U.S. government bonds extended sharp losses on Wednesday, pushing the dollar higher against the yen and the euro while sending most other investors fleeing to the sidelines.

U.S. Treasuries prices plunged on Tuesday and yields surged after President Obama proposed a deal to extend tax cuts that would support economic growth but raise national debt levels in the longer term.

The yield on 10-year Treasuries rose more than 4 basis points from overnight U.S. levels in early Asian trade to around 3.188 percent, its highest since late June.

In the short run this is good news, but two or three years down the road foreign buyers of U.S. Treasuries may start to balk, said David Carter, chief investment officer at Lenox Advisers in New York.

The move in Treasuries made the dollar more attractive to investors looking for higher yields, pushing it up against the yen, the euro and most emerging Asia currencies. The dollar index <.DXY> against a basket of major currencies was up 0.4 percent.

The weaker yen gave the Japanese stock market a boost. The benchmark Nikkei average <.N225> hit its highest in almost seven months, reversing Tuesday's move to rise more than 1 percent.

Major exporters such as Sony Corp <6758.T> and Hitachi Construction <6305.T> were among the biggest gainers, both adding more than 1 percent in early trade. A weaker domestic currency helps exporters who are paid in foreign currency.

The selloff in Treasuries and the Nikkei's rise spurred further losses in Japanese government bonds after the previous day's weak 30-year debt auction. The yield on 10-year JGBs rose to its highest since June.

A further rise (in Treasuries) would put pressure on some of the higher correlated bond markets in Asia such as Singapore, Hong Kong and Thailand which have seen yields rising in recent weeks due to inflationary pressures and year end profit taking, said Kenneth Akintewe, a fund manager at Aberdeen Asset Management who helps manage $5 billion in Asian fixed income assets.

Still, inflows into the region are very strong ... which would mean any sharp selloff would be temporary and offer attractive entry points.

Other Asian stock markets stumbled as the suddenness and size of the U.S. bond selloff added to uncertainty heading into year-end.

South Korean stocks <.KS11> and the won fell briefly on a report North Korea had fired an artillery round, but partially recovered when it emerged it was a military exercise, while weak resources stocks dragged Hong Kong stocks down around 0.6 percent.

The MSCI Asia index excluding Japan was down 0.7 percent, but with a year-to-date gain of around 12 percent was still well ahead of the main MSCI world index.

Asia has been one of the chief beneficiaries of flows of capital from the United States, where the Federal Reserve is pursuing a policy of printing more cash.

The euro fell to $1.322, wiping out Tuesday's gains, and is expected to remain under pressure given persistent concerns about high debt levels in the single currency zone.

It's becoming increasingly clear the U.S. Is taking a very different approach to the Europeans in dealing with their debt overhang ... they're reflating their way out of it and the Europeans are going the opposite way, said Grant Turley, strategist at ANZ.

Gold, which has gained almost one-third since the start of the year, traded at $1,400 per ounce, down from its most recent record high of over $1,430.

The precious metal's fall is expected to be temporary, as it is firmly supported by its traditional appeal as a 'safe haven' in contrast to the euro and the dollar, which are undermined by worries about debt levels, and the prospect of the U.S. central bank printing cash respectively.

The stronger dollar dragged down other dollar-denominated commodities.

U.S. crude oil futures fell for the second day in a row, losing nearly a dollar to $87.76 per barrel, while benchmark industrial metal copper slid almost 1 percent to $8,817 per metric ton after hitting a fresh peak of $9,044 on Tuesday.

(Additional reporting by Hideyuki Sano in Tokyo and Ian Chua in Sydney)

(Editing by Kim Coghill)