Asian stocks sagged on Friday as worries U.S. growth data may surprise on the downside and downbeat comments from a Federal Reserve official gave investors reason to book profits from a steady rally this month.

The dollar remained near a three-month low against a basket of currencies <.DXY> ahead of the second-quarter GDP data, due at 8:30 a.m. ET, after a raft of data in the past month undershot market expectations.

Asian stocks outside Japan were lower with materials and technology shares underperforming while consumer discretionary shares got a boost from Sony Corp's <6758.T> robust results.

The MSCI Asia ex-Japan Index <.MIAPJ0000PUS> fell half a percent. The index is up about 7 percent this month as steady flows into Asian funds continued through the month.

European shares were set to open lower for the third consecutive session with Britain's FTSE 100 <.FTSE> seen 0.8 percent lower.

Asia ex-Japan equity funds absorbed more than $1 billion in the week ending July 28, their biggest inflow in 14 weeks, with China equity funds enjoying their best since mid-April, according to data from fund tracking firm EPFR Global.

For all the risk on/off talk, I would suggest that risk is never off, rather it becomes more selective, said Geoff Howie, Sales and Markets Strategist, MF Global Markets in Singapore.

At this juncture risk is being allocated to asset markets of economies with solid industrialization trajectories, such as China and ASEAN; or economies seeing policy normalization, such as Korea.

Japan's Nikkei <.N225> closed down 1.6 percent as signs that the U.S. recovery was faltering outweighed upbeat domestic earnings.

The overall U.S. economy appears to be stalling -- there's been a wave of poor indicators and even some surprisingly negative comments from Federal Reserve officials, said Kenichi Hirano, operating officer at Tachibana Securities.

With GDP coming out tonight and amid predictions it's going to show weaker growth, the big question now is how U.S. markets will respond, making investors wary of buying.

Shares of world's No.1 memory chip maker Samsung Electronic <005930.SS> closed 2 percent lower on outlook worries after its warned of weak margins, dragging Seoul shares lower.

Wall Street fell on Thursday after U.S. technology firms offered glum outlooks, with the Philadelphia semiconductor index <.SOXX> falling nearly 2 percent.

Macquarie , Australia's top investment bank, joined global peers in warning weak markets were hurting key businesses, pulling back from a bullish forecast in April and sending its shares down as much as 6 percent.

U.S. WORRIES

Economists forecast U.S. growth to have slowed to 2.5 percent in the three months to June from 2.7 percent in the first quarter. But worries persist it could come in weaker.

We expect US GDP to slow more sharply than consensus is calling for, which would confirm concerns over slowdown in the US, possibly adding to risk aversion bets, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole in Hong Kong.

St. Louis Federal Reserve bank President James Bullard said on Thursday he is worried about the risks the United States might fall into a Japan-style quagmire of falling prices and investment, helping push major U.S. indexes marginally lower.

The dollar fell to an eight-month low against the yen, hurt by selling from Japanese exporters and concerns about the U.S. economic recovery.

Sluggish jobs growth, marked by a 9.5 percent unemployment rate, is the biggest obstacle to the economy's recovery from the most brutal recession since the 1930s.

U.S. equities have been supported by earnings this month, according to MF Global, with 74.5 percent of S&P 500 components that have reported earnings in the United States beating estimates and only 15 percent posting a negative surprise.

Going forward, those positive surprises to second quarter earnings need to transform into third quarter jobs, said MF Global's Howie.

U.S. crude prices paused from the previous session's strong gains and hovered at just about $78 a barrel while gold edged up but trading was thin in both markets as investors awaited the release of U.S. second quarter GDP data.

(Additional reporting by Elaine Lies in Tokyo)

Japan Australia United kingdom China