Chinese banking shares fell for a second day on Wednesday after a sovereign fund unloaded a stake in two banks, flashing a cautious signal about risk even after the euro clawed back losses endured on Moody's downgrade of Portugal to junk status.

A rally in risky assets has stalled after a week, as investors take a cautious stance ahead of a European Central Bank meeting on Thursday, Friday's U.S. payrolls report and the latest inflation and GDP data from China next week.

However, Japan's Nikkei stock index <.N225> bucked the trend, as investors scrambled to latch on to a 1.1 percent climb, which lifted the market to the highest since the first full trading day after a devastating earthquake and tsunami in March.

The MSCI Asia ex-Japan index <.MIAPJ0000PUS> rose a modest 0.2 percent with weakness in financials largely offsetting gains in materials and industrials.

Financials were led lower by a second day of underperformance by China's banking sector, often considered a proxy for the country's economy, after Singapore's Temasek, a sovereign wealth fund, sold part of its stake in two of the so-called Big Four Chinese banks.

Temasek sold a combined $3.6 billion worth of shares in Bank of China <3988.HK> and China Construction Bank <0939.HK> sending their shares down over 3 percent.

Financials, which carry the biggest weight by far as a sector on Chinese bourses, pulled the Hang Seng <.HSI> down 0.4 percent and pushed the Shanghai Composite <.SSEC> 0.7 percent lower and further from Tuesday's six-week high.

Shanghai stocks had made a strong rebound over the past fortnight, with the index rising 8 percent to a six-week high. But that bounce has stalled on fresh fears about the impact of China's local government debt on the sector.

Valuations-wise, we've probably seen the bottom but it's a confidence issue right now, said Tom Kaan, a director at Louis Capital Markets in Hong Kong.

The Temasek move comes a day after ratings agency Moody's warned that its credit outlook on Chinese banks may turn negative as China's local government debt may be understated by as much 3.5 trillion yuan ($540 billion).

EURO STEADIES

The euro nudged higher after its steep overnight drop following Moody's downgrade of Portugal's credit rating to junk status reignited lingering fears about other highly indebted peripheral euro zone countries.

Some economists think Ireland may also need more support and worry Spain and Italy may be next in line for aid.

The Portugal news doesn't really change fundamentals. That's why the market's reaction was limited to one day. If we were talking about Spain, now that would be a totally different story, said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo.

The euro rose 0.2 percent higher to $1.4460 after dropping about a full cent to a low around $1.4395 on Tuesday but analyst said the euro will have a hard time eking out more long-term gains versus the greenback if Friday's U.S. payrolls suggest the U.S. economy is not doing as badly as feared.

Spot gold hovered near a 1- week high as Moody's latest move once again raised fears about highly indebted peripheral euro zone countries.

While the market has moved on from Greece a little, there is still significant concern out there that it's not close to the end game, said Greg Gibbs, strategist at RBS in Sydney.

U.S. crude oil futures extended gains, rising 81 cents to $97.70 a barrel, after earlier hitting the highest since June 15, ahead of industry data that is expected to show a decline in U.S. crude oil inventories.

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