The Federal Reserve meets on Tuesday and Wednesday to discuss tapering its $85 billion in monthly bond buying and opinion is divided on whether it will move this week or wait for January -- or March.
"It's still 50/50 as to whether the Fed will announce tapering," said Shane Oliver, head of investment strategy at AMP Capital in Sydney.
Oliver said the case for a December taper is that the U.S. labour market looks stronger and fiscal risks have diminished with the budget deal. Against this, inflation remains very low and Fed Chairman Ben Bernanke may prefer to see more evidence that recent employment and spending gains can be sustained.
"I kind of think they should just bite the bullet and start the process to put an end to the 'will they taper or not' soap opera," he added.
The cautious mood in markets was aptly encapsulated by MSCI's broadest index of Asia-Pacific shares outside Japan which was trading 0.5 percent lower.
The March futures contract for the S&P 500 likewise dropped 0.5 percent.
Shanghai slipped 1.4 percent as a measure of growth in China's vast factory sector slowed to a three-month low in December as reduced output offset a pickup in new orders.
The flash Markit/HSBC Purchasing Managers' Index (PMI) fell to 50.5 from November's final reading of 50.8, but for a fifth consecutive month remained above the 50 line which separates expansion from contraction.
Japan's Nikkei lost 1.2 percent despite a generally upbeat survey of the country's business sector.
Confidence among big manufacturers improved to its highest level in six years, the survey from the Bank of Japan showed, boding well for Prime Minister Shinzo Abe's stimulus policies aimed at ending 15 years of grinding deflation.
Importantly, confidence among small firms was the highest since 1992, and they are big employers in Japan.
"Conditions had definitely improved, especially if you look at small firms," said Masamichi Adachi, a senior economist at JPMorgan in Tokyo.
"Their improvement was much bigger. It means the foundations of the recovery are getting stronger by the end of this year."
Part of the pick-up comes courtesy of the yen, which hit a five-year low against both the dollar and euro last week.
On Monday, the Japanese currency regained just a little ground as dealers trimmed short positions into the Fed meeting. The dollar bought 102.80 yen, having briefly hit a peak just shy of 104.00 on Friday. The euro stood at 141.42 yen, against a top of 142.82.
The dollar index was 0.16 percent lower at 80.083.
Using the low-yielding yen to buy riskier assets has been a very popular trade as investors bet the BOJ will maintain its ultra-loose monetary policy and may even ease further next year when a sales tax hike kicks in.
The euro fetched $1.3755, down from a near two-month peak of $1.3811 scaled last week. Failure to hold above $1.3800 suggested scope for a retreat back to $1.3695 near term, BNP Paribas analysts said.
In commodity markets, spot gold was a shade lower at $1,235 an ounce, after gaining 1.2 percent on Friday.
Brent futures rose above $109 a barrel on Monday as supply concerns revived after Libya failed to reach a deal with tribal leaders to end the blockade of several oil-exporting ports.
Brent crude for January was 43 cents higher at $109.26, after falling to as far as $108.02 in the previous session, the lowest since November 21.
U.S. crude oil for January delivery edged down 8 cents to $96.52 per barrel. The contract touched a low of $96.26 on Friday, its weakest since December 3.