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Spreads tightened in Asian credit markets while U.S. Treasuries extended losses in Asia, but gold extended gains to their highest in more than a month on confirmation that progress in resolving European sovereign debt crisis will remain slow.

Lack of details on how to deliver the broad rescue scheme meant there was still a long way before markets get any convincing answers to relieve their concerns over the contagion of the Greek debt crisis to other euro zone countries and the damage to the broader economy.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS was up nearly 2 percent to its highest level since September 12, rising more than 18 percent from its lows hit on October 4.

The Nikkei .N225 rose 0.5 percent, as the yen's rise to a record high against the dollar of around 75.70 yen on Wednesday fueled worries about the impact to corporate earnings. .T

"The blueprint is out, but it's coming in dribs and drabs and not as clear as we thought it will be," said Jonathan Barratt, managing director at Commodity Broking Services, adding that it also did not fully address the issues.

"But it's still a step forward and each step keeps optimism intact. But the task ahead is too large to put a deadline on, and if there is a lag, the market will lose its optimism. If there are no concrete measures, it will draw down market prices."

French President Nicolas Sarkozy said on Thursday after a summit of euro zone heads of state and government that the region's rescue fund will be leveraged four or five times, giving it firepower equivalent to about 1 trillion euros ($1.4 trillion).

He said the leaders had agreed with bankers that private sector investors would accept the loss of half the value of their Greek bond holdings, and to refinance Greece's remaining debt at preferential rates.

Two approaches to strengthen the bailout-fund, the European Financial Stability Facility, were identified: one aiming at getting credit enhancement to sovereign bonds issued by member states and another aiming to set up one or several special purpose vehicles to finance its operations.

European policymakers also agreed to force banks to raise their capital buffers to 9 percent in core Tier 1 capital, a measure of banks' financial health, by June next year, to protect against losses from any Greek debt restructuring and to contain the region's financial crisis.

In another sign of progress to ease concerns about Greece's debt issues from spreading, euro zone leaders will welcome Italy's plans to increase the pension age to 67 but will want detailed plans on how it can be achieved.

The euro surged to its highest in seven weeks to just below $1.40.

NEXT FOCUS - FUNDAMENTALS

With the summit meeting providing some direction for key issues, the market will shift its focus to details for implementing these measures while more closely watching the impact of the euro zone debt crisis on the economy.

"The markets will remain in a cycle of expectations and disappointments over the euro zone debt issues for some more time to come, as Europe's sovereign debt issue will take a long time to resolve and there are many more hurdles that need to be cleared," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ.

The markets had priced in an extremely pessimistic scenario, so the outcome prompted covering of these positions.

"The markets are now shifting their focus to how the debt crisis has affected the economy," Uchida said. "Whether the market can consolidate in a range or enter a downtrend will depend on how they see risks from fundamentals."

Commodities rose, with oil gaining more than $1 while gold extended its gains to its highest in over a month on Thursday, after rising 1.5 percent the previous session when it notched its longest stretch of gains in over two months.

Gold has been underpinned by safe-haven allure amid uncertainty over the euro zone crisis as well as strong physical demand when prices fall.

BET ON RISK RALLY

Technicals suggest the markets were providing good trading opportunities for both bulls and bears, encouraging investors to buy on dips when a risk rally eases.

The euro, having consolidated in a range of $1.3650-$1.3950 since mid-October, was technically set to break out the range.

In Asian credit markets, weakening strains helped sharply narrow the spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, by 12 basis points on Thursday.

"We could see this rally go further based on the technicals, as real money accounts are underweight and dealers are lightly positioned, but longer term it could be capped by issuance," said a Singapore-based credit trader with an Asian bank referring to the supply pressure built up after inactivity in the primary markets in over a month.

Investors' appetite eased for protection in the options market against losses, with the CBOE Volatility index VIX .VIX -- a 30-day risk forecast of volatility in the S&P 500 -- falling 29.86 on Wednesday from 32.22 the day before.

Since October 4, when the Standard & Poor's 500 Index .SPX slumped to intraday levels last seen in September 2010, the benchmark index has surged nearly 15 percent, mostly on hopes for a solution to the debt crisis.

While it has failed to clear a key technical level of a 61.8 percent retracement of the 2011 decline around 1,258, the index has found a solid support around 1,221, suggesting a level investors could buy on dips.

With the rally in riskier assets, safe-haven U.S. Treasuries fell further in Asia, with yields on the benchmark 10-year notes inching up to 2.22 percent from 2.21 percent late in New York on Wednesday. <US/>

(Additional reporting Umesh Desai and Reuters FX analyst Krishna Kumar in Hong Kong; Editing by Kavita Chandran)

German sources said Chancellor Angela Merkel and French President Nicolas Sarkozy were now negotiating directly with representatives of the banking industry, on the sidelines of a euro zone summit, to try to forge a deal in which the banks will accept a writedown of at least 50 percent on their holdings of Greek government bonds.

