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Coordinated central bank action around the world to boost liquidity for European banks, at a time when some institutions have been shut out of short-term lending markets, has raised speculation that policymakers may take bold steps to hold the euro zone together.

Equity markets in Asia rallied taking heart from the S&P 500 .SPX closing above the 1200 level, which had proved to be a stiff resistance over the past two weeks.

Japan's Nikkei was up 1.8 percent, climbing above a steep trendline formed off intra-day highs in August and September.

"With today's rise, it is like we are cautiously climbing up a wall but at the same time we're thinking that the wall may collapse if we go up any further," said Kenichi Hirano, a strategist at Tachibana Securities.

Profit-taking ahead of a long weekend in Japan could see some of the gains fade in the afternoon session.

The benchmark MSCI index of Asia Pacific stocks outside Japan rose 2.3 percent .MIAPJ0000PUS, with gains mostly spread between technology and commodity-related shares.

The index has rebounded more than 4 percent from a 14-month low hit on Wednesday.

While stocks across Asia rallied, volumes remained light and were significantly below levels seen during the selloffs over the past six weeks.

"It certainly doesn't feel like a rally, but then again, that's what melt-ups are all about," said Todd Martin, Asia equity strategist at Societe Generale in Hong Kong, in a note to clients.

In Hong Kong, shares of European retailer Esprit Holdings (0330.HK) fell more than 32 percent - the worst two-day drop since October 1997 - after disappointing first-half results on Thursday.

ASIA FX

Weakness in Asian currencies as foreign investors offloaded on regional bets and thin equity volumes, however, suggest investors remain skeptical that the debt crisis can be solved by providing temporary emergency funds for banks.

"Obviously it's not a long-term solution, we need to see some resolution to the sovereign debt issue to give market confidence we'll have stronger growth over the medium-term," said Spiros Papadopoulos, a senior market economist at National Australia Bank.

"Certainly these policy measures will help improve confidence in the short-term," he added.

This week has seen hedge funds of all stripes and mutual funds selling Asian currencies at a rapid pace and the move continued on Friday in spite of the stable euro.

The euro slipped 0.2 percent to $1.3850 though was actually up 2.1 percent on the week, with the swift move up through $1.3750 making traders nervous about opening bets against the currency ahead of the ECOFIN meeting and with the next Federal Reserve meeting on Sept 20-21.

The weakness in Asian currencies has spilled over to the Australian dollar because of the antipodean currency's use as a play on investor risk-taking.

The Australian dollar was down 0.1 percent to $1.0321 and has fallen a percent this week.

Spot gold prices slid 1 percent to $1,772.75 an ounce, on course for the biggest weekly decline since January 2009.

The combination of resilient equities, a rebound in the euro and a bearish double-top chart pattern in gold have combined to cast a shadow on the safe-haven asset.

(Additional reporting by Ayai Tomisawa in TOKYO and Cecile Lefort in SYDNEY; Editing by Kavita Chandran)

The disclosure came as the European Central Bank said on Thursday it was joining with other major central banks in a joint action coordinated with the U.S. Federal Reserve to ease dollar funding for stricken European banks to tackle an emerging credit crunch due to the sovereign debt crisis.

Geithner will hold talks with EU ministers in Poland on Friday and will propose that the European Financial Stability Fund, the 440 billion euro fund set up in May 2010, be used in a similar way to an emergency loan fund created by the U.S. Treasury and the Fed in 2008 to thaw frozen credit markets, sources said.

"Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece," one EU official told Reuters ahead of the meeting in Wroclaw, Poland.

The U.S. emergency fund served to support U.S. lenders in the 2007-2009 crisis. Responding to signs of similar stress rising in Europe now, the ECB and the central banks of Britain, Japan and Switzerland agreed on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.

The news sharply boosted European bank shares and the euro, with shares in French bank BNP Paribas jumping as much as 13 percent. U.S. bank shares also rose, helping Wall Street close higher.

International Monetary Fund chief Christine Lagarde said the joint move was "exactly what is needed" since the world has entered a dangerous phase of the crisis, and repeated her call for European countries to recapitalize their banks.

U.S. financial regulators, led by the Treasury and the Fed, held a conference call on Thursday to discuss the latest global market developments, a Treasury official said, without elaborating.

Bank of France Governor Christian Noyer said all European banks, not just French ones, would have to adjust their business models and shrink their balance sheets because U.S. money market funds were "withdrawing from Europe.

Geithner is expected to expound the model of the Term Asset-Backed Securities Loan Facility (TALF) that U.S. financial authorities used to jump-start the asset-backed securities market, which was frozen at the time and stalling an economic recovery.

Under TALF, the Treasury offered up to $20 billion in credit protection to the New York Federal Reserve Bank, where Geithner was then president, allowing it lend up to $200 billion. In return, the New York Fed took in asset-backed securities as collateral with a haircut.

TALF was credited with restarting frozen U.S. markets for securities backed by car, student and small business loans and leases. By taking in paper that had no other buyers at the time, the Fed acted as market maker. No losses were reported on the program.

