By Hideyuki Sano and Paulina Duran

TOKYO/SYDNEY (Reuters) – Global stock markets grappled with contagion fears on Tuesday, sparked by troubles at China Evergrande as growing risks the property giant could default on its massive debt pile prompted investors to flee riskier assets.

Asian stock markets became jittery as volumes were reduced by holidays in China and South Korea. The recovered from an early drop to trade near flat as financials and property firms bounced, while returned from a market holiday with a drop of almost 2%.

rose 0.3% following the index’s biggest fall in two months overnight and the rebounded in offshore trade to recover Monday losses.

The markets of Taiwan and China were both closed Tuesday. Korean markets are still closed Wednesday.

Evergrande may collapse, or be liquidated in a chaotic manner. This is at a moment when China’s economy is experiencing slow growth.

The Evergrande bond payment due Thursday will be a major test. Failure to pay the interest in 30 days could result in the bonds going into default. Evergrande shares dropped 4% in Hong Kong but remained above Monday’s lows.

China’s financial sector could face greater risk if it doesn’t stabilize its $305 million in debts, regulators warn.

Masahiro Ichikawa is chief strategist of SumitomoMitsui (NYSE 🙂 DS Asset Management.

In the longer-term, slower Chinese growth could be a problem for other countries.

Australia’s stock markets stabilized after Monday’s plunge in shares of BHP (NYSE:), Rio Tinto and Fortescue Metals. Evergrande’s wobbles raised concerns about demand.

John Milroy (Ord Minnett’s investment advisor) said that there is a “bit of a relief rally.” It will depend on how the iron ore markets shape and react to it.

After Hong Kong’s stock markets stabilized, traders sought refuge in the currency market. The dollar traded at $6.6700, despite the fact that it lost most of Monday’s drop.

After touching a low of $1.1700 a month ago, the euro was trading at $1.1738. The safe-haven currency, the yen, fell to 109.48 dollars to the dollar.

The crept up to 1.3226%, though moves were relatively subdued as investors looked to the U.S. Federal Reserve’s two-day policy meeting starting on Tuesday.

Investors will be watching for details on the U.S. Federal Reserve’s tapering schedule and long-term economic projections as well its board members’ rates and long-term forecasts.

Many other central banks will make policy decisions this week, including those from Brazil, Hungary, Indonesia and Japan as well as South Africa, South Africa.

Asia’s oil prices rebounded after dropping the day before. Oil futures closed at $70.90 a barrel. [O/R]

The floor was also set for cryptocurrencies, as bitcoin bounced from its 1 1/2 month low of $40.193 and traded just short of $43,000.

Additional reporting by Tom Westbrook, Editing by Ana Nicolaci da Costa and Shri Navaratnam.