Strauss-Kahn arrest adds to euro debt woes

The arrest of IMF chief Dominique Strauss-Kahn on sexual assault charges added to existing uncertainty about the euro zone debt crisis on Monday, initially knocking the euro to seven-week lows and pressuring stocks.

While there was little indication that the International Monetary Fund's overall activities would be curtailed by its managing director's arrest, it came almost on the eve of a series of new talks on how to handle the euro zone crisis.

Strauss-Kahn -- also a potential French presidential candidate -- had been due to meet German Chancellor Angela Merkel on Sunday and join euro zone finance ministers on Monday to discuss the bloc's debt crisis.

Greece, for one, is struggling to meet the terms of a 110 billion euro European Union/IMF bailout last year.

"This came at a really bad time for the euro as it could delay efforts to put together a rescue package for Greece. It's adding salt to their wounds," said Tsutomu Soma, manager of foreign bonds at Okasan Securities.

Financial markets have been jittery for months over the debt crisis, which comes down to fears that indebted peripheral economies will be unable to meet their obligations.

"The key is whether Greece approves its medium-term fiscal strategy. Should that happen, Germany and the IMF will likely come to an agreement to fill Greece's funding gap," said Raghav Subbarao, currency strategist at Barclays Capital.

The euro fell as far as USD 1.4048, its lowest since March 30, having dropped 6% from a 17-month peak of USD 1.4940 hit less than two weeks ago.

It later recovered to stand flat at USD 1.4122.

Euro Shares Slip

The Strauss-Kahn affair also fed into a general mood of risk aversion, weighing on stocks.

European shares hit their lowest in more than a week with an eye on the euro zone finance ministers meeting.

As well as discussing Greece, the ministers were likely to back a bailout package for Portugal, with new conditions set by Finland.

The FTSEurofirst 300 index of top European shares was down 0.4%.

"We are seeing the signs of nervousness perhaps in trying to establish a very decisive policy framework to get the euro zone settled," said Mike Lenhoff, chief strategist at Brewin Dolphin.

World stocks as measured by MSCI were down half a percent.

Earlier, Japan's benchmark Nikkei average ended down for a third straight day, losing 0.9%  to 9,558.30, while the broader Topix shed 1.2% to 829.55.

Euro zone bonds were mixed, with pressure expected on the periphery.