While it remains unclear whether the same mechanism could be used to leverage Europe's bailout funds, one analyst said EFSF money could be used to guarantee a portion of potential losses on euro zone sovereign debt bought by the ECB, providing more purchasing clout than if it just bought the bonds in the secondary market with money on hand.

"It is possible to leverage the EFSF so as to expand its headline capacity to support sovereign bonds, for example through the use of partial guarantees against first losses," said Sony Kapoor, managing director of think tank Re-Define.

One difficulty is that leveraging a fund that is underwritten by guarantees from euro zone member states could increase liabilities across the board, putting pressure on the triple-A credit rating of countries such as France.

ANOTHER NO FOR EURO BONDS

Leveraging the EFSF would be a radical new approach in the crisis at a time when financial markets are fixated on the possibility of the euro zone introducing jointly issued bonds, even though such a move is strongly opposed by Germany and unlikely to happen any time soon.

German Chancellor Angela Merkel again bluntly rejected such bonds as a solution to the crisis on Thursday, saying that "collectivizing debts" would not solve the problem.

"In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don't get them by collectivizing debts," she said.

The European Union's top economic official meanwhile said he expected international lenders to be able to recommend by the end of the month releasing a vital next tranche of aid to Greece, warding off the threat of an imminent default.

While that may keep Greece afloat until it gets a second bailout package from the euro zone, the finance minister said the country would remain mired in recession through 2012, the fourth year in a row, a contraction that is only likely to fuel popular outrage at the austerity drive.

Lagarde was more cautious on Greece's progress, saying Athens had partially implemented reforms under its EU/IMF bailout program but must make more progress to secure release of the next 8 million euros in emergency loans.

"If there has been no implementation, we don't pay," she warned.

On a conference call with Greek Prime Minister George Papandreou on Wednesday, Merkel and French President Nicolas Sarkozy voiced their support for keeping Greece in the euro zone and continuing financial assistance provided it sticks strictly to austerity measures to meet its fiscal targets.

EU Economic and Monetary Affairs Commissioner Olli Rehn said he now expected an EU/ECB/IMF "troika" of inspectors to complete their review of Greece's fiscal targets by the end of the month.

(Additional reporting by David Lawder in Washington; Writing by Luke Baker and Paul Taylor; Editing by Janet McBride/Patrick Graham/Ron Askew/Leslie Adler/Diane Craft)

"The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion," the bank said in a brief statement just before the stock market opened.

"It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected."

UBS shares immediately tumbled 8 percent at the open and were trading down 5.8 percent at 10.30 francs at 0714 GMT (3:14 a.m. ET), compared with a flat European banking sector index.

"It is amazing that this is still possible," said ZKB trading analyst Claude Zehnder. "They obviously have a problem with risk management. Even when the amount isn't so high it is once more a loss of confidence that casts UBS in a poor light."

"With this they are losing a lot of credit that they had regained with effort," he added.

UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank.

UBS AG announced last month it is to axe 3,500 jobs to shave 2 billion Swiss francs ($2.3 billion) off annual costs as it joins rival investment banks in reversing the post-crisis hiring binge and preparing for a tough few years.

Investment banks worldwide have been hit by slow trading due to the debt problems in the euro zone and United States, as well as regulations aimed at forcing banks to hold more capital to protect them from future shocks after the 2008 global financial crisis.

UBS expects to book a restructuring charge due to the job cuts of some 550 million francs, and around 450 million francs of this will be booked in the second half of the year, with the majority recognized in the third quarter.

($1 = 0.880 Swiss Francs)

(Additional reporting by Andrew Thompson; editing by Sophie Walker)

Global equities were buoyed by comments from a top European official on plans for a common euro zone bond and by France and Germany pledging their commitment to keeping debt-laden Greece in the single currency.

Still, some fund managers doubted the rebound would be sustained.

"I haven't seen anything that provides me comfort that the situation has been dealt with yet," said Simon Burge, a portfolio manager at ATI Asset Management in Sydney.

Euro STOXX 50 index futures rose 1.1 percent, and DAX and CAC-40 futures also gained around 1 percent, while financial bookmakers called the FTSE 100 .FTSE to open as much as 1.4 percent up. .EU .L

Equity markets have been hammered since late July on the twin fears of renewed recession in the United States and the potential for Europe's sovereign debt woes to trigger a wider crisis in the financial system. This week, European stocks hitting a two-year low.

TECH STOCKS DO THE BEST

Japan's Nikkei share average .N225 closed 1.8 percent higher, while MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS gained 0.9 percent, with tech stocks the best performers .MIAPJIT00PUS. .T

The Nikkei was coming off a two-and-a-half year closing low on Wednesday, while the MSCI index, which touched a 14-month low in the previous session, remained more than 20 percent below its 2011 high in April.

Optimism over tentative steps to resolve Europe's debt crisis trumped weaker-than-expected retail sales data in the U.S., helping the S&P 500 .SPX close up more than 1 percent.

