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The euro spiked against the dollar, although market players attributed its strength to technical factors in light holiday trade, and oil edged up near a 26-month high as a snow storm in the U.S. northeast underpinned demand expectations.

Data from Japan showed factory output rose for the first time in six months in November and a survey of manufacturers revealed they expected to boost production in the coming months to meet firm demand from the rest of Asia.

"Data in recent weeks have been supportive of the stocks and commodity markets globally," said David Cohen, director of Asian economic forecasting at Action Economics.

"The U.S. will avoid a double-dip. The Asian region including Japan looks a little bit better, with its industrial production finally showing an increase."

But despite some positive signs on the outlook, investors entering thin year-end trading remained concerned about Chinese monetary policy tightening in the months ahead.

The timing of China's Christmas Day interest rate rise may have surprised but the move itself did not, with Chinese leaders pledged to make fighting inflation a priority in 2011.

World shares mostly fell on Monday in response to the move, as investors fretted that tighter monetary policy would moderate the growth that many are relying on to support the global economic recovery.

On Tuesday, MSCI's broadest index of Asia shares outside Japan, which is up nearly 13 percent for the year, rose 0.1 percent.

But Shanghai shares fell 1 percent, after a 2 percent drop the previous day, and Tokyo's Nikkei shed 0.6 percent.

"Investors locked in profits as Shanghai shares fell in late trade yesterday," said Kazuhiro Takahashi, general manager at Daiwa Capital Markets. "They didn't want to buy further as uncertainty remained for Chinese shares."

With Australian markets closed for a holiday the main stock gains in Asia were in South Korea, where the benchmark index rose 0.6 percent, led by a 1.7 percent rise for Samsung Electronics.

U.S. stocks finished little moved on Monday, with the Dow Jones industrial average down 0.2 percent but the Nasdaq Composite 0.1 percent firmer.

EURO JUMPS

The euro rose sharply as bears who had been betting on further weakness due to worries about the continent's sovereign debt crisis were forced to abandon their positions.

In a statement on the central bank's website (www.pbc.gov.cn), Hu Xiaolian, a deputy governor, said China had been normalizing policy and will explore new ways to manage excess cash, which is seen as a major driver behind 28-month high inflation.

Her remarks reinforced statements from China's top leaders that the task of taming inflation will be a priority for Beijing next year.

"An implementation of prudent monetary policy is helpful in strengthening the management of inflationary expectations and in fending off asset bubbles," Hu said.

On Saturday -- Christmas Day -- the central bank surprised investors with a 25-basis-point rate rise in benchmark deposit and lending rates, its second increase in just over two months.

Hu reiterated the central bank's determination to drain excess cash from the financial system by using all tools at its disposal: interest rates, reserve requirement ratios, open market operations and more.

"We will explore new tools ... to keep a good control on the gate of liquidity," she said, but did not indicate what these might be.

A steady stream of anti-inflation talk from the Chinese central bank has led many investors to bet on more rate increases in 2011.

A Reuters poll showed investors see the benchmark one-year deposit rate rising to 3.25 percent by the end of next year, from 2.75 percent now.

The specter of more tightening cast a pall over Chinese stocks on Monday, though investors abroad were more sanguine, in part due to confidence that China's steady tightening is a sign of solid growth in its vast economy.

In a separate statement, the monetary policy committee within the central bank noted China's economic resilience, but with a touch of caution.

"The improving trend in our economy is solidifying and the financial system is working smoothly," the committee said after a quarterly meeting.

"But it is still a pressing task to manage credit, money and liquidity as well as cut financial risks," it said.

The committee has no decision-making powers within the central bank. The central bank in turn has no autonomy over monetary policy and any move on interest rates has to be approved by the highest echelons of power within the government.

(Reporting by Langi Chiang, Aileen Wang and Koh Gui Qing; Editing by Simon Rabinovitch and Ben Blanchard)

On Saturday, China's central bank raised interest rates for the second time in just over two months as it stepped up its battle to rein in stubbornly high inflation. The People's Bank of China said it will raise the benchmark lending rate by 25 basis points to 5.81 percent and lift the benchmark deposit rate by 25 basis points to 2.75 percent.

A winter blizzard moved across the northeastern United States on Monday, disrupting air and rail travel and forcing motorists to deal with blowing snow and icy roads at the end of the busy Christmas weekend.

Oil climbed to a 26-month high on Monday as the blizzard in the U.S. Northeast offset uncertainty over Chinese fuel demand following the Christmas Day interest rate hike.

The global economy can withstand an oil price of $100 a barrel, Kuwait's oil minister said on Saturday, as other exporters indicated OPEC may decide against increasing output through 2011 as the market was well supplied.

European stocks were down 0.8 percent in early trade, with thin volumes as UK markets remained closed, and as China's latest rate hike prompted investors to cash in a little portion of the strong gains made in December.

Auto stocks such as BMW (BMWG.DE) and Daimler (DAIGn.DE) were down around 4 percent, surrendering some of their lofty gains made so far this year, as investors digested Beijing's new measures to limit new car registrations to tackle congestion in the country's capital.

U.S. stocks racked up a fourth straight week of gains last Thursday. The Dow Jones industrial average .DJI added 14.00 points, or 0.12 percent, to 11,573.49. The Standard & Poor's 500 Index .SPX edged down 2.07 points, or 0.16 percent, at 1,256.77. The Nasdaq Composite Index .IXIC eased 5.88 points, or 0.22 percent, to 2,665.60.

(Reporting by Blaise Robinson, editing by Miral Fahmy)