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The euro slipped against the dollar after two days of gains, supported overnight by talk that the European Central Bank of was buying bonds of peripheral countries such as Ireland and Portugal, even though no new policy was formally announced.

With the euro little changed this week at $1.3211 and holding above its 200-day moving average despite the euro zone fiscal crisis, investors ahead of the U.S. payrolls report put cash to work in stock markets, lifting Japan's Nikkei share average to its highest since May.

"It is clear that the labor situation is improving and with consumption demand -- the final demand that drives all else -- strengthening by the day, hiring should continue to improve," economists at DBS Group in Singapore said in a note.

The Nikkei rose 0.6 percent .N225, driven higher mainly on buying of technology stocks.

For a second day, the technology sector also outperformed in the MSCI index of Asia Pacific stocks outside Japan .MIAPJ0000PUS. The index was up 0.5 percent and extended a 3.5 percent gain in the week, on track to exceed weekly returns of Japanese stocks for the first time in three weeks.

MACRO OUTLOOK

The U.S. economy is forecast to have generated 140,000 new jobs in November, with signs of a sustained recovery in private sector hiring combined with solid auto sales and continued industrial growth boding well for the macro outlook.

The improving U.S. economic picture has been a factor lifting the entire U.S. government bond yield curve higher.

The benchmark 10-year U.S. Treasury yield edged down to 2.98 percent compared with a four-month high of 3.03 percent reached on Thursday. Since Monday, the yield has risen 16 basis points, half of the entire rise since November.

Though the U.S. labor market report will be center stage on Friday, investors will also been watching for follow-through on Thursday's unexpected narrowing in the spread of higher risk European government bond yields over German bond yields.

Market chatter about the European Central Bank stepping into the market to buy bonds of at-risk countries such Spain and Portugal caused the Spain/Germany 10-year yield spread to narrow to 230 basis points, the least in two weeks.

The Portugal/Germany 10-year yield spread was at 344 basis points, the narrowest since Oct 28.

(Editing by Alex Richardson)

Nonfarm payrolls likely rose 140,000, with private hiring increasing by more than 100,000 for a fifth straight month in November, according to a Reuters survey. The unemployment rate is forecast to have held steady at 9.6 percent.

Economists said there was a chance payrolls could surprise on the upside, citing a resurgence in retail hiring after a two-year slump. In October, U.S. employment increased by 153,000.

The Labor Department will release its closely watched monthly report on jobs at 8:30 a.m. ET.

"There is a lot of optimism that the economy is on the rebound and definitely has turned around," said Barbara Byrne Denham, chief economist of Eastern Consolidated in New York.

A second month of strong employment gains coming on the heels of reports indicating a pick-up in demand could shore up perceptions the economy's recovery from the worst recession since the 1930s is becoming self-sustaining.

That shift began to shape up in the third quarter as consumer spending's contribution to growth eclipsed the rebuilding of inventories. Consumer spending typically accounts for about two-thirds of U.S. economic activity.

But unemployment is seen remaining stuck at 9.6 percent for a fourth straight month in November because, with conditions in the jobs market improving, some discouraged workers probably rejoined the labor force.

Employment has increased by about 874,000 since December 2009, a tiny fraction of the over 8 million jobs lost during the recession.

Analysts believe that gap would compel the Federal Reserve to fully implement its controversial $600 billion program to buy government bonds. The purchases are designed to push already low interest rates down further to stimulate demand.

Concerns about joblessness and low inflation led to the U.S. central bank's decision last month to launch its now much-criticized second round of quantitative easing, as QE2 is known in financial markets.

QE2 HERE TO STAY

"We need to create 150,000 to 250,000 jobs consistently over a number of years before the unemployment rate can come down," said John Canally, an economist at LPL Financial in Boston.

"So even if we get a blow-out number of 300,000 in November and it increases calls for the Fed to stop QE2, they will want to see that over a number of months."

Fed officials are not the only ones worried about unemployment. The health of the labor market could determine whether President Barack Obama gets a second term in office in 2012.

ECB President Jean-Claude Trichet said the bank had decided at its monthly policy meeting to keep interest rates on hold and it extended its liquidity safety net to support vulnerable euro zone banks.

