Cracks deepened in Asian equities on Thursday, with markets set to post their worst daily performance in more than five months, while the euro took a breather from its recent rally as it neared key resistance levels.

Stocks opened slightly lower after a 1 percent overnight drop in the S&P 500 <.SPX> but quickly extended losses, weighed down by sectors such as technology <.MIASJIT00PUS>, materials <.MIAPJMT00PUS> and energy <.MIAPJEN00PUS> shares.

Materials was hit by a selloff in commodities such as oil, which added to its previous day's losses, and a 2.8 percent plunge in U.S. corn futures on Wednesday.

The MSCI index of Asia and Pacific shares excluding Japan <.MIAPJ0000PUS> fell 1.3 percent, retreating further from a two-month peak tested on Wednesday and set for its biggest daily fall since mid-August 2010 as investors booked profits.

Japan's Nikkei <.N225>, which has raced up 14 percent since November, fell 1.1 percent after weaker-than-expected earnings by key U.S. technology and banking firms and strong Chinese growth data.

The sharp fall in tech shares on Wall Street is prompting investors to take profits on chipmakers that have outperformed the market in recent weeks, said Shoji Yoshigoe, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co Ltd.

The euro faltered at around $1.3450 after extending its rally to a two-month high overnight, but analysts said the single currency's uptrend looked intact after recent hawkish comments from European Central Bank President Jean-Claude Trichet, solid bond auctions in Spain and Portugal and talk that German officials were drafting contingency plans in case Greece defaults on its debt.

If we can trade through $1.3500 and hold that, I can see it trading up to $1.3750, a trader for a European bank in Hong Kong said. Such a rise could occur in the next month, he said.

Adding to investor caution, China reported annual gross domestic product growth sped up to 9.8 percent in the fourth quarter, beating market forecasts, while inflation slowed less than expected, numbers which could prod Beijing into stepping up its policy tightening campaign.

But the impact was limited as the key figures had already been leaked on Wednesday.

TIME TO CATCH UP

Emerging market (EM) equities have been the laggards so far in 2011 with the MSCI Asia ex-Japan index up just 0.3 percent so far this year compared to MSCI U.S. index <.MIUS00000PUS>, which was up 2 percent at the close of Wednesday.

A combination of investor fatigue after record performances in 2010 along with rising inflationary pressures, particularly in Indonesia and India, have prompted investors to rotate funds out of emerging markets and into developed markets (DM).

Foreigners were net buyers of Japanese equities last week for the 11th straight week, with buying at a 9-month high, data showed, but market players said the trend could be nearing its end after the Nikkei's sharp run-up in recent months.

Both Poland and Brazil delivered interest rate hikes this week with India expected to follow with another quarter point rate increase next week.

While inflows into emerging market equity funds extended their streak to eight consecutive weeks, the amount they took in was a third of the weekly average for 2010, EPFR data showed.

Tighter monetary policy is typically negative for equity markets at the outset, but we believe this will eventually be offset in EM by the positive effect of rising U.S. equity markets as well as strong EM growth prospects, Brown Brothers Harriman strategists said.

As such, we look for EM equities to play some catch up ahead and outperform DM.

(Additional reporting by Antoni Slodkowski in TOKYO, Ian Chua in SYDNEY and Masayuki Kitano in SINGAPORE)

Poland Portugal India Japan