The talks were expected to drag on deep into the night, with positions far apart on perhaps the most complex element of the three-part "comprehensive package" that the currency bloc is trying to pull together.

The three elements are so intertwined that euro zone leaders face an all-or-nothing showdown.

"They only started now on the hard core of the matter, which is the PSI (private sector involvement)," one EU source said.

The leaders earlier made progress on two other elements -- bank recapitalization and moves to scale up the size of the euro zone's 440 billion euro ($600 bln) bailout fund.

A draft statement from the summit, obtained by Reuters, outlined two options to leverage the fund designed to shore up heavily indebted states and thwart market attacks.

It said details would not be nailed down until next month, suggesting the second summit in four days will have sketched broad intentions but failed to produce anything like a detailed master plan to resolve a crisis that threatens the single currency project.

"It is going to disappoint the market, particularly given the emphasis policymakers put on this meeting," said Jessica Hoversen, foreign exchange analyst at MF Global in New York.

A senior EU source said the euro zone leaders wanted private sector creditors to accept a writedown of 50 percent or more on their holdings of Greek government debt to reduce Greece's total outstanding private sector debt by around 100 billion euros.

While there is consensus on the need for European banks to raise around 110 billion euros ($150 billion) in extra capital to withstand a potential Greek debt default, governments and banks are at odds over the scale of write-offs.

"There has been no agreement on any Greek deal or a specific 'haircut'," Charles Dallara, head of the Institute for International Finance which represents private sector creditors, said in a statement. "There is no agreement on any element of a deal."

Sources said the IIF could present another offer, a move that is likely to further extend negotiations.

EU leaders did agree the outlines of a package on bank recapitalization, including raising the core capital ratios of European banks to 9 percent by the end of June 2012, but they did not provide a headline figure, which will depend in part on negotiations over Greek debt.

The European Banking Authority said the euro zone banks needed to raise 106 billion euros of capital to meet that ratio with Greek and Spanish banks facing the most work.

STRONGER RESCUE FUND

For the European Financial Stability Facility, where progress was made, one proposal involves creating a special purpose investment vehicle (SPIV) to tap foreign sovereign and private investors, such as Chinese and Middle Eastern wealth funds, to buy bonds of troubled euro zone countries.

The other method for scaling up the rescue fund, which was set up last year, involves using it to offer partial guarantees to purchasers of new euro zone debt. The two options could be used simultaneously and the International Monetary Fund could also help.

Euro zone finance ministers will be asked to finalize the terms and conditions in November, the draft statement said.

EU sources said the EFSF was expected to be leveraged by something like a factor of four giving it scope of around 1 trillion euros. It has about 250-275 billion euros available given funds set aside for aid to Greece, Ireland and Portugal and for recapitalizing the region's banks.

Sarkozy is expected to talk with Chinese President Hu Jintao soon on Beijing's participation in the bailout fund.

U.S. stocks rallied on the pledge to boost the power of the fund, while the euro fell as investors awaited details that will not be forthcoming until next month.

European leaders' pattern of responding too little, too late to a debt crisis that began in Greece has spawned a wider economic and political crisis that threatens to undermine the euro single currency and the European Union project.

ITALIAN INTENT

Earlier, Merkel won a parliamentary vote of support for strengthening the rescue fund after warning in a dramatic speech that Europe was facing its most difficult situation since the end of World War Two.

Merkel told parliament that private bondholders would have to take a substantial write-down so that Greece's debt could be reduced to 120 percent of gross domestic product by 2020 from 160 percent this year.

Experts said that implied a 50 percent "haircut" for private investors.

"The world is watching Germany and Europe to see if we are ready and able to take responsibility. If the euro fails, Europe fails," said Merkel, in a characteristically sober tone.

"No one should take for it for granted that there will be peace and affluence in Europe in the next half century," she said.

Also weighing on the summit was deep concern about Italy, which is now in the bond market firing line.

Under huge pressure from its euro zone partners, Rome promised a package of reform steps to boost growth and control its public debt, including labor and pensions reforms and additional revenues from property divestments.

In a letter sent to the summit in Brussels, the government said it would produce a plan of action to boost growth by November 15, promising to raise the retirement age to 67, cut red tape and modernize state administration to improve conditions for business and raise 5 billion euros a year from divestments and improved returns from state property.

Rome's inability to deliver a substantive plan for reforming its pensions system has raised doubts about Prime Minister Silvio Berlusconi's seriousness in tackling a crisis that threatens the euro zone's third largest economy.

Italy has the euro zone's largest sovereign bond market, with a public debt of 1.8 trillion euros, 120 percent of GDP. If it went the same way as Greece, Ireland and Portugal, the rescue fund would not have enough money to bail Rome out.

Its partners remain skeptical -- a draft summit statement showed euro zone leaders will welcome Italy's plans to increase the pension age but will ask for detailed plans on how it plans to achieve that.

