Fears over the outcome of crucial Greek debt restructuring talks pulled the euro off its recent highs and put share markets on the retreat on Wednesday, overshadowing signals this week that the global economy may not slow as much as feared.

International creditors are set to meet the Greek government later on Wednesday to resume talks that broke down last week over the interest rate Greece will offer on new bonds and a plan to enforce private investor losses.

A deal with the private sector is vital to cash-strapped Athens if it is to gain its next batch of international aid and avoid going bankrupt when 14.5 billion euros ($18.5 billion) of bond redemptions fall due in late March.

"Greek bond negotiations could trigger more euro weakness as they have to close a deal soon, before Greek debt repayments are due in March," Richard Falkenhall, currency strategist at SEB in Stockholm said.

The euro traded around $1.2755, slightly up on the day but below a session high of $1.2808 and in range of the $1.2624 low hit on Friday, its weakest rate since last August.

Analysts said European share markets were still looking for reasons to go higher after economic data from China and Germany on Tuesday encouraged hopes that the outlook was improving and prodded shares to 5-1/2-month highs.

"Global stocks are still over sold and have room to grow on further good news," said Tom Elliott, global strategist at JP Morgan Asset Management.

The concern over the euro zone's debt crisis kept the FTSEurofirst 300 index of top European shares in negative territory on Wednesday, however, down about 0.6 percent at 1,028.35 points.

The euro held on to recent gains on Friday, supported by expectations that U.S. jobs data would show the economy slowly recovering, but it struggled to extend its rally in the absence of a comprehensive solution to the euro zone debt crisis.

Trading ranges were tight early in the European session, as few investors were willing to buy the single currency aggressively given that it has already rallied more than 1 percent so far this week.

The non-farm payrolls report due at 1330 GMT is expected to show an increase of 122,000 jobs and a steady unemployment rate of 9.0 percent.

A positive surprise would underpin a recent string of solid U.S. data and bolster risk sentiment, which might prompt some selling in the dollar. A weaker-than-expected outcome may push investors to take more profits on recent euro gains.

Johan Javeus, chief strategist at SEB in Stockholm, said he expected the data would confirm the U.S. economy is faring better than it was in the first half of the year, although it would not show a very strong recovery trajectory. more

A group of European elder statesmen has urged euro zone governments to resolve the financial crisis, warning that it risks destroying the global financial system.

They called for a legally binding agreement to establish a common treasury, reinforce common supervision and regulation and deliver a growth strategy.

"The euro is far from perfect, as this crisis has revealed," they wrote in a letter to the Financial Times.

"But the answer is to fix its faults rather than allowing it to undermine and perhaps destroy the global financial system," it added.

The 17 signatories included former Finnish President Martti Ahtisaari, ex-Belgian premiers Jean-Luc Dehaene and Guy Verhofstadt, former German foreign minister Joschka Fischer, recent French foreign minister Bernard Kouchner and former Spanish economy minister and European monetary affairs commissioner Pedro Solbes, as well as investor George Soros. more

The euro held firm on Tuesday after a choppy session overnight saw a wave of short-covering lift it by more than two cents on hopes that China will bolster Italy by buying its bonds, but traders found few reasons to stay upbeat about the currency.

The euro was last down 0.1 percent at $1.3670 , having jumped off an overnight low around $1.3495 after the Financial Times reported that Italy had asked China to make "significant" purchases of Italian debt.

The downside trend, however, stayed intact as markets come to grips with the prospect of a Greek debt default after senior German politicians started talking openly about it and a European Central Bank official quit amid policy disputes.

"All eyes are squarely on that seven-month low around $1.35 hit overnight," said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo.

"The downtrend in the euro will surely continue, but my sense is that unless the Italian bond auction goes extremely badly, this level may hold today," he said.

Italy is offering up to 7 billion euros of new long-term paper later in the day, with the auction in focus after the previous long-term sale drew tepid demand and as the spread of Italian bond yields over German Bunds rose to about 380 basis points, close to a peak near 400 basis points hit in August.

Markets are also bracing for a possible ratings downgrade on France's top banks, as well as an Italian sovereign rating cut. Moody's warned on June 17 that it may cut Italy's credit ratings in the next 90 days.

Chart-wise, the euro looks heavy, after a short-covering rally stalled ahead of the top on the weekly Ichimoku cloud at $1.3705 and the 100-week moving average at $1.3739.

"Having failed to bounce back above $1.37, the euro has become extremely vulnerable on the charts. I wouldn't get my hopes up for the auction -- the euro is still a sell," said a trader for a Japanese bank who spoke on condition of anonymity.

But the trader also said that as the euro is oversold in the short term, it may find some immediate support. Other traders added that the potential euro slump will likely be bumpy and peppered with short-covering rallies like the one seen on Monday.

The common currency has already fallen about nine cents, or 6 percent, in two weeks from a high around $1.4548 hit on Aug. 29.

It is now trading on the verge of the lower Bollinger Band, now at $1.3646, and its 14-day relative strength index is hovering around the 30 mark, which is considered to be oversold territory, for the first time in more than nine months.

EURO/YEN UNDER PRESSURE

Against the yen, the euro fell 0.2 percent to 105.31 yen , but was off a 10-year trough plumbed on Monday at 103.90 yen.

Traders said that the sharp fall through 105.00 and 104.00 in euro/yen overnight has knocked out some Japanese exporter hedges, and that heading into the fiscal half-year end at the end of September they may have to re-sell the common currency.

Risk reversals also showed increasing demand for bets on a lower euro, with the 25 delta one-month euro/yen risk reversal rising to levels not seen in over a year, trading around 4.4 in favour of euro puts. more