He made no mention of increasing the ECB's government bond buying program, despite calls to do so after an 85 billion euro ($110.7 billion) EU-IMF rescue of Ireland failed to dispel fears that Portugal or Spain may need a bailout.

"I say we are constantly alert. We are constantly looking at the situation of the markets," Trichet told a news conference.

But referring to a bond-buying policy that the ECB started after Greece was bailed out in May, he said: "The Securities Market Program (SMP) is ongoing, I repeat -- ongoing ... I won't comment on the observations of market participants."

Suggestions before Thursday's meeting that the ECB could agree new anti-crisis measures had helped the euro stabilize and lifted stock markets, despite lingering concerns about Spain and Portugal.

Adding to those concerns, Standard & Poor's warned late on Thursday that it may downgrade Greece's BB-plus credit rating in three months if it becomes clear that Europe's new mechanism to stabilize the debt crisis would favor public creditors to the detriment of private bond holders.

The failure to announce any major new action worried some economic analysts. But others' disappointment was tempered by the reports of ECB purchases of Portuguese and Irish bonds, which caused a drop in the premium that investors demand to buy these countries' debt over German benchmarks.

ECB bond buying, one trader said, has "been bigger than the last couple of weeks, since yesterday. Yesterday and today have definitely been bigger than usual."

Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, said Trichet had not set a limit on the bond-buying program and this suggested the option of further bond purchases was "not necessarily off the table at all."

Morgan Stanley said in a research note that market hopes of a far-reaching announcement on bond purchases had been disappointed but: "At the same time, it seemed that ECB has continued to step up the pace of its purchases under the SMP."

EURO IN DANGER?

Some economists say the future of the euro is in doubt because of the sovereign debt crisis and fear contagion to Asia and the United States.

International Monetary Fund chief Dominique Strauss-Kahn, visiting India, said the situation in Europe was "serious" and the IMF was ready to provide financial and technical support to member states if needed.

But EU leaders deny the euro will collapse and dismissed reports on Thursday that they would call a special summit this weekend on the crisis.

The measure, which passed 234-188, is expected to die in the Senate, where Republicans have the votes to block it. Twenty Democrats voted against the House bill and three Republicans voted for it.

Despite the likely outcome, Senate Majority Leader Harry Reid may hold a vote on the House bill as early as Friday, Democratic aides said.

Most Democrats say Republicans were willing to jeopardize low tax rates for middle- and lower-income taxpayers to ensure low taxes for the wealthiest Americans.

The tax cuts were signed into law by former President George W. Bush in 2001 and 2003 and are set to expire December 31.

"The Republicans want to continue to keep middle-income tax cuts hostage until it is combined with upper-income tax cuts," said Democratic Representative Sander Levin, head of the tax-writing panel in the House.

Republicans countered that allowing any tax rates to rise would threaten the economy, which is suffering from high unemployment rates.

The House action comes as congressional leaders and the Obama administration negotiate behind closed doors for a compromise that would allow Congress to extend tax rates before they expire at year's end.

"The talks are ongoing and productive, but any reports that we are near a deal in the tax cut negotiations are inaccurate and premature," said White House press secretary Robert Gibbs.

On Capitol Hill, senior Democratic aides said they did not expect any significant progress until at least next week.

Another aide said many Democrats were worried the White House would not stand up to Republicans.

"There's a growing concern that the White House won't fight hard enough for the middle class and will cave (on extending tax cuts for wealthier Americans) without getting much in return, other than perhaps a Senate vote" on a stalled U.S.-Russian arms treaty, the aide said.

'THIS IS NONSENSE'

Democrats fear negotiations will go much as they did over the past two years on healthcare and the economic stimulus package, with President Barack Obama making concessions without getting much, if anything, in return from Republicans, the aide said.

The top House Republican blasted Thursday's vote on renewing only lower-tax rates as political maneuvering that would undermine the bipartisan talks.

After the meeting with Kansas City Federal Reserve Bank President Thomas Hoenig, the No. 3 Republican in the House of Representatives, Mike Pence, told reporters he continues to think the Fed should focus solely on fighting inflation.