Some traders attributed the gains on Wall Street to short-covering -- when market players buy to realize profits on bets a stock will fall in price -- ahead of inflation numbers in the United States, with Europe still the clear focus. .N

CREDIT CRUNCH

European finance ministers have been warned confidentially of the danger of a renewed credit crunch as a "systemic" crisis in euro zone sovereign debt spills over to banks, according to documents obtained by Reuters on Wednesday.

The euro jumped to a three-day peak of $1.3873 on Wednesday after a 25-minute telephone call between the leaders of France, Germany and Greece which boosted confidence that Athens will receive the next tranche of aid from the European Union and IMF and avoid imminent default.

The single currency's recovery was further helped after European Commission President Jose Manuel Barroso flagged plans to present options soon for the introduction of common euro bonds, seen by many as a key tool to ease the crisis.

The project, however, is likely to meet stiff political resistance and potential legal challenges in Germany.

The euro edged down on Thursday to around $1.3720. Most strategists believe its trend remains downwards, with only short-term solutions to the crisis on the table for now.

"Nothing has changed. Greece is still highly likely to have to do more restructuring," said Joseph Capurso, currency strategist at Commonwealth Bank of Australia.

BONDS FIRM

Many perceived safe-haven assets, including the dollar, U.S. Treasuries and Japanese government bonds (JGBs), remained in demand, underlining the brittle nature of the stocks rally.

Ten-year Treasury notes nudged up 1.5/32 in price to yield 1.988 percent, compared with 1.992 percent in late U.S. trade. The dollar rose 0.2 percent against a basket of major currencies .DXY.

The yield on benchmark 10-year JGBs was steady at 0.990 percent.

"Stocks are catching up with the relief rally on Wall Street, but bonds are being supported too as investors fret over a possible rating cut to Italy and a Greek default," said a trader at a European bank.

But spot gold slipped around 0.7 percent to about $1,808 an ounce, after falling nearly 1 percent in the previous session. It hit a lifetime high of around $1,920 an ounce last week.

Oil eased as rising fuel stocks and falling demand in top consumer the United States reinforced views that slowing economic growth and Europe's debt crisis would dent energy use.

Brent crude edged down 0.3 percent to $112 a barrel, while U.S. crude lost 0.4 percent to $88.57.

"The concern is that what starts as a financial crisis will drive the cost of borrowing to levels where it is difficult for the corporate world to invest, depressing economic activity and putting pressure on oil," said Michael McCarthy, chief markets strategist at CMC Markets in Sydney.

(Additional Reporting by Cecile Lefort in Sydney, Sonali Paul in Melbourne Hideyuki Sano in Tokyo and Alejandro Barbajosa in Singapore; Editing by Richard Borsuk)

Soros, in an article for the New York Review of Books and Reuters.com, says policymakers must prepare for the possibility that Greece, Portugal and perhaps Ireland will have to default and leave the euro zone.

"It appears the authorities have reached the end of the road with their policy of 'kicking the can down the road'," he says.

"Even if a catastrophe can be avoided, one thing is certain: the pressure to reduce deficits will push the euro zone into prolonged recession. This will have incalculable political consequences."

A growing number of policymakers, as well as market economists, are convinced it is a matter of time before Greece, which keeps falling behind on its fiscal targets after two EU/IMF bailouts, will have to default.

Italy and Spain have come under pressure from bond markets over their large public and bank debts and weak growth, a cause for particular concern as both economies are too large to be saved by the European rescue fund that has been used in bailouts for Greece, Portugal and Ireland.

As well as preparing for a default and euro zone exit by those three "peripheral nations," Soros recommends four bold policy measures:

- Bank deposits have to be protected to prevent bank runs in weaker states;

- Some banks in the defaulting countries have to be kept functioning to keep their economies afloat;

- The European banking system would be recapitalized and put under European-, as distinct from national-, supervision;

- Government bonds of other deficit countries would have to be protected.

"All this would cost money," writes the 81-year-old hedge fund manager and philanthropist. "There is no alternative but to give birth to the missing ingredient: a European treasury with the power to tax and therefore to borrow."

Soros acknowledges that such a move would require a new European Union treaty and urges European leaders to begin work straight away because of the time it would take to conclude.

"Once the principle of setting up a European Treasury is agreed upon, the European Council could authorize the ECB to step into the breach, indemnifying the ECB in advance against risks to its solvency," he says.

"That is the only way to forestall a possible financial meltdown and another Great Depression."

He also recognizes it would be deeply controversial, especially in Germany, where there is strong opposition to underwriting the debts of what are seen as profligate southern European nations.

"The German public still thinks that it has a choice about whether to support the euro or to abandon it. That is a mistake," he writes.

"The euro exists and the assets and liabilities of the financial system are so intermingled on the basis of a common currency that a breakdown of the euro would cause a meltdown beyond the capacity of the authorities to contain.

"The longer it takes for the German public to realize this, the heavier the price they and the rest of the world will have to pay."

(Reporting by Alex Richardson in Singapore)