* Asian shares down 1.3 pct, U.S. stock futures shed 0.8 pct
* World leaders not convinced by Saudi Arabia’s Khashoggi account
* European stocks hit by worries over Italy’s budget
By Hideyuki Sano
TOKYO, Oct 23 (Reuters) - Asian shares fell on Tuesday as earnings season nerves in the U.S. dented Wall Street, while a cocktail of negative drivers from Saudi Arabia’s diplomatic isolation to concerns over Italy’s budget and Brexit talks depressed sentiment.
Selling in the region erased gains made in the previous two sessions’ rally, which were led by China stimulus hopes, with the MSCI’s broadest index of Asia-Pacific shares outside Japan dropping 1.3 percent.
South Korea’s Kospi fell as much as 2.5 percent and was on course to hit a 1-1/2-year low. In Japan, the Nikkei fell 2.3 percent.
U.S. stock futures dropped 0.8 percent in early Tuesday trade. On Monday the S&P 500 lost 0.43 percent as investors kept a wary eye on earnings amid global growth worries. Enthusiasm over some of the upbeat results was also tempered by the growing political uncertainty around the world.
“In short, the world seems to be getting into chaos,” said Akira Takei, bond fund manager at Asset Management One.
U.S. President Donald Trump said on Monday he was not satisfied with what he had heard from Saudi Arabia about the killing of journalist Jamal Khashoggi at its consulate in Turkey.
Trump has expressed reluctance to punish the Saudis economically. But while Saudi Arabia has sought to shield its powerful crown prince from the killing, many officials have cast doubt on Riyadh’s narrative.
Several countries, including Germany, Britain, France and Turkey, have pressed Saudi Arabia to provide all the facts.
An immediate market focus is on Turkish President Tayyip Erdogan, who said he will release information about the investigation in a speech on Tuesday.
Any signs of instability in Saudi Arabia, a major oil producer as well as a big investor in financial markets, could have wide-ranging repercussions.
“I would think this issue could drag on for some time,” said Asset Management One’s Takei.
In Europe, Italy told the European Commission on Monday it would stick to its contested 2019 budget plans in defiance of EU fiscal rules.
The European Commision will decide on its response on Tuesday.
The euro traded at $1.1466, having lost 0.44 percent the previous day to edge near its Oct. 9 low of $1.14325, its lowest level since mid-August.
Although Italian bond prices rose on relief after Moody’s did not slap on a negative outlook as the market had feared, European stock markets were less enthused.
France’s CAC closed at the lowest level in more than a year while Italian shares hit 1-1/2-year lows and Spanish shares ended at their weakest level since late 2016.
The British pound stood at $1.2965, hovering just above this month’s low of $1.2922 on fears the Irish border issue and disagreements within Britain’s ruling Conservatives over Brexit could see Prime Minister Theresa May face a serious leadership challenge.
The yen eased to 112.82 per dollar, touching its lowest levels in about two weeks.
The yuan was little changed but stood near Monday’s 21-month low of 6.9445 per dollar in the onshore trade on expectations China will pursue looser monetary policy to cope with pressure from U.S. President Donald Trump on tariffs.
Chinese shares also lost steam after two days of strong gains following guidance from Chinese officials, including Vice Premier Liu He, to major investors to support the sagging stock market.
“Any stimulus by China should be viewed not as a boost but as a cushion against a slowing economy against external headwinds,” said analysts at DBS in Singapore. “This reality was better reflected in the Chinese yuan which continued to trade weaker against the central parity in both the onshore and offshore markets.”
Oil prices fell on Tuesday after Saudi Arabia pledged to play a “responsible role” in energy markets, although sentiment remained nervous in the run-up to U.S. sanctions against Iran’s crude exports that start next month.
Saudi Arabia has pledged to keep markets supplied despite its increasing isolation over Khashoggi’s killing, easing fears Riyadh may use oil production as its diplomatic weapons.
Front-month Brent crude oil futures were at $79.60 a barrel, down 0.3 percent.
U.S. West Texas Intermediate (WTI) crude futures were at $69.22 a barrel, dropping 0.2 percent. (Editing by Shri Navaratnam and Sam Holmes)