Pence said last month that he planned to introduce legislation to change the Fed's mandate, which currently charges it with using monetary policy to achieve full employment as well as to keep inflation at bay. Sen. Bob Corker, an influential Republican on the Senate Banking Committee, has also backed the shift.

The proposal comes alongside domestic and international criticism over the U.S. central bank's plan to buy an additional $600 billion in government bonds to try to speed up a sluggish economic recovery.

Opponents, including a number of Republican lawmakers, worry the program will weaken the U.S. dollar and sow the seeds of inflation without doing much to lift economic growth and lower unemployment.

Many top Fed officials, including Chairman Ben Bernanke, have defended the action on the grounds that the economy is underperforming on both ends of the Fed's responsibilities with unemployment near 10 percent and inflation below the Fed's comfort zone.

Bernanke is expected to defend the bond-buying spree anew in an interview with the popular CBS newsmagazine show "60 Minutes" on Sunday.

Hoenig is one of the most inflation-focused "hawks" on the Fed and has dissented at every Fed policy vote this year on the grounds easy money could fuel asset bubbles.

When asked whether he supports efforts to pare the Fed's mandate to maintaining price stability, his office pointed to an October speech in which he said: "I am fully committed to the Federal Reserve's dual mandate to maintain long-run growth so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

Republican lawmakers have jumped to criticize the Fed's new stimulus effort since November elections swept them into control of the House.

Pence said members of Congress had wanted to talk to a policy-maker who also objects to the Fed's bond-buying plans, which are also referred to as QE2 because it is the second time the Fed has sought to lower rates by buying Treasuries, a tactic known as quantitative easing.

"Based on upon his public statement and his dissenting views on QE2, Thomas Hoenig is a member of the ... central bank that shares our concerns about the prospect of inflation and we're grateful that he came by," Pence said.

Fed officials say the central bank would likely be pursuing its bond-buying program even if it only had a mandate to ensure price stability because policy makers worry that low levels of inflation risk tipping into a dangerous deflationary spiral.

However, the move to simplify the mandate has not encountered the same vehement Fed opposition that greeted failed congressional efforts earlier this year to subject the central bank's monetary policy decision-making to lawmaker review, which officials said would have compromised the central bank's independence.

When Pence and Corker announced their support for changing the mandate, a Fed spokeswoman said the central bank was not seeking a change and that the dual mandate was appropriate.

The measure, which passed 234 to 188, is expected to die in the Senate, where Republicans have the votes to block it. Twenty Democrats voted against the House bill and three Republicans voted for it.

Most Democrats say Republicans are jeopardizing low tax rates for middle- and lower-income class taxpayers to ensure low taxes for the wealthiest Americans.

The tax cuts were enacted by former President George W. Bush.

"The Republicans want to continue to keep middle-income tax cuts hostage until it is combined with upper-income tax cuts," said Democratic Representative Sander Levin, head of the tax-writing panel in the House.

Republicans countered that allowing any tax rates to rise would threaten the economy, which is suffering from high unemployment rates.

The House action comes as congressional leaders and the Obama administration negotiate behind closed doors for a compromise that would allow Congress to extend tax rates before they expire on December 31.

The top Republican in the House blasted Thursday's vote as political maneuvering that is undermining those separate, ongoing talks.

"This is nonsense, all right? The election was one month ago," said John Boehner, who is in line to become House speaker when Republicans take over in January.

U.S. Treasury Secretary Timothy Geithner and White House budget chief Jacob Lew met with two Republicans and two Democrats twice on Wednesday on the tax issue and are set to meet again Thursday.

President Barack Obama repeated his optimism that a deal could be reached. He has indicated a willingness to compromise in recent weeks, even as Republicans have dug in their heels.

"I believe it will get resolved," Obama said at an unrelated event. "That doesn't mean there may not be some posturing over the next several days."

If no agreement is reached, all tax-paying Americans could face higher bills next year, giving Republicans a chance to score politically by making tax cuts their priority when taking control of the House of Representatives in January. Finding common ground before then will be tricky.

EXTENSION LIKELY, DEMOCRATS SEEK CONCESSIONS

Many people, including some Democratic aides who asked not to be identified, believe a one-to-three year extension of all the Bush-era rates is the most likely scenario.