(Additional reporting by Julien Toyer, Jan Strupczewski, Yann Le Guernigou and John O'Donnell in Brussels, Annika Breidthardt and Sarah Marsh in Berlin, Daniel Flynn and Harry Papachristou in Athens, Barry Moody in Rome; Writing by Luke Baker and Mike Peacock; editing by Janet McBride)

EU officials and European diplomats are lowering expectations of a breakthrough when the 17 euro zone leaders meet, despite Franco-German assurances only weeks ago that a "comprehensive solution" to more than two years of debt and economic turmoil would be found by the end of the month.

While there appears to be broad consensus on the need for around 110 billion euros ($150 billion) to be injected into the European banking system to help it withstand a potential Greek debt default and wider financial contagion, there is little clarity on either of the other two critical parts of the plan.

One element involves scaling up the region's 440 billion euro bailout fund, known as the European Financial Stability Facility, and the other is focused on reducing Greece's debt burden by deepening the losses private investors -- major banks and insurance companies -- must take on their Greek bonds.

EU leaders will consider two methods for scaling up the EFSF, one by using it to offer guarantees to purchasers of new euro zone debt, and the other using part of its capacity to set up a special purpose investment vehicle that would attract money from sovereign wealth funds and other investors to buy debt. They might also agree to combine both options.

NO CONCRETE NUMBERS EXPECTED

Whereas financial markets have been hoping for weeks that Wednesday's summit, scheduled to start at 11:00 a.m. EDT with a gathering of all 27 EU leaders, followed at 1730 GMT by the meeting of the euro zone heads of state, will produce detailed figures on how to combat the debt crisis, there is now little likelihood of concrete numbers, sources say.

"The numbers are not yet finalized -- you have to have all parameters in place and see what is needed and what the leverage factor would be. It needs a lot of technical work to come up with a number," one EU official said, adding that discussions would continue on Wednesday to forge a pre-summit consensus.

"The leaders will agree on the options tomorrow, but whether it will be an agreement with all details remains to be seen. I think it will be challenging -- it will be very difficult to agree on everything."

Instead, it looks likely that it won't be until November 7-8, when EU and eurozone finance ministers are next scheduled to meet, that the details of whatever euro zone leaders agree on during Wednesday's summit will be completely finalized.

Financial markets are likely to find that extremely disappointing, having been told on multiple occasions by EU leaders that a resolution to the crisis was near, only to find the EU and its institutions unable to deliver.

That has in turn morphed a banking and debt crisis into a wider economic and political crisis that threatens to undermine the euro single currency and the European Union project.

Further complicating Wednesday's talks -- which will be preceded by a meeting of the Eurogroup Working Group, an elite collection of senior finance officials and central bankers who will have a last attempt to hammer out a meaningful agreement -- is intense market pressure on Italy and a dispute in Germany.

Italy's inability to deliver a substantive plan for reforming its pensions system has raised doubts about Prime Minister Silvio Berlusconi's seriousness in tackling a crisis that threatens the euro zone's third largest economy.

Italy has the euro zone's largest sovereign bond market, with a public debt of 1.8 trillion euros, 120 percent of GDP. EU leaders fear that failure to make its debts more sustainable will mean it goes the same way as Greece, Ireland and Portugal, which have had to accept EU/IMF financial aid programs.

The problem is, there is not enough money to bail out Italy.

ECB ROLE IN DISPUTE

There is also a stand-off over how much the European Central Bank, the ultimate defender of the euro, should be involved in trying to resolve the crisis, with France wanting deep and direct ECB involvement and Germany staunchly against it.

Chancellor Angela Merkel, fighting to secure parliamentary backing for the euro zone rescue measures, particularly the scaling up of the EFSF, said Germany opposed a phrase in the summit's draft conclusions urging the ECB to go on buying troubled states' bonds -- a key backstop against deeper turmoil.

Many analysts believe the ECB is the only authority at this stage that can deliver the financial firepower that convinces nervous and skeptical markets that the crisis can be contained. Locking the ECB out could prove another negative therefore.

At the same time there is intense disagreement about how to make Greece's debt situation sustainable.

Euro zone governments are demanding that the private sector accept a 60 percent "haircut" as part of a second rescue package to make Athens' debt mountain, set to reach 160 percent of economic output this year, more sustainable.

Bank negotiators have offered a 40 percent write-down and warned that forcing them into deeper losses would amount to a forced default, with what banks say will be devastating consequences for the European financial system.

EU diplomats said the outcome was uncertain, but some forecast a last-minute deal on a 50 percent write-down -- an outcome backed by Jean-Claude Juncker, the chairman of euro zone finance ministers.

Greek Prime Minister George Papandreou said: "I hope that tomorrow we will come to decisions, this is our partners' will.

"Tomorrow we want to put an end, turn a page, in order for the country to move forward."

They were hopeful words, but the prospect looks slight. (Additional reporting by Jan Strupczewski in Brussels and Catherine Bosley in Zurich; Editing by Kevin Liffey)