By Chikako Mogi
MSCI's broadest index of Asia Pacific shares outside Japan rose as much as 0.8 percent earlier to its highest point since September 16, before trimming some gains to be up 0.3 percent.
But financial spreadbetters expected Britain's FTSE 100 <.FTSE> to open down as much as 0.4 percent. Futures for the Euro STOXX 50, Germany's DAX and the French CAC 40 were each down 0.6 percent to 0.7 percent.
European policymakers neared a deal over the weekend on bank recapitalization, and France and Germany appeared close to agreement on how to use the European Financial Stability Facility (EFSF) to stave off contagion in the bond market.
But final decisions were deferred until a second summit on Wednesday, putting a cap on markets.
Deep divisions over the extent of losses that private holders of Greek bonds would have to incur remain a huge risk, putting downward pressure on the markets.
Investors are also concerned that the size of the bail-out fund, the EFSF, may not be sufficient to keep debt woes from widening.
"A lot has already been priced in, so profit-taking flows will likely set initially and put downward pressure on the market after Wednesday, before the market consolidates," said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.
Tuesday's gain in the MSCI's Asia ex-Japan index was led by the metals and energy sectors as commodities rebounded.
Strength in material stocks also helped the Shanghai Composite Index <.SSEC> post gains of 1.4 percent, as midday A-share turnover hit its highest in five sessions.
Despite the rise in Asia, uncertainty before the meeting on Wednesday dampened sentiment in Europe, causing the market indicators to point to a lower open.
ASIA SENTIMENT BRIGHTENS
Sentiment in Asia was boosted after the world's largest heavy equipment maker Caterpillar Inc <CAT.N> reported a 44 percent jump in profits, suggesting the underlying health of the global economy may not be as dire as widely believed.
Its shares gained 5.5 percent on the New York Stock Exchange and upbeat forecasts from General Electric Co <GE.N> and United Technologies Corp <UTX.N> helped spark an overall rally in the market Monday.
The markets, particularly commodities, were also encouraged by comments from William Dudley, president of the New York Federal Reserve Bank, that another round of quantitative easing, or QE3, is one possible option the U.S. central bank has to boost the slow recovery.
"With some direction emerging from Europe on its debt crisis, there is a feeling the worst can be avoided, spurring an unwinding of an excessive risk aversion, which may continue in the very near-term," said Tetsuro Ii, president of Commons Asset Management in Tokyo.
"Money is flowing into commodities, and speculation about QE3 is definitely helping the mood."
But over the medium-term, markets will be firmly capped by the European debt crisis.
"What will be agreed on Wednesday will be just the start," Ii said. "It will address the macro issues, but micro issues, problems facing individual countries must be tackled next, so we can't be optimistic."
Japan's Nikkei stock average <.N225> reversed earlier gains and closed down 0.9 percent as the yen stayed near a record high versus the dollar. <.T>
The yen rise denting stock prices and keeping market hopes for more easing lent support for Japanese government bonds (JGB).
"There are still many domestic investors who want to buy JGBs at higher yields to satisfy their investment plans for the second half of the fiscal year (ending in March)," said a fund manager at a Japanese asset management firm.
Many Japanese life insurers are shifting funds to domestic bonds and cutting foreign bonds as worries about Europe's debt crisis and the U.S. economy push down overseas yields.
CAUTION BEYOND WEDNESDAY
Shanghai copper hit its daily upper trade limit on Tuesday, climbing for a third straight session.
Gold prices held steady and resilient physical demand from Asia also lent support, while oil kept its gains after U.S. crude jumped more than 4 percent to its highest level in more than two months on Monday.
Some recovery signs reflecting improving sentiment and more appetite for risks may, however, soon give way to caution and skepticism about a long-term solution to the euro zone crisis.
"Asian markets are on a long-term rising trend based on fundamentals but the markets may turn their focus on worries over the U.S. and European economy, which will affect exports from Asia," Cheung said.
"Even if (Europe's) measures are delivered, there is still concern that the EFSF is not enough to contain euro zone debt problems from spreading out."
HSBC's flash purchasing managers' index (PMI) on Monday showed China's vast manufacturing sector expanded moderately in October, reflecting the resilience of robust domestic demand and soothing fears of a hard-landing in the world's second-largest economy.
China's PMI data and Caterpillar's results pushed the Standard & Poor's 500 Index <.SPX> up near a key technical level on Monday, with the index testing a 61.8 percent retracement of the 2011 decline.
On Monday, global stocks hit a seven-week high and commodities rallied on hopes Europe was moving closer to resolving the debt crisis.
The euro edged lower on Tuesday but still held near a six-week high Of $1.39570 reached the previous day, supported by market expectations for broad crisis-tackling measures from a summit due on Wednesday.
"Funds want a bit more of a rise in markets to take profits before they close their books for the year, so that may help support the market in the near-term," Ii said. "At the same time, there are also needs to cash out to cover losses."
Easing strains helped firm Asian credit markets, with the spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, narrowing by a few basis points.
Hong Kong-based Sun Hung Kai Properties, Asia's largest developer by market value, issued 5-year $500 million bonds on Monday at 245 basis points above U.S. Treasuries, in line with final guidance.
Data from EPFR Global on Monday showed an increased risk appetite helped Emerging Market bond funds snap a short, sharp outflow streak.
EPFR Global-tracked Bond Funds recorded net inflows of $2.51 billion in the week ending October 19. In mid-October, investors returned into high yield bond funds, with the combined U.S., Europe and Global high yield funds absorbing over $3 billion during the same week.
(Additional reporting by Kityin Boey in Singapore; and Akiko Takeda in Tokyo; Editing by Richard Borsuk)