By Jamie McGeever

LONDON (Reuters) – The euro slumped to a nine-year low on Monday as investors bet that the prospect of inflation across the region turning negative and mounting political uncertainty in Greece will force the European Central Bank to unleash quantitative easing.

European shares were volatile, initially falling sharply before rebounding into positive territory within an hour of the open as investors digested the implications of the weak euro and yet another hefty slide in oil to a 5-1/2 year low.

The euro fell to $ 1.18605 in early Asian trading on Monday, its weakest level since March 2006. In early European trade it was at $ 1.1964, down 0.3 percent from late U.S. trade on Friday.

Investors betting that the ECB will take the plunge and open up a bond-buying program like the U.S., UK and Japanese central banks have done were emboldened by an interview ECB president Mario Draghi gave to German financial daily Handelsblatt on Friday.

He said the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half a year ago.

German state inflation figures for December due later on Monday before Wednesday’s euro zone estimate will be closely watched, and the downward pressure on the euro and government bond yields remains intense.

“Wednesday’s inflation data might determine the extent of the ECB’s action,” said Gary Jenkins, chief credit strategist at LNG Capital.

“Confucius said it was good to live in interesting times, although Mr Draghi might well be thinking ‘yes but not quite this interesting…’ as yet again Greece threatens to upset the European apple cart,” he said.

Economists forecast that euro zone consumer prices fell 0.1 percent in December, the first decline since 2009 . That should fan expectations the ECB will ease policy as soon as Jan. 22, when it holds its first policy meeting of the year.

Greek politics were at the forefront of market thinking on Monday as the debate around the possibility of elections later this month resulting in the country leaving the euro zone picked up again.

The German government wants Greece to stay in the euro zone and there are no contingency plans to the contrary, Vice Chancellor Sigmar Gabriel said on Sunday, responding to a media report that Berlin believes the currency union could cope without Greece.

European shares shrugged off an early selloff on Monday and the FTSEuroFirst 300 index of leading shares was last up 0.3 percent at 1367 points <.FTEU3>, Britain’s FTSE <.FTSE> up a quarter of a percent at 6563 points, France’s CAC40 up a fifth of a percent at 4262 points <.FCHI> and Germany’s DAX <.GDAX> up at 9763 points.

Also underscoring the pressure on central banks to implement more stimulus, business surveys last week showed factories struggled to maintain growth across Europe and Asia.

Asian shares excluding Japan fell 0.8 percent <.MIAPJ0000PUS> and Japan’s Nikkei dipped 0.25 percent <.N225>. Chinese shares, however, maintained their bullish tone since last year on hopes of more stimulus and added 3.6 percent <.SSEC> to hit a fresh 5-1/2 year high.

U.S. futures pointed to a steady open on Wall Street, with the main three indices all called to open broadly flat .

All this political and monetary policy uncertainty in Europe helped support major government bond markets. Euro zone yields were anchored near record lows with Germany’s 10-year yield at 0.5 percent and U.S. Treasury yields were steady at 2.12 percent .

Greece was the outlier, its benchmark yields up 7 basis points to 9.33 percent .

Oil prices, whose decline of more than 50 percent from peaks in June last year rattled many energy producers, hit a 5-1/2-year low as global growth concerns fanned fears of a supply glut.

Brent crude futures dropped as low as $ 55.36 a barrel, also its lowest since May 2009, before edging back to $ 55.42, still down around a dollar.

“Oil demand is unlikely to be robust this year when we look at the state of economies in China, Japan and Europe,” said Yusuke Seta, a commodity sales manager at Newedge Japan.

The U.S. dollar rose broadly, extending a recent bull run as markets wagered a relatively healthy U.S. economy will lead the Federal Reserve to raise rates in the middle of this year.

(Reporting by Jamie McGeever; Editing by Andrew Heavens; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)