Asian stocks climbed on Tuesday, with banks extending gains on hopes the struggling global financial system is stabilizing, despite reports showing the U.S. economy is deteriorating further.

The dollar edged higher against the euro and the yen while U.S. Treasuries were steady, awaiting word on whether the Federal Reserve would buy government debt to stimulate the economy.

Barclays Plc said on Monday it has had a strong start to the year, echoing upbeat comments in recent weeks from Citigroup , JPMorgan and Bank of America which have sent battered banking shares higher.

The rebound has squeezed some investors who bet against equities, forcing them to buy back shares, but analysts are divided over whether the rally can be sustained without a broad recovery in investor confidence.

Wall Street snapped a four-day winning streak overnight after American Express Co said its credit card default rates soared last month, hammering home the heavy toll the financial crisis has had on U.S. consumers.

U.S. industrial output fell to its lowest level in almost seven years in February, while manufacturing in New York State slumped further this month, data on Monday showed.

We still can't really relax, since we won't know the full details of this profit until quarterly results come out, and there's still a lot of uncertainty, said Takashi Ushio, head of the investment strategy division at Marusan Securities in Japan.

But they do seem to have pulled back from the worst danger.

The MSCI index of Asia Pacific shares traded outside Japan <.MIAPJ0000PUS> rose 0.75 percent to a one-month high, with the materials and consumer staples sectors providing the most support.

Japan's Nikkei share average <.N225> rose 1.5 percent to its highest intraday level since Feb 12. On a 20-day rolling basis, the Nikkei's 2.4 percent gain -- though meager -- has outperformed the 0.3 percent loss on European stocks <.FTEU3> and a 2.6 percent decline in U.S. shares <.SPX>.

Australia's benchmark S&P/ASX 200 index <.AXJO> rose 1.7 percent, powered by the country's banks. Shares of Westpac Bank rose 2.5 percent, while Commonwealth Bank of Australia climbed 1.7 percent.

Hong Kong's Hang Seng index <.HSI> underperformed the region and was mostly unchanged on the day. The index has had a five-day rally, enticing investors to lock in profits while they can, though a shift out of bets against HSBC <0005.HK> pushed the shares of Europe's biggest bank up 2.5 percent.

CENTRAL BANKS MULL BOND BUYS

U.S. Treasuries were largely steady ahead of a two-day policy meeting of the Federal Reserve.

The yield on the benchmark 10-year note has been unable to rise above 3 percent after four attempts in the last few months, with investors wondering if the Fed will soon start buying long-dated Treasuries to drag rates lower in other markets.

The yield is currently 2.96 percent.

Goldman Sachs economist Ed McKelvey still believes the Fed will shy away from this option for now because the worst of the consumer retrenchment may have passed, equity markets have improved lately and recent comments from Fed officials suggesting otherwise.

He said the outcome of the upcoming meeting will be identical to the January meeting.

While we see several reasons why Treasury purchases make even more sense now than they did then, the FOMC appears disinclined to take this step yet, he said in a note.

The Bank of Japan is expected to discuss whether to raise its purchases of government debt at a two-day meeting ending on Wednesday, but market participants were unsure if the central bank will make such a move at this week's board meeting.

June 10-year futures fell 0.28 point to 138.63. The benchmark 10-year yield rose a basis point to 1.305 percent, rebounding toward a one-month high of 1.320 percent hit on Friday.

Outright purchases of government bonds is one of the extreme policy options some central banks, such as the Bank of England, have adopted to buttress hard-hit economies after having already chopped interest rates down to nearly zero.

The euro edged up against the U.S. dollar, in sight of five-week highs hit the previous day and girding for a clear break above $1.3000. Positive comments from banks have improved confidence among investors and whetted their appetite for risk.

After hitting a near three-year high on March 4, the ICE U.S. dollar index <.DXY>, a measure of its performance against a group of major currencies, has fallen about 3 percent.

Gold was nearly unchanged in the spot market, trading at $921.65 per ounce, though could come under pressure depending on the sustainability of the current rally in global equities.

U.S. crude for April delivery slipped 0.6 percent to $47.05 a barrel. Since the beginning of the year, oil has bounced around a range of $50 to just below $40.

(Additional reporting by Elaine Lies in Tokyo; Editing by Kim Coghill)

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