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Even as the upbeat outlook spurred some talk of a possible "V shaped" recovery for the world's third-largest economy and room for the central bank to hold off with any more policy easing, rating agency Moody's Investors Service flagged its concerns over the weak policy response to the crisis.

Moody's moved one step closer to downgrading the country's debt ratings, putting it on review for a possible downgrade and highlighting its concerns over the policy response to "faltering economic growth prospects."

Data on Tuesday showed output rose 1.0 percent in April, short of economists' median 2.8 percent forecast, but firms' plans for the following two months suggested a brisk recovery from a record 15.5 percent slump in the immediate aftermath of the March 11 disaster.

Manufacturers predicted an 8.0 percent rise in their May output and a similar 7.7 percent increase in June, Ministry of Economy, Trade and Industry data showed on Tuesday.

However, optimism about longer-term outlook was tempered by lingering fears of power outages during the summer peak period and concerns that political infighting may delay reconstruction spending.

"From May a V-shaped recovery may start and it (output) may keep rising through July and August at a similar pace to what is forecast for May and June," said Kyohei Morita, chief economist at Barclays Capital Japan.

He said reduced electricity supplies might dampen output in July-September, but the economy should regain steam later on, provided that extra reconstruction spending kicks in by then.

"One risk is what politicians do in June. If they end up holding a snap election, that will delay the second extra budget," Morita said.

Prime Minister Naoto Kan faces a no-confidence vote as soon as this week and even though most political analysts think Kan will survive, the looming face-off bodes ill for cooperation with opposition needed to get spending through a divided parliament.

The 9.0 magnitude quake and a deadly tsunami that lashed Japan's northeast left around 24,000 dead or presumed dead and triggered the world's worst nuclear crisis in 25 years, knocking Japan back into a second recession in less than three years.

The immediate blow from the disaster proved more violent than many had initially thought, shaving 0.9 percent off the first-quarter economic output.

Most economists expect the economy to shrink further in the second quarter before gradually starting to recover some time in the second half of the year with the help of Japan's biggest reconstruction effort since the post-World War Two era.

The Bank of Japan eased monetary policy just days after the March earthquake, but it has stood pat on policy since then on the view that the economy will resume a moderate recovery before the end of the year. It has signaled, however, that it stands ready to loosen policy further if the damage from the quake proves bigger than expected.

The latest data and news from individual companies, however suggested manufacturers were making good progress in restoring supply networks torn apart by the disaster and managing their energy needs in the face of possible electricity shortages.

A separate private Purchasing Managers' survey for May confirmed the improving outlook with manufacturing activity rebounding from a two-year low and expanding for the first time in three months this month.

Economists pointed to a still subdued consumer demand as another reason for caution about the economy's longer-term prospects.

Underscoring lingering weakness in consumption, household spending fell 3.0 percent in April from a year earlier, after a record 8.5 percent annual drop seen the previous month and against a median forecast for a 2.9 percent annual decline, government data showed. Separate data showed wage earnings fell in the year to April 1.4 percent, the sharpest decline since 2009.

The jobless rate inched up to 4.7 percent from 4.6 percent seen in March, as expected, while the availability of jobs fell to 0.61 from 0.63 in March, below 0.62 expected by economists, meaning that there were more than three jobs available for every five job seekers.

(Additional reporting by Kaori Kaneko; Writing by Tomasz Janowski; Editing by Edmund Klamann and Vidya Ranganathan)

The euro rose to $1.4354, its highest in three weeks, supported by a Wall Street Journal report that Germany is considering dropping its demand for an early rescheduling of Greek bonds in order to facilitate a new package of aid loans for heavily-indebted Greece.

The European Union wants to draft a second bailout package for Greece to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.

"The euro zone problems appear to be subsiding for now. Or putting it another way, the market appears to have stopped looking at them as a factor for now," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ, adding the market could focus on upcoming U.S. data releases. Key numbers including ISM manufacturing and payroll data are due this week.

In Japan, the Nikkei average rose more than 1 percent to 9615.54, boosted by industrial output figures.

