Debt woes on both sides of the Atlantic and new signals from China on inflation dangers weighed on markets yesterday, though strong earnings saw European shares claw back some of the previous day’s losses.

Greece was to sell short-term debt later in the morning, an event likely to test euro zone money markets made increasingly jittery by mounting concerns the country will be forced to restructure its debt.

The dollar was slightly weaker against a basket of major currencies after climbing on Monday as investors engineered a classic rush to safety even as Standard & Poor’s threatened to downgrade U.S. debt.

European stocks bounced back, but only in the context of having fallen nearly two per cent on Monday. Japan’s Nikkei closed down nearly 1.3 per cent.

S&P stirred up investor concerns on Monday when it changed its outlook on the U.S. to negative from stable, threatening the future of its prized AAA credit rating.

The threat brings into focus the huge U.S. budget deficit and the difficulty that Washington has in paring it down. The deficit is a key element in the global imbalances that currently worry many investors and policymakers.

Another Chinese ratesetter said inflation pressures gave further scope for hike reserve requirements for banks.

“Discussions on the U.S. losing its AAA-status have been active for two years, if not longer. S&P’s move might have been a jolt, but should not really be a true surprise,” said David Watt, senior currency strategist at RBC Dominion Securities.

Equity investors, meanwhile, are focused on the earnings season.

In Europe, there was some boost from SKF  and Burberry , which both beat consensus forecasts.

But results lay ahead in the United States from banking heavyweight Goldman Sachs and technology groups IBM and Intel Corp .

The FTS Euro first 300 was up half a per cent.

“We were hit down big time yesterday and I expect to see some bargain hunting,” said Simon Clark, trader at ETX Capital.

“But, we have Goldman Sachs later and there could be some caution before that, one negative comment from anyone and we could be back down.

“Focus on bond markets was clearly on Greece, which faces the difficult task of selling T-bills with markets continuing to price in a high probability that the country will need to restructure its public debt.

“At the very least, they will have to pay up relative to the comparatively successful auctions carried out so far this year,” said Credit Agricole’s head of European interest rate strategy Luca Jellinek.

The euro paused from the previous day’s sell-off, but the debt problems remained in the background.

It edged up to the day’s high around 1.4260 dollars .

overall, it has pulled back sharply, having hovered at a 15-month high around 1.4520 dollars or the past week.

“The European debt crisis is in the market’s focus again, and people are concerned there is no lasting solution. Meanwhile, even negative news in the U.S. isn’t putting too much pressure on the dollar anymore,” said Lutz Karpowitz, currency analyst at Commerzbank in Frankfurt.