With anxiety over government debt roiling markets in Europe and driving global capital into U.S. Treasury bonds, Republican Senators Tom Coburn and Mike Crapo said they will vote for the bold proposal at a decisive commission meeting on Friday.

But Republican Representative Paul Ryan said on Thursday he will vote against the plan, saying it does too little to tackle health care costs and relies too much on tax increases.

The announcements brought to nine the number of commission members backing the plan, with 14 votes needed to trigger congressional action on it. But analysts are betting that level of support will not materialize on the 18-member commission.

"It remains highly unlikely that any proposal will get the necessary 14 votes to become an official recommendation," said Steve McMillin, a partner at Hamilton Place Strategies, a Washington policy advisory firm.

The co-chairmen of the commission -- Democrat Erskine Bowles and Republican Alan Simpson -- unveiled the plan on Wednesday. The commission was set up by President Barack Obama in February to find ways to balance the federal budget.

If the plan fails to win 14 votes, its progress through official channels ends, but its influence could go on.

"We think it will be a baseline for next year's budget battles; we believe significant components could find their way into the president's budget to be released in February as well as congressional budget proposals," said Brian Gardner, policy analyst at investment firm Keefe Bruyette & Woods.

The Bowles-Simpson plan is coming at a time when the U.S. budget deficit is the highest it has been since World War Two. Polls show voters are deeply concerned, and they made that clear in the 2010 congressional elections, when Republicans scored enough victories to retake the House in 2011 and will hold more seats in the Senate.

At the same time, a government debt crisis is rolling through Europe -- from Greece to Ireland -- and raising concerns about the creditworthiness of larger nations.

'NATIONAL SURVIVAL' CITED

"Our debt crisis is a threat to not just our way of life, but our national survival ... This plan will not just avert a disaster but help drive the kind of economic recovery we need," Coburn and Crapo said in a joint statement.

However, they said the plan does not go far enough in addressing rising health care costs. They argued that 80 percent of the debt problem comes from the government-run Medicare health program for the elderly.

All Americans should be ready to sacrifice to tackle the $1.3 trillion annual deficit and $13.8 trillion debt, they said.

The Bowles-Simpson plan proposes a major tax code overhaul and deep spending cuts to eventually balance the U.S. budget.

The picture also was brightened by news retailers saw stronger-than-expected sales for November as shoppers flocked to stores and spent more during the annual discount bonanza known as Black Friday.

The reports were the latest to suggest a pick-up in activity in the fourth quarter.

"There seems to be no doubt that the economy is improving and likely to continue to improve," said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Initial claims for state unemployment aid increased 26,000 to a seasonally adjusted 436,000 last week, the Labor Department said. But a four-week moving average -- a better gauge of underlying labor trends -- fell to its lowest level since the week ending Aug 2, 2008.

While claims bounced off the prior week's two-year low, they stayed in a range viewed by economists as indicating some strength in the labor market. Economists had forecast claims rising to 425,000.

The claims data has little bearing on Friday's employment report for November as it falls outside the survey period.

Anecdotal evidence points to a firming labor market and the government is expected to report that nonfarm payrolls rose 140,000 last month after increasing 151,000 in October.

JOB LOSSES EASING

"The core story here is that firmer demand and easing credit conditions for smaller firms are allowing them to hang on to people who might otherwise have been let go," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

In a second report, the National Association of Realtors said its Pending Home Sales Index, based on contracts signed in October, jumped 10.4 percent to 89.3. Economists had expected a decline of 0.5 percent.

The data and a decision by European officials to extend a liquidity safety net for vulnerable banks buoyed stocks on Wall Street. The dollar fell against the euro and the yen, while prices for U.S. government debt were little changed.

Europe's sovereign debt crisis early this year helped to slow the U.S. economy's recovery from its worst recession since the Great Depression of the 1930s.

Analysts believe the Federal Reserve's decision to loosen monetary policy further through additional purchases of $600 billion worth of government debt should help shield the domestic economy from much of the turbulence from Europe.