Though an output increase of 1 percent in April was below expectations, manufacturers sharply increased their forecasts for May, predicting output will rise 8.0 percent compared with the previous 2.7 percent forecast, data from the Ministry of Economy, Trade and Industry showed.

Companies expect the recovery to continue in June, a sign they are making progress in recovering from the March earthquake.

"Investors got past the weak data in April and cheered the strong outlook by buying futures," said Tsuyoshi Segawa, an equity strategist at Mizuho Securities.

Big gainers on the Nikkei included solar power firms, expected to win business as a result of Germany's decision to shut all its nuclear reactors by 2022, a switch in policy prompted by the Fukushima radiation scare in Japan.

Panel-maker Sharp Corp rose 3.0 percent to 762 yen and panel equipment manufacturer Ulvac surged 2.9 percent to 2,073 yen.

MSCI's index of Asia-Pacific stocks outside Japan was up 1.2 percent.

Brent crude oil for July delivery rose 97 cents to $115.65 a barrel, having slipped below $115 on Monday, when markets were closed in the United States and Britain. Prices are down around 9 percent in May, the biggest drop since May last year.

Gold ticked up to $1,538.80 per ounce by 0209 GMT, after closing at $1,597.95 on Monday in trade drastically thinned by market holidays in the U.S. and Britain.

Gold, one of the chief beneficiaries of worries about the security of currencies and other assets, set a record high of $1,575.79 per ounce in early May.

Greece's conservative opposition meanwhile demanded lower taxes as a condition for reaching a political consensus with the Socialist government on further austerity measures, which Brussels says is needed to secure any further assistance.

Moves to plug a looming funding gap for 2012 and 2013 were accelerated after the International Monetary Fund said last week it would withhold the next tranche of aid due on June 29 unless the EU guarantees to meet Athens' funding needs for next year.

Senior EU officials held unannounced emergency talks with the Greek government over the weekend, an EU source said.

Greece took a 110 billion euros ($158 billion) rescue package from the EU and IMF last May but has since fallen short of its deficit reduction commitments, raising the risk of a default on its 327 billion euro debt -- equivalent to 150 percent of its economic output.

The tax cuts sought by conservative New Democracy leader Antonis Samaras could aggravate the revenue shortfall, but he argues they are essential to revive economic growth.

EU officials said a new 65 billion euro package could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatisation program. "It would require collateral for new loans and EU technical assistance -- EU involvement in the privatisation process," one senior EU official said, speaking on condition of anonymity.

Extra funding for Greece faces fierce political resistance from fiscal conservatives and nationalists in key north European creditor countries -- Germany, the Netherlands and Finland -- complicating EU governments' task.

Greek daily Kathimerini said finance ministers of the 17-nation single currency area may hold a special meeting next Monday on a new package. European Commission spokesman Amadeu Altafaj dismissed the report as "unfounded rumours, once again."

The next scheduled meeting of euro zone finance ministers is on June 20 in Luxembourg, having been pushed back a week from its original date. It will be followed three days later by a summit of EU leaders to assess the 18-month-long debt crisis.

MARKETS RATTLED

Mass unemployment and wage and benefit cuts due to the EU/IMF austerity plan have triggered spontaneous youth protests in Greece as well as a series of one-day strikes by powerful trade unions.

Weekend comments by an Irish minister that Dublin too may need a second rescue package may also fuel opposition to further bailouts among lawmakers in Berlin, the Hague and Helsinki.

Transport Minister Leo Varadkar told The Sunday Times newspaper that Ireland was unlikely to be able to return to capital markets next year as foreseen in its EU/IMF program.

"It would mean a second program (of emergency loans)," he was quoted as saying.

Irish central bank governor Patrick Honohan acknowledged at a news conference on Monday that debt market conditions were worse now than when Ireland took an 85 billion euro bailout last November but said they would improve.

Uncertainty over whether Greece will receive the next 12 billion euro aid tranche required to meet 13.4 billion euros in funding needs in July continued to rattle financial markets.

