Asian shares steadied on Friday as a pick-up in China's manufacturing sector calmed investor sentiment, but gains were capped by concerns that U.S. lawmakers are still too far apart to avert a fiscal crisis as an end-of-year deadline looms.
A deteriorating business sentiment survey and expectations that the Bank of Japan will ease policy further to support the weak economy next week continued to undermine the yen, helping Japanese equities pare much of their earlier losses.
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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 jumped 2.8 percent while Hong Kong shares rose 0.6 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was little changed after it eked out a 0.1 percent gain, hitting successive 16-month highs since December 5.
"Clearly, growth momentum is improving but remains modest by historical standards. Overall, the number is consistent with acceleration of GDP growth in Q4 to 2.4 percent quarter-on-quarter and 7.9 percent year-on-year, and with annual growth reaching 7.7 percent," said Dariusz Kowalczyk, strategist at Credit Agricole CIB.
"The data highlights lack of need for more stimulus, and should be well received," he said.
Australian shares rose 0.3 percent, but the U.S. budget concerns and a higher local currency weighed. The Australian dollar traded at $1.0528, not far from a three-month high of $1.0585 hit on Wednesday. South Korean shares <.KS11> fell 0.3 percent, narrowing earlier declines.
"Investors are realizing that the U.S. fiscal talks are difficult to resolve, but the index is only paring the big gains it made in the last few minutes of Thursday's trades on program buying," Han Bum-ho, an analyst at Shinhan Securities, of Seoul shares.
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.
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.
Data on Thursday shed some hopeful signs for the U.S. economy, with new claims for jobless benefits falling sharply to a near four-year low last week while retail sales rebounded in November.
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, adding to signs that the global slowdown and a territorial row with China were 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 to its lowest in nearly nine months against the dollar of 83.91 yen. The euro stood at 109.77 yen, its highest in more than eight months and looked set to end the week more than 3 percent higher on the yen.
Japan's Nikkei share average <.N225> was down 0.1 percent but held above 9,700, a level reclaimed on Thursday for the first time in eight months.
"We forecast more yen weakness in 2013 ... eventually, the yen must weaken because the economy needs help so badly, but we have seen many years of policy timidity and frequent policy disappointments," said Kit Juckes, strategist at Societe Generale.
Oil prices rebounded from Thursday's fall, with U.S. crude futures up 0.6 percent at $86.41 a barrel and Brent up 0.3 percent at $108.28.
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.
The Federal Reserve's announcement earlier this week of fresh liquidity measures underpinned sentiment in shares and commodities initially, but gold investors focused on the Fed's new approach of linking its policy to a drop in jobless rates, fearing the Fed might withdraw its economic stimulus if the job market improved dramatically.
Liquidation by large institutional investors in gold futures on fears of tax hikes in the new year also pressured prices, traders said.
Sluggish stocks weighed on Asian credit markets, widening the spreads on the iTraxx Asia ex-Japan investment-grade index by two basis points early on Friday.
(Additional reporting by Ian Chua in Sydney and Somang Yang in Seoul; Editing by Jacqueline Wong)