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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)

People's Bank of China raised rates by 25 basis points on Saturday, the second rate rise in just over two months, as part of a series of measures designed to combat inflation which hit a 28-month high of 5.1 percent in November.

"Our economists had expected a rate rise before the end of the year, but releasing the news on Christmas Day itself came as a little surprise to the market," said Chen Xin Yi, associate vice president at Barclays Capital in Singapore.

"Nevertheless, we believe that the well-calibrated timing reflects consideration for minimizing unwanted financial market volatility and reducing potential capital movement to the extent possible."

The MSCI index of Asian stocks outside Japan .MIAPJ0000PUS rose 0.2 percent. Major markets such as Hong Kong and Australia remained closed.

"The impact of today's rate move on the real economy's growth momentum is likely to be minimal." said Qian Wang, chief China economist at JP Morgan.

China's key stock index .SSEC pared earlier gains and yuan forwards were modestly higher. The Shanghai Composite was down 0.3 percent, with weak small and mid-cap shares offsetting mild gains in banking and insurance shares.

Japan's Nikkei .N225 closed up 0.75 percent, extending its recent outperformance versus other Asian markets. The Nikkei is up over 10 percent this quarter versus a 5.4 percent rise for the MSCI Asia ex-Japan index.

Still, Japanese investors are entering 2011 in a bullish mood, raising equity holdings to a 10-month high, increasing exposure to high-yield credit and cutting back on government debt, Reuters polls showed last week.

S&P futures were a shade lower, down 0.2 percent.

FUNDAMENTALS SUPPORT COMMODITIES

Commodity markets pared early losses in response to an interest rate rise by PBOC, focusing instead on positive fundamentals and threats to supply.

U.S. wheat had dropped by more than 2 percent at the open before recovering to $7.81-3/4 a bushel, down 0.2 percent, while spot gold was trading flat after dropping to a one-week low of $1,371.1 earlier.

Crude oil futures reversed early falls, rising 0.3 percent to a two-month high.

The Australian dollar was flat after slipping in early trading on expectations that more tightening by China could prompt investors to sell the Aussie after the year-end break.

(Additional reporting by Nick Trevethan in SINGAPORE and Anotoni Slodkowski in TOKYO; editing by Kazunori Takada)