CORRECTED-GLOBAL MARKETS-Asian shares rise on China hopes, U.S. budget worries linger

(Corrects lead - Asian shares hit 16-mth high, not 4 mth)

* MSCI Asia ex-Japan at 16-mth high, policy hopes buoy China

* Euro hits 7-week high, dollar regains vs yen

* Obama firm on 'fiscal cliff', higher taxes for wealthy

* Australia economy grows 0.5 pct in Q3 vs Q2

* European shares likely to climb

TOKYO, Dec 5 (Reuters) - Asian shares hit a 16-month high on

Wednesday, led by surging Chinese equities on hopes for stable

growth, but concerns over whether U.S. lawmakers can break a

budget impasse before year-end to avert a possible economic

slump kept optimism in check.

European shares were expected to rise, with financial

spreadbetters predicting London's FTSE 100, Paris's

CAC-40 and Frankfurt's DAX to open as much as 1

percent higher. A 0.3 percent gain in U.S. stock futures

hinted at a similarly firm Wall Street open.

MSCI's broadest index of Asia-Pacific shares outside Japan

advanced 0.8 percent, gaining momentum as

Shanghai shares soared nearly 3 percent to reclaim the

2,000-point level after slumping to near four-year lows last

week.

Chinese shares were boosted by remarks late on Tuesday from

new Communist Party chief Xi Jinping, who said that the

government aimed to stabilise exports and make policies more

targeted and effective.

"We are due for a short-term bounce anyway. Xi's comments

suggest he thinks the slowdown in the Chinese economy has

bottomed and inflation is not going to be a big problem," said

Hong Hao, chief equity strategist at Bank of Communications

International Securities.

Hong Kong shares jumped 1.5 percent, Australian

shares rose 0.4 percent and Japan's Nikkei stock average

erased earlier losses to end up 0.4 percent.

The HSBC Purchasing Managers Index for China's services

sector on Wednesday showed the barometer slipped to 52.1 in

November from October's 53.5, but recent indicators from factory

output to retail sales and investment reflected positive effects

from Beijing's pro-growth policies.

Growth prospects for China, the world's second-largest

economy, and a fiscal crisis facing the world's top economy

remain underlining market themes. However, daily flows are

increasingly being dictated by year-end position reshuffling,

with price swings magnified by thinning activity ahead of the

holidays, traders said.

FISCAL CRISIS

The White House and Republicans remain at odds on how to

avoid a $600 billion "fiscal cliff" of U.S. budget cuts and tax

increases starting from Jan. 1. Despite the uncertainty, markets

hope U.S. lawmakers will eventually reach a compromise.

President Barack Obama dangled the possibility on Tuesday of

lowering tax rates in 2013 with a broad U.S. tax code revamp,

but stood firm on insisting rates for the wealthiest must rise

as part of a budget deal with Congress.

His conciliatory tone helped drive the dollar lower and

risky assets higher, Sebastien Galy, currency strategist at

Societe Generale, said in a note to clients.

"This rally in risk is tempered by a steady profit-taking as

investors close their books for the year and some need to lock

in their profits ... Short term redemptions are a factor in

December after a difficult year," Galy said.

Spot gold inched up 0.3 percent to $1,701.95 an

ounce, after falling to its lowest in nearly a month on Tuesday.

"If the U.S. really falls off the 'fiscal cliff', we are

likely to see some buying of gold for store of value and also on

the outlook that the U.S. dollar may depreciate further," said

Lynette Tan, senior investment analyst at Phillip Futures in

Singapore.

SUPPORT FOR EURO

Risk sentiment was also supported by receding fears about

the contagion risk of the euro zone's debt crisis after a Greek

plan to buy back debt pushed the euro to a fresh seven-week high

of $1.3125 on Wednesday. The plan spawned optimism that

Athens will secure much-needed emergency aid to avert a default.

"The news helped those who were sceptical of Greece cover

their short euro positions but at this time in the year, market

activity will be influenced by position adjustments before the

year-end holidays, with each currency pair moving on its own

factor," said Hiroshi Maeba, head of FX trading Japan for UBS in

Tokyo.

"Friday's U.S. nonfarm payrolls will be key to market

sentiment and the U.S. fiscal issue will be the primary focus

for markets," he said.

But other analysts noted that due to the impact of

superstorm Sandy on the U.S. Northeast in November, it may be

difficult to get a clear picture of the labour market from

Friday's data.

The U.S. Federal Reserve is set to announce a fresh round of

Treasury bond purchases at its Dec. 11-12 meeting, replacing a

programme which expires at the end of the year called Operation

Twist, under which it bought $45 billion of longer-dated bonds a

month while selling its shorter-date holdings.

The European Central Bank is widely expected to keep rates

on hold at its policy meeting on Thursday.

The dollar climbed 0.4 percent against the yen to 82.23 yen

.

Australia's resource-reliant economy grew a moderate 0.5

percent last quarter, but lower export revenues government

cutbacks and a decelerating mining boom painted tougher times

ahead.

The Reserve Bank of Australia (RBA) cut interest rates to a

record-matching low of 3 percent on Tuesday. The local dollar

held around $1.0470.

U.S. crude futures were up 0.4 percent to $88.87 a

barrel and Brent futures were up 0.2 percent to $110.04.

A rise in broad assets boosted sentiment for Asian credit

markets, narrowing the spreads on the iTraxx Asia ex-Japan

investment-grade index by 3 basis points.

(Additional reporting by Clement Tan in Hong Kong and Lewa

Pardomuan in Singapore; Editing by Kim Coghill and Richard

Borsuk)

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