Improving global manufacturing data lifted Asian shares on Tuesday, bringing a regional index near to levels before the collapse of Lehman Brothers in September, but the pace of gains slowed as investors weighed how much longer a heady, three-month rally will last.

The gains come after reports on Monday showed contractions in manufacturing activity in the United States, the euro zone and the United Kingdom last month had eased, while China saw factory activity expanding for a third consecutive month.

The reports reinforced expectations the worst in the global economy is over, while the widely expected bankruptcy filing by General Motors on Monday removed another major risk factor hanging over financial markets, at least in the near-term.

However, some of the other riskier asset classes which rose on Monday steadied in Asia on Tuesday, highlighting investor caution after a steady run-up in prices.

U.S. crude futures fell on Tuesday but held above $68 a barrel as investors took profits from a jump of more than 3 percent the day before which carried oil to its highest level

since early November.

Safe-havens such as the dollar also steadied on Tuesday after falling in the previous session.

A recovery is well underway and the market is following positive economic news, said Brian Eley, fund manager with Eley Griffiths, which oversees about A$500 million ($406 million) in Australia.

In the initial phase, materials, energy and cyclical stocks will show the strongest moves, he added.

The MSCI index of Asian stocks outside Japan <.MIAPJ0000PUS> rose 0.9 percent after earlier in the day hitting its highest since September 29, just weeks after the Lehman's catastrophic collapse. The gain was modest when compared to the combined 5.2 percent jump in the previous two sessions.

The index has now surged some 65 percent from lows in early March, spurred by signs of stabilization in the battered banking sector and credit markets, and by hopes that the global downturn was bottoming out.

The MSCI index is not far off the levels of September 12, the Friday before Lehman collapsed, sparking a rout in global markets.

Japan's Nikkei average <.N225> advanced 0.9 percent, at one point hitting its highest since Oct 8, while Australia <.AXJO> and Taiwan <.TWII> rose more than 1 percent each.

However, some other gauges faltered. Hong Kong <.HSI> shares were down 0.8 percent, dragged down in part by a 2.9 percent fall in shares of Industrial and Commercial Bank of China <1398.HK> after Goldman Sachs was seen selling a stake in the Chinese lender.

U.S. stock futures posted modest losses of about 0.15 percent after Wall Street jumped 2-3 percent overnight on recovery hopes. <.N>

BETTER DAYS

Recent economic data appear to show the global economy has hit bottom, as evidenced by easing pain in the manufacturing sector shown by Monday's reports.

On Tuesday, Australia reported a lower-than-expected current account deficit in the first quarter, while signs of momentum in the export sector fueled hopes that the country dodged a recession last quarter.

But questions remain over the timing and strength of any recovery.

Policymakers are wary of overconfidence. Japanese Finance Minister Kaoru Yosano said on Tuesday the world's second-largest economy has already hit bottom but a full recovery may not come until spring next year.

That caution is also being reflected by central banks worldwide, which after sharply cutting interest rates are now mostly on hold and eager to keep their options open.

The dollar, which has been whipped recently by investors' preference for higher-yielding assets and concerns about rising U.S. debt levels, steadied against a basket of major currencies <.DXY> at 79.144.

The U.S. currency had hit a new low for the year on Monday.

Commodity-linked currencies have especially outperformed on hopes that demand will soon pick up again. The Australian dollar held above 81 cents to the dollar near eight-month highs ahead of a decision by the central bank on interest rates.

Japanese government bonds, however, took a hit, as investors looked to higher-risk assets which offered the prospect of stronger returns. The yield in the 10-year note climbed 3 basis points to 1.510 percent, its highest in nearly 7 months.

Yields rose in Japan ahead of Tuesday's 10-year auction and tracked a sell-off in U.S. Treasuries on Monday that led the gap between two-year and 10-year Treasury notes to match the previous record high hit on Friday of 275 basis points.

Heavy selling by mortgage players in response to a recent spike in home loan rates intensified the bond sell-off. The 10-year U.S. note yield posted its biggest one-day spike in eight months and flirted with a six-month high set last week.

(Additional reporting by Denny Thomas in Sydney; Editing by Kim Coghill)

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