The Greek 10-year bond spread over safe haven German Bunds rose by 20 basis points to 1,387. Two-year yields were up 58 bps to 26.23 percent.

The European Central Bank maintained a drumbeat of pressure against any attempt by EU politicians to restructure Greece's debt mountain, even by asking investors to accept a voluntary extension of bond maturities.

ECB board member Lorenzo Bini Smaghi said in an interview published on Monday the idea that debt restructuring could be carried out in an orderly way was a "fairytale," saying it was the equivalent of the death penalty.

"If you look at financial markets, every time there is mention of a word like 'restructuring' or 'soft restructuring' they go crazy -- which proves that this could not happen in an orderly way, in this environment at least," Bini Smaghi told the Financial Times.

He also warned against a debt 'reprofiling', or voluntary extension of Greek bond maturities, saying it would be hard to get investors to agree to such a deal without the use of force.

Euro zone governments are actively studying options for changing the maturities on Greek debt, officials say, although German Finance Minister Wolfgang Schaeuble acknowledged in an interview last week that it was very high risk.

"The Eurogroup is doing research for reprofiling -- what can you do on reprofiling? Is it possible without a credit event?" Dutch Finance Minister Jan Kees De Jager told reporters on Saturday in Cyprus. "It's an investigation, and we have to wait for the outcome of it.

EU officials contend that Greece could do much more to help itself by selling off a treasure trove of state assets.

ECB executive board member Juergen Stark told Welt am Sonntag newspaper that Athens could raise as much as 300 billion euros from privatising state property.

Greece currently aims to raise 50 billion euros from privatisations by 2015 to help stave off a fiscal meltdown, but the country lacks a proper land registry and ownership of many potentially lucrative assets is legally uncertain.

Athens is setting up a sovereign wealth fund to pool real estate assets and state stakes in companies such as telecom company OTE, Post Savings Bank and ports.

Top EU officials have asked Greece to step up privatisations urgently and suggested creating a trustee institution to help the process similar to the body that privatised East German firms after the fall of communism.

(Additional reporting by Angeliki Koutantou and Ingrid Melander in Athens, Marius Zaharia in London, Luke Baker in Brussels; writing by Paul Taylor, editing by Mike Peacock)

European stocks were also set to dip, tracking weakness in Asia, but trading was expected to be thin with holidays in the United States and the UK.

European Union and IMF officials are likely to deliver their verdict this week on Greece's faltering drive to bring its budget deficit under control.

Compounding euro zone debt woes, a government minister in Ireland said it may have to ask for another loan from the EU and IMF because it will struggle to return to debt markets to raise funds next year.

The euro fell to $1.4263, having pulled back from resistance near $1.4327, its 55-day moving average.

The single currency, which has bounced off of a two-month low of $1.3968 hit a week ago on trading platform EBS, also faces resistance near $1.4369, the top of the cloud on the daily Ichimoku chart, a technical analysis tool popular among traders.

Against a basket of currencies .DXY, the dollar was trading near the 75 line, just shy of a two-week trough hit in the previous session.

A batch of weak data has also raised questions on whether the U.S. economic recovery is faltering, raising expectations that authorities may keep interest rates at zero well into 2012, undermining the dollar's appeal.

Traders are also awaiting global manufacturing data on Wednesday for any signs of a slowdown in the world economy.

While Asian stocks have floundered in recent months, the appeal of fixed income assets has grown as regional central banks look set to keep raising interest rates to tackle inflation.

Year-to-date volumes of $47.4 billion in bonds sold in dollars, euros and yen from Asia ex-Japan, ex-Australia is already more than half of $83.6 billion transacted in all of 2010. Morgan Stanley projected that at the current pace the annual tally could end up in excess of $100 billion.

London-listed Indian mining company Vedanta Resources (VED.L) last week priced $1.65 billion worth of five- and 10-year bonds, which marked the largest high-yield bond out of Asia.

That bullishness hasn't been restricted to such bonds only.