Despite signs of improvement, strains remain in the labor market. The number of people still receiving benefits under regular state programs after an initial week of aid rose 53,000 to 4.27 million in the week ended November 20, above expectations for 4.21 million.

IAC said on Thursday that Liberty had sold its entire equity stake in IAC, worth $368 million, in exchange for $220 million in cash and the Evite and Gifts.com businesses. The online businesses will become part of Liberty's Interactive unit.

IAC shares were up 2.5 percent in late morning trading as some investors bet on further transactions which could boost the stock.

Liberty's stake had included 60 percent of voting rights of all classes of IAC stock, which had been represented by Diller -- a long-time business associate of Malone, the cable television pioneer.

The two media moguls fell out in a 2008 court case over how Diller used Malone's voting rights in IAC.

Diller, 68, will remain as chairman and senior executive, while the company has appointed former Match.com Chief Executive Greg Blatt, 42, to be IAC's new chief executive.

"It's been clear to me for some time that this company needs a full-time, aggressive and aspirational executive in the CEO role," said Diller, adding that he's "not going anywhere".

Following the transaction, Diller's voting rights will be reduced to 34 percent -- still the largest individual voting stake in the company.

IAC said that Diller has been granted the right to increase his voting stake to around 41 percent within the next nine months -- which would give him more control of the business.

The transaction effectively ends a major part of a 17-year business engagement between Malone and Diller that began when Diller joined Silver King Communications.

Both men remain on the boards of several companies that were spun off from IAC in 2008, including Ticketmaster, now part of Live Nation Entertainment.

While Diller has always said he remains good friends with Malone, there was more evidence of the tensions that can arise in business when Diller suddenly stepped down in October as chairman of Live Nation and was replaced on an interim basis by Malone.

"While I'll continue my association with Dr. Malone in Expedia, and as significant shareholders of the multiple spun-off companies, Liberty's exit from IAC is a turning point," Diller said in a statement.

Lazard Capital analyst Barton Crockett said the improving relationship between Liberty and IAC is important because it could allow IAC to potentially exchange its 24 percent stake in Expedia, which is worth around $1.9 billion on a tax free basis. "This now looks more likely," he said in note to clients.

IAC owns Web businesses including search businesses like Ask and Citysearch and dating sites like Match.com and Chemistry. It has also announced plans for a joint venture with its Daily Beast media site with weekly print magazine Newsweek.

IAC's shares are up around 35 percent over the last 12 months, significantly outperforming the S&P 500 index. The shares were up 72 cents to $29.44 in late morning Nasdaq trade on Thursday.

(Reporting by Yinka Adegoke; Editing by Tim Dobbyn)

Not only were there more shoppers on Black Friday -- the annual discount bonanza following U.S. Thanksgiving -- but retailers also benefited as more people bought for themselves, promotions were less aggressive than last year and weather cooled after a mild October.

Same-store sales, or sales at stores open at least a year, are a closely watched gauge of retail performance and offer an early look at the strength of the shopping season, which can account for as much as a third of a retailer's annual revenue.

Consumer spending also equals about 70 percent of the U.S. economy, so this year's holiday sales season is being closely watched to determine if the economic recovery can pick up steam.

After only a handful of sales reports, Costco Wholesale Corp (COST.O), Zumiez Inc (ZUMZ.O) and Hot Topic Inc (HOTT.O) reported better-than-expected November sales. Eight of the 11 retailers that reported sales so far beat Wall Street expectations, according to Thomson Reuters data.

One early disappointment was teen apparel chain Aeropostale Inc (ARO.N), which on Wednesday forecast a holiday-quarter profit below Wall Street expectations after posting a 1 percent decline in November same-store sales.

Black Friday kicked off the holiday season last weekend, bringing hordes of people to retailers like Wal-Mart Stores Inc (WMT.N), Best Buy Co (BBY.N) and Macy's Inc (M.N) before dawn with early-bird discounts. Wal-Mart and Best Buy do not report monthly sales.

Broadly, consumers are in a buying mood due to pent-up demand following two anemic holidays seasons coupled with growing consumer incomes and lower savings rates, said Craig Johnson, president of Customer Growth Partners.

