Asian stock markets steadied on Tuesday and the dollar held on to gains versus the yen following a rally on Wall Street, but lingering concerns about a global credit squeeze kept many investors sidelined.

Economic worries stemming from the credit crisis also kept oil prices at a one-month low after a near 5 percent slide for London Brent on Monday, while gold lost grip of a one-week high of $676.50 an ounce.

Investors were also wary ahead of the Federal Reserve's policy-setting meeting due later on Tuesday, but there was speculation the central bank may reassure investors about the health of the U.S. economy in the wake of the market turmoil.

The rebound in U.S. markets was a relief. But it's not over yet. We still need to watch out for developments tied to the U.S. subprime sector, and there will continue to be uncertainty, said Kim Jeong-hwan, a strategist at Woori Investment and Securities.

By the end of the morning session, Tokyo's Nikkei had risen just 0.1 percent after earlier gains mostly evaporated, while other major markets in the region advanced between 0.2 percent and 3 percent.

Beaten-down financial stocks led the rebound with Australia's Macquarie Bank (MBL.AX: Quote, Profile, Research) jumping 6.2 percent. South Korea's top lender Kookmin Bank climbed 2 percent and Singapore's United Overseas Bank (UOB) gained 3.1 percent.

Japanese exporters including Honda Motor and Sony Corp. were also in favor thanks to a retreat in the yen, which tends to help boost overseas earnings, but energy firm INPEX Holdings slumped 7.1 percent following the slide in oil prices.

MSCI's measure of Asian Pacific stocks excluding Japan added 1 percent by 0227 GMT, recouping nearly half of Monday's 2.2 percent fall. The index is still down about 8.4 percent from a record high set on July 24.

Hong Kong's Hang Seng Index climbed nearly 1 percent, Singapore's Straits Times Index added 0.9 percent and South Korea's KOSPI put on 0.7 percent.

On Wall Street, both the blue-chip Dow and wider S&P 500 index rallied more than 2 percent as investors snapped up financial stocks such as Bear Stearns.

YEN WEAKER

In the currency market, the dollar paused after rising against the yen on the back of Wall Street's rally as investors awaited the outcome of the Fed's one-day policy meeting.

The Fed is widely expected to keep interest rates unchanged at 5.25 percent, but investors are keen to find out the central bank's outlook on the economy and clues for future rate moves.

Players continue to focus on the stock markets and it's unlikely that investors will resume carry trades just yet, especially when we don't know what would come out of the Fed's statement, said a senior trader at a big Japanese bank.

Credit worries have spurred investors to unwind riskier carry trades in recent sessions, sending the yen sharply higher. In a carry trade, investors sell a low-yielding currency, usually the yen, to buy riskier but higher-yielding assets.

The dollar eased to 118.71 yen from 118.93 yen late in New York, while the euro edged up to $1.38 from around $1.3788. Against the yen, the euro was steady at 163.90 yen.

Strength in stocks weighed on Japanese government bonds, pushing yields higher. The yield for the benchmark 10-year JGB edged up half a basis point to 1.755 percent from a two-month low of 1.750 percent.

London Brent crept up 4 cents to $71.21 a barrel following Monday's drop, while spot gold traded at $670.20.

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