Asian stocks slid more than 1 percent in thin volume on Thursday as investors trimmed positions with just three trading days to go before a deadline to lift the U.S. debt ceiling, while the Australian dollar showed resilience in the face of global sovereign risks.

European stock futures fell 1 percent in early trade, echoing losses in Asia and on Wall Street overnight.

The increasing possibility of a U.S. credit rating downgrade -- with Washington still in a stalemate over government spending -- is weighing on equity markets globally, though there have been no signs of panic selling.

The S&P 500 index finished down 2 percent on Wednesday <.SPX>, while the futures were up a touch on Thursday.

Fears of a U.S. debt default or downgrade and Europe's own sovereign borrowing crisis have overshadowed most other risks, just as the corporate results season gets going in Asia.

Japan's Nikkei share average was down 1.5 percent <.N225>. Clothing chain company Fast Retailing <9983.T>, whose stock hit a 13-month high on Wednesday, was off 2.3 percent and led the Nikkei lower.

Hitachi Construction Machinery <6305.T>, a subsidiary of Hitachi Ltd <6501.T>, Japan's largest industrial electronics company, saw its shares jump 4.6 percent after posting a 65 percent annual rise in April-June net profits.

Japan's biggest consumer electronics makers are expected to show quarterly earnings slumped due to the March earthquake, but investors will focus on whether these companies can meet their forecasts for a swift recovery, given a fragile global economy.

Buying on dips in companies with good earnings may continue, but exporters may not fare well for the time being as long as there are concerns about the U.S. economy, said Hideyuki Okoshi, general manager at Chibagin Securities in Tokyo.

Analysts in Asia Pacific have cut their estimates for September quarter earnings across sectors by an average 0.6 percent, according to Thomson Reuters Starmine's SmartEstimates, which give a greater weighting to more accurate forecasters.

Of these estimates, average downgrades were 4.9 percent for technology firms and 1.4 percent for industrial companies.

The MSCI index of Asia Pacific stocks outside Japan <.MIAPJ0000PUS> was down 1 percent, with technology, commodity-related and consumer shares the biggest drags.

The index is up 1 percent so far in July compared with a 0.9 percent fall in the MSCI all-country world index <.MIWD00000PUS> and a 1.2 percent decline in the S&P 500.

ASIA'S GOLDEN OPPORTUNITY?

However, the outlook for Asian earnings is still brighter than elsewhere globally.

Companies in emerging Asia Pacific are expected to generate earnings growth of 18.8 percent next year, exceeding the estimate of 15.8 percent for global emerging markets and 16.8 percent for the world in aggregate, according to Starmine.

However, valuations in some Asian markets do not reflect that premium. For example, Chinese companies are expected to post earnings growth of 20 percent next year, but are trading at 11.8 times 12-month forecast earnings, in line with the global average.

Investors are now torn between the fear and danger of a U.S. default, even though most pundits still maintain that this will be avoided, and the potential of a golden opportunity to strike and pick up some stocks at bargain prices, said Ben Le Brun, CMC Markets analyst in Sydney.

The Australian dollar has been an attraction for investors in currency markets looking for opportunities in the midst of debt crises in the United States and the euro zone.

The currency rose 0.3 percent to $1.1050, not far from a post-float high of $1.1081 on Wednesday after Australian inflation data.

Having stayed above $1.10 even after the S&P 500 fell 2 percent, the Australian dollar may be forming a base from which it will gradually head higher, analysts said.

Of course, flows into Asia Pacific have reversed quite quickly in the past.

Three years ago as the global financial crisis was coming to a boil, the Australian dollar made a post-float high at $0.9851, with the market convinced that Australia was insulated from the West's sub-prime mortgage fallout. Three months later the currency had dropped to a low of $0.6007.

REDUCING EUROPE EXPOSURE

The euro was flat on the day at $1.4370, still well off its July low around $1.3835.

The deadlock in Washington over the U.S. debt ceiling has not pulled traders' attention away completely from the euro zone, where Italian and Spanish bond yields keep rising relative to German bonds and calm after a second bailout for Greece has evaporated.

Japanese fund managers slashed their euro-zone bond weighting to a record low and cut their U.S. bond allocation, while raising their Japanese bond weighting to a fresh all-time high, a Reuters poll showed.

After falling overnight on a less-than-stellar auction of new 5-year bonds, U.S. Treasuries stabilized. The benchmark 10-year yield was at 2.97 percent, a basis point above where it finished last night in New York.

Focus in credit markets would likely be on U.S. credit default swap rates with a ratings downgrade possible at any time. The 1-year CDS blew out to a record 85 basis points overnight, pushing out the difference over the 5-year CDS to more than 20 basis points.

Gold has also been a big winner as investors seek out hard assets to hedge against risks. Gold rose 0.1 percent to $1,615.04 an ounce after hitting an all-time high of $1,628 on Wednesday.

U.S. oil futures were down 15 cents to $97.25 a barrel, down a second day after hitting a one-month high. Brent futures were up 30 cents to $117.73 a barrel.

(Additional reporting by Ayai Tomisawa in TOKYO and Michael Smith in SYDNEY; Editing by Kim Coghill)

Japan Fall Australia