"It's like a perfect storm for a good holiday," Johnson said late on Wednesday. "The 83 percent of people with full-time jobs are beginning to spend again. That's the big factor that's different."

Johnson is expecting holiday sales to rise 4.5 percent, but said that if the current pace continues, he may raise his forecast closer to 6 percent. By contrast, the National Retail Federation forecast a gain of 2.3 percent, following a 1.1 percent increase in 2009 and a 3.4 percent decline in 2008.

Costco reported a 9 percent rise in November same-store sales. Analysts on average forecast a 6.2 percent increase, according to Thomson Reuters data.

Zumiez posted a 20.7 percent rise in November same-store sales, beating estimates of a 12.6 percent increase -- the highest expectation for any apparel retailer. The company also forecast quarterly earnings above Wall Street estimates.

But some retailers might expect a lump of coal.

Analysts were expecting a rise of 3.7 percent on average for November, according to Thomson Reuters data, with the biggest gain seen for discounters like Costco and Target Corp (TGT.N).

Hot Topic logged a 2.1 percent decline, but that was smaller than the 4.6 percent drop that analysts expected.

The Standard & Poor's Retail index .RLX is up 26 percent since August on hopes of improving earnings. Analysts have said there may be little more room for a near-term increase in many retail stocks unless the holiday season is even stronger than expected.

(Reporting by Martinne Geller; Editing by Lisa Von Ahn)

European stocks were up 0.7 percent in morning trade, extending the previous session's strong gains, as investors watched to see if the European Central Bank would rush through new measures to resolve the euro zone debt crisis.

The European Central Bank is expected to keep unlimited liquidity operations in place for longer with the euro zone debt crisis raging unabated, but analysts say it is unlikely to announce mass new bond purchases on Thursday.

The cost of insuring peripheral euro zone debt against default eased on Thursday ahead of the ECB meeting, while the euro gained ground against the dollar.

Oil was steady near $87 on Thursday after rallying 3 percent in the previous session on encouraging jobs data in top consumer the United States that helped drive prices to their highest in almost three weeks.

Singapore's GIC and OCBC's (OCBC.SI) insurance arm have joined a group led by U.S. private equity firms KKR KKR.UL and TPG Capital TPG.UL in buying Morgan Stanley's (MS.N) 34.3 percent stake in top Chinese investment bank CICC.

General Motors (GM.N) and its Chinese partners sold 196,990 vehicles in China in November, up 11.2 percent from a year earlier, while Toyota Motor (7203.T) said it sold 17 percent more cars in China in November compared with a year earlier.

Costco Wholesale Corp (COST.O) posted a 9 percent rise in November sales at store open at least a year, helped by higher gasoline prices and strengthening foreign currencies.

Dutch mail and logistics firm TNT (TNT.AS) on Thursday detailed the planned separation of its Express activities from its mail activities and said it would keep a 29.9 percent stake in the Express unit. The move cuts down TNT to its old postal activities and could make Express a takeover target in a new consolidation wave in the global sector in which Fedex (FDX.N) and United Parcel Service Inc (UPS.N) are big rivals and most growth is in emerging markets such as in Asia.

Economic data on tap for Thursday includes weekly initial jobless claims, pending home sales for October, and retail chain store sales for November.

Companies expected to report quarterly results include Novell Inc (NOVL.O), The Kroger Co (KR.N), Toll Brothers (TOL.N) and Del Monte Foods (DLM.N).

The Dow and the S&P 500 scored their biggest gains in three months on Wednesday as efforts to resolve the EU's debt crisis helped push the S&P above 1,200, an important technical level that signals the potential for the rally to continue.

The Dow Jones industrial average .DJI gained 249.76 points, or 2.27 percent, to 11,255.78. The Standard & Poor's 500 Index .SPX rose 25.52 points, or 2.16 percent, to 1,206.07. The Nasdaq Composite Index .IXIC added 51.20 points, or 2.05 percent, to 2,549.43.

(Reporting by Blaise Robinson; Editing by Hans Peters)

Even after Ireland's bailout, investors have been losing confidence that Portugal and Spain can escape a similar fate, leading to expectations the ECB will announce backstop measures to keep cash flowing in its financial system, though it may disappoint investors by not being ready to increase bond purchases just yet.

