Euro and stocks drop as Greece worries build

(Reuters) - The euro fell on Friday, with investors still largely unconvinced that Greece can dodge a debt default without more political stability in Athens, keeping equity and commodity prices in a near-term downtrend.

Greece, whose prime minister is struggling to form a coalition government to push through unpopular austerity reforms, has become a focal point for investors looking for signals on whether to shed more risky assets and take defensive positions over the next few months.

Olli Rehn, the European Union's top economic official, tried to soothe markets overnight with expectations that the EU and International Monetary Fund will disburse a 12 billion euro loan in early July to Greece, but any benefits from his comments quickly faded by the Asian session, where investors kept reducing exposure to risks.

The euro steadily slid back toward $1.41, and shares of Samsung Electronics (005930.KS), normally a favorite of foreign investors, dropped 4 percent, while oil prices slid back to red, heading for their biggest weekly drop since early May.

After a steady feed of negative headlines on Greece, investors were cautious ahead of a cabinet reshuffle in Athens and a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy about Greek debt later on Friday. Athens has a vote of confidence on the government scheduled for Tuesday.

"The wild card actually becomes the Greek political situation. The Greek government has stood out from the other troubled peripheral countries by surviving," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said in a note.

"A new cabinet will seek to push through the new austerity measures as a vote of confidence. This will take place in the coming days and before the IMF/EU have to write a check to Greece."

The Nikkei .N225 fell 0.6 percent, with weakness in blue-chip stocks such as Honda Motor Co (7267.T) dragging down the index to the lowest since March 18.

The MSCI index of Asia Pacific shares outside Japan edged down 0.5 percent .MIAPJ0000PUS, with the tech sector by and far the biggest drag on the index.

Weighing on Asian stock markets, U.S. equity futures flipped to negative mid way through the Asian session on Friday, and it appeared for now that the U.S. S&P 500 index may test the low for the year hit in March.

U.S. stock investors have been consolidating their exposure through ETFs. Inflows into the SPDR S&P 500 ETF, a popular exchange-traded fund that tracks the benchmark U.S. stock index, soared to a three-year high in the week ending June 15, but, excluding ETFs, U.S. equity funds had weekly outflows of $2.03 billion during the week.

The euro fell 0.5 percent to around $1.4135. Traders will look for the euro to retest Thursday's low around $1.4070 later in the day and will probably add to short positions if the currency gets near the lows.

The aversion to risk taking sucked down the Australian dollar, which fell 0.5 percent to US$1.0514.

Brent oil futures fell 0.6 percent to $113.37 a barrel, well off the six-week high reached on Wednesday of $121.47.

(Additional reporting by Ayai Tomisawa in Tokyo; Editing by Kim Coghill)