after reaching a five-month low of 136.715 yen earlier in the session. The euro was steady at $1.3523 but not far from $1.3512 touched earlier in the session, its lowest in a month.
In commodities trading, U.S. crude oil gained about 0.3 percent to $103.53 a barrel after jumping by more than $2 on Thursday. Russia pumps more than a tenth of the world's crude.
Brent climbed about 0.2 percent to $108.13 a barrel. Both benchmarks were on track for their first weekly gain in four weeks.
Gold met profit-taking after soaring on safe-haven bids, slipping to $1,311.20 an ounce after gaining 1.5 percent in the previous session. It was still on track for a weekly loss of nearly 2 percent, breaking a six-week winning streak.
(Additional reporting by Ayai Tomisawa and Shinichi Saoshiro; Editing by Eric Meijer, Jacqueline Wong and Alan Raybould)