Asian shares outside Japan posted their best gains in a month on Tuesday while safe-haven flight to the dollar eased, but the moves were seen as only a momentary reprieve from a gloomy economic outlook.

European stock markets were expected to open slightly lower, pressured by overnight losses on Wall Street and disappointing reports on UK home prices and retail sales.

Asian share gains were led by banks, including heavyweight HSBC <0005.HK>, which have taken a recent pounding globally on concerns about capital raising, weakening profits and persistent credit-related losses that are threatening the stability of the world's financial system.

However, Japan's Nikkei average <.N225> dipped to a new 26-year closing low for the second session in a row, hit by worries about the global competitiveness of the country's drugs sector following a $41 billion merger in the United States.

Oil extended gains to above $47 a barrel on expectations for more OPEC output cuts and ahead of weekly U.S. stocks data out later in the day expected to show a fall in crude inventories.

It is hard to think that stocks will turn to an upward trend given the credit situation. The dollar is likely to retain its safe-haven status, said Kazuyuki Kato, treasury department manager at Mizuho Trust and Banking Co in Japan.

But since gains in the dollar have progressed to a considerable degree, the currency will face its peak at some level, he said.

The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> rose 2.1 percent by 0715 GMT, more than recouping its 1.7 percent fall over the previous three sessions.

The index was headed for its biggest daily percentage gain since a 2.5 percent advance on February 13.

But confidence in policymakers' efforts to revive global economic growth will be key to a sustained rebound in global equities, analysts said.

Top U.S. officials on Monday urged other countries to step up spending to combat recession but Europe dismissed the call, exposing a rift before a summit this weekend by finance ministers from the world's largest rich and developing economies.

We're doing more in weeks than other countries do in years, U.S. Treasury Secretary Timothy Geithner told Reuters after briefing U.S. lawmakers on the administration's economic stimulus and financial stability programs.

Central bankers are also cutting interest rates, which are already near zero in Japan and the United States.

China's central bank may have ample scope to ease monetary policy after data on Tuesday showed the country last month fell into deflation at the consumer level for the first time since December 2002.

SOME LESS PESSIMISTIC

The rise in Asian shares was led by a 3 percent gain in Hong Kong stocks <.HSI>, while South Korea <.KS11> and China <.SSEC> markets rose nearly 2 percent each.

Indexes in Australia <.AXJO>, Taiwan <.TWII> and Singapore <.STI> gained nearly 1 percent each.

HSBC jumped 14 percent in Hong Kong after news of its upcoming rights issue had led shares in the lender to slump on Monday to its lowest since 1995.

Banking shares elsewhere also advanced, with South Korea's Woori Finance Holdings <053000.KS> surging 15 percent.

Some people are starting to realize that some things are just too good a value to pass up, said Michael Heffernan, senior client adviser and strategist at Austock Group, referring to the rally in banking shares that were also seen in Australia.

But among Tuesday's decliners, the Nikkei <.N225> slid 0.4 percent, weighed down by drugmakers such as Astellas Pharma <4503.T>.

The losses were sparked by worries the Japanese drugs sector will be less competitive in the global market place after U.S.-based Merck proposed to take over Schering-Plough for $41 billion.

The dollar fell 0.8 percent to 88.533 <.DXY> against a basket of currencies <.DXY>, as repatriation flows into the greenback slowed and speculators trimmed bets it will rise further.

The euro advanced 0.8 percent to $1.2710, rebounding above a three-month low of $1.2457 hit last week. The euro rose 0.6 percent against sterling to 91.98 pence.

The pound managed to recover from a six-week low against the dollar to rise 0.3 percent on the day to $1.3824.

However, the yen continued to suffer on worries about the world's second-largest economy, after data on Monday showed it posted its first current account deficit in 13 years in January.

Concerns over supply sent June Japanese government bond futures -- the new lead contract -- down 0.06 point to 138.60. The benchmark 10-year yield inched up 0.5 basis point to 1.300 percent, near a three-week high of 1.310 percent struck last week.

In commodity markets, oil prices rose 56 cents to $47.63 a barrel on expectations that weekly U.S. inventory data due later in the day would show another fall in crude stocks.

Gold dipped about $6 to $914.10 an ounce, retreating further from an 11-month high above $1,000 marked on February 11.

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