A month-long rally in world shares and riskier currencies such as the Australian dollar stalled on Tuesday as uncertainty over global growth and the next moves by the world's major central banks put investors in a cautious mood.
However, the threat of a tropical storm in the Gulf of Mexico hitting oil supplies supported crude prices, while Wall Street looked set to open unchanged ahead of a key speech by Federal Reserve Chairman Ben Bernanke on Friday.
Major risk asset markets have enjoyed broad-based gains over the past month due to hopes for a third round of monetary easing by the Fed and a promise from the European Central Bank President Mario Draghi to do everything needed to save the euro.
But after the rallies, which saw the euro touch a seven-week high on Thursday of $1.2590, investors are looking for more clarity on the next steps.
"Markets have priced in too much optimism of late which has seen traders finally question the likelihood of central banks delivering on what the market had led itself to believe would happen," said Andrew Taylor, market strategist at GFT Global.
This followed a weak August reading of business sentiment in Germany on Monday and last week's purchasing managers reports, which painted a picture of economic malaise stretching from Beijing to Berlin.
The price of iron ore, coal and other commodities have fallen sharply in reaction to concerns about the world economy, and the commodity-linked Australian dollar hit a fresh five-week low of $1.0345.
Adding to signals of weakness, Spain said on Tuesday that its recession had deepened in the second quarter as domestic spending slumped in the wake of tough austerity measures aimed at tackling the government's fiscal problems.
Bernanke's widely anticipated speech comes as expectations for a so-called QE3 have increased since minutes from the central bank's August policy meeting were released, even though there has been an improvement in U.S. data since that meeting.
However, the ECB Draghi's is no longer planning to attend the conference due to a heavy workload - a decision which triggered a sudden surge in the value of the euro to a day's high of $1.2563. Gains were seen limited though.
The Jackson Hole retreat comes just as ECB policymakers are hammering out the details of a new bond-buying plan aimed at tackling the euro zone debt crisis.
Uncertainty about how the scheme will work and whether it will ease the funding crisis facing many key euro zone governments, like Spain and Italy, has added to the cautious tone in risk asset markets.
Top ECB policymaker Joerg Asmussen said on Monday the plan would ensure countries whose bonds the central bank bought did not soft-pedal on reforms. He did not say when the bank would begin buying, but did make clear the plan would go ahead despite opposition from Germany's Bundesbank.
"The newsflow out of the ECB still leaves a lot of room for surprises, both on the upside and on the downside," said Elwin de Groot, senior market economist at Rabobank.
"Markets want to see strong commitment from the ECB that it is willing and able to pin down (Spanish and Italian) yields to levels much lower than they have been at lately," he said.
Ten-year German government bond yields were flat at 1.34 percent but this could change on Thursday when Italy will sell up to 6.5 billion euros ($8.1 billion) of new five- and 10-year bonds. A poor sale in Rome could prompt more investors to seek safety in Germany.
This will be the first auction of longer-term Italian debt since ECB President Mario Draghi said in late July he was ready to do whatever it took to preserve the euro.
His comments provoked a 14 percent rally in the euro zone's blue-chip stock index, the Euro STOXX 50, but this index was retreating on Tuesday, mirroring overnight losses in Asia, on the uncertain growth outlook.
Global shares, as measured by the MSCI world equity index , were also lower on the economic worries, falling 0.6 percent to 323.73 points and on track for a fifth straight day of losses.
Oil prices were holding steady with Brent crude around $113 a barrel as markets watched the progress of Tropical Storm Isaac towards the oil rigs and production facilities in the Gulf of Mexico.
"Because U.S. Gulf Coast refiners are operating near full utilisation, the potential for disruption to oil product markets is particularly pronounced," J.P. Morgan analysts, led by Colin Fenton, said in a report.
Gold joined other risk assets in edging lower after rising to its highest in over four months in the previous session, as caution prevailed ahead of the Wyoming central bankers meeting.
Spot gold edged down 0.2 percent to $1,660.10 an ounce, having risen to $1,676.45 on Monday, its highest level since mid-April.