Japanese shares rose on Friday, lifted by news of a mega merger in the steel sector, while a rebounding dollar put a slight dent in a commodities rally that saw copper hit a record $10,000 a tonne in the previous session.

While there are signs that the global economy is gaining momentum, many market players were on the sidelines, eyeing developments in Egypt after the White House was said to be discussing the immediate resignation of Hosni Mubarak as one of several scenarios for a transition of power.

The U.S. move comes after 10 days of anti-government protests in Egypt and ahead of a mass Day of Departure rally planned by protesters in Cairo's Tahrir Square on Friday to force Mubarak to quit.

Clashes between pro- and anti-Mubarak demonstrators have fueled fears of possible disruptions to energy supplies and boosted crude oil prices, which were headed for a second straight week of gains.

Brent crude for March gained 31 cents on Friday to $102.07 a barrel at 0525 GMT, after touching $103.37 on Thursday, the highest intraday price since September 26 2008, and then sliding on a stronger dollar. U.S. crude rose 39 cents to $90.93.

Japan's Nikkei <.N225> shares gained 1.1 percent, lifted by steelmakers which surged on news of a mega merger in the sector that would create the world's No.2 steel producer.

Tough competition from steelmakers in China and India, shrinking demand from domestic automakers and rising prices for raw materials such as coal and iron ore prompted the deal which would likely see Nippon Steel acquiring Sumitomo Metal, valued at $11 billion.

Shares of Nippon Steel <5401.T> and Sumitomo Metal <5405..T> rallied sharply, rising 9 percent and 16 percent, respectively.

The news will likely raise expectations that more Japanese companies will seriously try to increase their competitive edge in the global market, said Shinichiro Matsushita, a senior market analyst at Daiwa Securities.

On top of last week's NEC-Lenovo deal, these deals will boost investor sentiment toward Japanese stocks.

The Nikkei has risen 3.1 percent so far this year and is Asia's top performing market as investors continue to favor developed markets over emerging markets that are battling with high inflation and political risk. The MSCI Asia ex-Japan index <.MIAPJ0000PUS> is up just 0.6 percent.

Australia's key stock index <.AXJO> rose 0.9 percent as heavyweighted commodity-related stocks rallied. Most other markets in Asia remained shut for the Lunar New Year holidays and will reopen on Monday.

Spurred by further signs that the global economic recovery is gaining traction and speculative buying, copper hit $10,000 a tonne for the first time in London overnight, before easing slightly. Sugar retreated as well after spiking to 30-year tops on Wednesday as a killer cyclone battered Australia's sugar cane fields. Wheat rebounded after a brief decline, staying near the 2008 highs seen in the last session after a snowstorm that paralyzed the U.S. grain belt.

Surging food prices have come back into the spotlight after they helped fuel the discontent that toppled Tunisia's president in January and spilled over to Egypt and Jordan.

Global food prices tracked by a U.N. agency hit their highest level on record in January.

Markets fear many central banks may have to take more aggressive action to contain growing inflationary pressures, which could dampen global growth.

Weighing on commodity prices on Friday was a rebound in the U.S. dollar <.DXY> as stronger-than-expected growth in the U.S. services sector showed a resilient economy.

Rising service-sector activity, improved jobless claims figures and stronger-than-expected retail figures in the U.S. have raised confidence ahead of Friday's payrolls report that is expected to show the economy adding 145,000 jobs in January.

A strong jobs report could help the dollar extend gains against the euro.

The euro was on the defensive after its more than 1 percent drop overnight after European Central Bank President Jean-Claude Trichet threw cold water on expectations of a rise in euro zone interest rates.

The single currency was trading at $1.3633 by the afternoon in Asia, moving further away from a 12-week high of $1.3862 set on Wednesday.

(Additional reporting by Antoni Slodowski in TOKYO)

(Editing by Kim Coghill)