Local currency debt have also emerged as a favorite for after January's selloff with net foreign ownership in Indonesian rupiah bonds rising to a record.

Measured in dollar-adjusted terms, total returns for HSBC Asia's U.S. dollar bond index is three percent on a year-to-date basis, according to Thomson Reuters data.

Its local currency bond index counterpart has delivered 2.5 percent while MSCI's index of Asia-Pacific shares outside Japan is up about 1.5 percent.

SOUTHEAST ASIA BENEFITS

While credits had yet another roaring month, equity indices across the region were mostly down in May, led by Chinese shares .SSEC which are set to post a 7 percent drop.

For the day, Japan's Nikkei .N225 and Australia .AXJO ended down 0.2 percent and 0.4 percent, respectively, while the MSCI index of Asia Pacific stocks outside Japan bounced slightly after falling for five consecutive weeks.

Southeast Asian markets were the clear outperformers with Malaysia and Indonesia among the leaders, posting marginal gains for the month, as authorities demonstrated a greater urgency to tackle rising prices after an inflation scare in January.

"In the past these (Southeast Asian) markets were very susceptible to inflationary pressures, but due to better economic management, they are not so much of a hot potato for investors nowadays," said Khiem Do, chairman of Asia multi-asset team at Barings Asset Management in Hong Kong.

"As long as North Asia continues to trade in a range and is dogged by inflationary pressures, these markets will continue to benefit," he said.

Elsewhere in markets, U.S. Treasury bond yields held near six-month lows, with 10-year yields at 3.07 percent compared to 3.29 percent at the start of the month.

In commodity markets, U.S. crude futures was broadly stable around the $100.30 per barrel mark.

The New Zealand dollar extended its gains to hit its highest in 26 years of $0.8218, the kiwi's loftiest level since it was floated in March 1985.

France was careful not to speak out about Lagarde's candidacy during a Group of Eight summit in Deauville last week but Juppe said all eight nations were firmly behind Lagarde.

"Among the eight heads of state and government, plus the president of the European Commission and the president of the European Council who were there, there was unanimous support for Christine Lagarde," Juppe said on Canal+ television.

The top IMF job is vacant after Dominique Strauss-Kahn quit over attempted rape charges in New York, which he has vowed to fight.

The United States on Sunday stuck with its policy of not announcing support for a specific candidate.

"I won't go beyond what we've said which is that we support the process that's been set up by the IMF to find a successor and we support a process that produces the best possible candidate," said Jay Carney, spokesman for President Barack Obama.

The main obstacle in Lagarde's way is the possibility of an inquiry into her role in a 2008 legal settlement involving paying 285 million euros ($408.2 million) to businessman Bernard Tapie, an ally of French President Nicolas Sarkozy.

Opposition Socialist Party politicians have accused Lagarde of abusing her authority when she awarded the money to Tapie.

Lagarde, who flies to Brazil Sunday to drum up key emerging economy support for her IMF bid, questioned the legal and factual basis of the public prosecutor's call for a formal inquiry into her role in the Tapie case, saying some aspects were false in an interview with Europe 1 radio.

She has said her conscience is clear over the case.

Tapie, a former left-wing government minister who switched sides to support Sarkozy's 2007 presidential campaign, was paid to settle a legal dispute with a state-owned bank.

He had accused former state-owned bank Credit Lyonnais of defrauding him during the sale of his stake in sports giant Adidas in 1993 because the final sale price was higher than he had been led to believe.

A French court initially ruled against Tapie in 2006 but the case was still open when Sarkozy won office in 2007.

Bringing the saga to a close, Lagarde agreed to drop the judicial proceedings and submit the case to a private three-member arbitration panel, overruling some in her ministry who argued that it should remain in court.

Lagarde needs support for her IMF candidature from emerging economies which have criticised EU officials for suggesting the new head must be a European.

The only other declared candidate is Mexican Central Bank Governor Agustin Carstens.

(Reporting by Yves Clarisse and Helen Massy-Beresford; Editing by Louise Ireland)