"The sovereign debt crisis has shown early signs of transforming into a banking and liquidity crisis," Todd Elmer, currency strategist with Citi in Singapore, said in a note.

"A breakdown in market function is likely to drive risk reduction among investors, which should favor sharp dollar strengthening vs euro.

"Such price action could eventually force a stronger response from both fiscal and monetary authorities in Europe, but expectations for imminent action are probably premature."

Wall Street's 2 percent rally on Wednesday led by companies most sensitive to economic turning points and a U.S. Treasuries sell-off after reports showed strength in labor and industrial sectors also sparked further equity buying in Asia. .N

There were limits though on how the seeming optimism was feeding through to greater risk taking. For example, the high-yielding Australian dollar slid 0.5 percent after retail sales posted the biggest monthly decline in 15 months in October.

Also, shares of Toyota Motor Corp (7203.T) fell 1 percent and were the most active in early trading in Tokyo after the company's U.S. sales dropped 3 percent in November compared with the 17 percent rise in U.S. auto industry sales.

The Nikkei led Asian markets higher, rising 1.9 percent .N225 to the highest since June 2010. Turnover has been picking up as well, with the 5-day moving average of total turnover holding above the 20-day moving average for longer than a month. .T

The MSCI index of Asia Pacific stocks outside Japan was up 1 percent .MIAPJ0000PUS after hitting a two-month low on Monday, with the materials and technology sectors outperforming.

The euro was at $1.3130, nearly unchanged on the day. The currency ended the New York session above its 200-day moving average at $1.3122 and Wednesday's highs and closing level were both higher than the prior day -- usually a signal of more gains ahead.

With so much hinging on the whims of policymakers though, the risk of disappointment was high and therefore a resumption of the euro slide a strong possibility.

"I'd think the euro is quite possibly going to return to below $1.30," said Sean Callow, currency strategist at Westpac Bank in Sydney.

The Australian dollar was down 0.4 percent to US$0.9648 but holding well above a base of support in the $0.9530 area, the two-month low plumbed overnight.

Anticipation of how European policymaker action, or inaction as it may be, would affect how risk taking moves asset prices was having a mixed impact on commodity prices.

Hopes that the ECB will rush through new anti-crisis measures, such as expanding its government bond buying, helped the euro stabilize and lifted stock markets.

But the central bank risks disappointing markets if, as several analysts predict, it will only decide at its monthly meeting that its liquidity taps for euro zone banks will stay wide open and merely hint at more government bond purchases.

"The price action ... adds to risk that the market may be disappointed with today's outcome," Citigroup currency and markets strategists said in a note.

Even European powerhouse Germany struggled to sell its bonds on Wednesday and Portugal's borrowing costs soared in further signs that last weekend's 85 billion-euro ($110.7-billion) EU-IMF rescue of Ireland and leaders' pledges to defend the euro at any cost failed to impress investors.

European Union leaders appeared to pass the baton to the ECB.

Economic and Monetary Affairs Commissioner Olli Rehn said recent EU actions provided a sound basis for further stabilization steps by the central bank, and European Commission President Jose Manuel Barroso said he was confident the ECB would do whatever was needed.

"I'm sure the ECB is analyzing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," he said.

Markets are now waiting to see how ECB President Jean-Claude Trichet will respond when he addresses the press at 1330 GMT on Thursday. Those most bullish expect to hear that the ECB will ramp up its government bond buying program, launched in May after Greece was bailed out.

HINTS

But many market watchers expect no more than hints in that direction, saying it is too soon for any conclusive announcement given a fierce debate within the ECB about the merits of such action.

Influential Bundesbank head Axel Weber has called for the program to be scrapped, and fellow ECB members have criticized the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt.

"Thursday's meeting could send the first signal that ECB is on course for stepping up its purchase program," RBS economist Jacques Cailloux said in a note to investors.

Yet ECB policymakers may feel under pressure to act faster, given growing concerns that the crisis could spread beyond Europe.

In Washington, the White House said President Barack Obama was briefed regularly on developments in Europe, while a senior Treasury official was heading to Berlin for talks on the economic situation after meetings on Wednesday in Madrid.