Asian shares were mixed on Friday with a pick-up in China's manufacturing sector lending support but worries over the progress of U.S. budget talks to avert the "fiscal cliff" weighing on investor sentiment.
European shares were expected to start higher, with financial spreadbetters predicting London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX will open as much as 0.3 percent higher. A 0.3 percent gain in U.S. stock futures hinted at a firm Wall Street open.
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A deteriorating business sentiment survey and expectations that the Bank of Japan will ease policy further to support the weak economy next week pushed the yen to a near 9-month low against the dollar and an 8-month low against the euro, helping Japanese equities wipe out earlier losses.
China shares outperformed Asian peers after the HSBC flash purchasing managers' index for December hit a 14-month high of 50.9, the fifth straight monthly gain, showing growth in China's vast manufacturing sector picked up and underlined a brighter outlook for the economy in coming months.
The private survey followed recent positive data suggesting Chinese economic activity has gained some momentum in the fourth quarter after it slowed for seven consecutive quarters.
A state-backed think tank has also forecast China's GDP growth next year at around 8 percent -- above the likely government target -- while calling for an expansion in the central government's fiscal deficit to offset an uncertain external environment.
The Shanghai Composite Index soared 4 percent while Hong Kong shares rose 0.8 percent to a 16-month peak.
"We're seeing positive PMI, industrial data and they are all pointing to the direction of an economic recovery," said Sijin Cheng, a commodities analyst at Barclays Capital. "The underlying demand is going to improve gradually."
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was little changed, hovering near 16-month highs which it had hit successively since December 5. The index was set to end the week up 1.4 percent.
Australian shares ended flat, giving up earlier gains as investors remained wary of the stalled U.S. budget talks.
A seven-day rally in world shares came to a halt and commodity prices slipped on Thursday after negotiations over the U.S. "fiscal cliff" hit a wall.
President Barack Obama and House of Representatives Speaker John Boehner held a "frank" face-to-face meeting late on Thursday in an effort to break an impasse in talks to avert the "fiscal cliff" of some $600 billion of tax hikes and spending cuts scheduled to start in January.
"With the end of the year coming up, I can't see anybody taking any significant positions ahead of this political unknown (the fiscal cliff)," the trader added.
Failure to avert the "fiscal cliff" could derail the struggling U.S. economic recovery and also snuff out encouraging signs emerging from China, the world's second-largest economy after the United States.
"You're not going to get a solution that will be a 100 percent, but it may be a third or a quarter. It will be something a bit hard to reduce the deficit, but they'll get a good vote on it which will make it a good rosy story -- the U.S. is not interested in can-kickers any more," said Jonathan Barratt, chief executive of Barratt's Bulletin, a Sydney-based commodity research firm.
China PMI surveys: http://link.reuters.com/rej64t
Japan Tankan: http://link.reuters.com/qet44t
Japan economy, election: http://link.reuters.com/jyc64t
Asset returns in 2012: http://link.reuters.com/nyw85s
YEN SELLING ACCELERATES
In the world's third-largest economy, big Japanese manufacturers' sentiment worsened in the three months to December, a Bank of Japan's quarterly tankan survey showed on Friday, hurting an economy already seen to be in a mild recession.
The data will help reinforce market expectations for the Japanese central bank to further ease monetary policy.
The yen fell as low as 83.95 against the dollar. The euro stood at 109.83 yen, its highest in more than eight months and looked set to end the week up over 3 percent on the yen.
Japan's Nikkei share average <.N225> turned up 0.1 percent, rebounding from earlier declines.
Japan's conservative Liberal Democratic Party (LDP) is on track for a stunning victory in Sunday's election, gaining momentum to pressure the BOJ for more forceful easing.
"The market is growing confident the next government will be one of the most aggressive about easing that you could think of," said a trader at a Japanese bank.
Oil prices rebounded from Thursday's fall after Chinese manufacturing data raised hopes for firmer demand, with U.S. crude futures rising 0.8 percent to $86.54 a barrel and Brent adding 0.4 percent to $108.39.
Spot gold steadied near $1,696 an ounce after tumbling 1 percent the previous session to push prices below $1,700 for the first time this week. Gold was set for a third weekly decline as funds liquidate positions to lock in profit for the year.
Sluggish stocks weighed on Asian credit markets, keeping the spreads on the iTraxx Asia ex-Japan investment-grade index barely changed from Thursday.
(Additional reporting by Hideyuki Sano in Tokyo, Florence Tan and Melanie Burton in Singapore; Editing by Jacqueline Wong)