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Shares elsewhere in Asia .MIAPJ0000PUS fell slightly and U.S. oil prices recovered to nearly $85 a barrel partly due to a surprise drop in weekly crude stocks.

Stocks in emerging markets in Asia have underperformed those in developed countries this year. Underscoring that trend, MSCI's Japan share index .MIJP00000PJP has risen around 7.5 percent this year, compared with a drop of more than 2 percent in MSCI's Asia Pacific share index excluding Japan.

But some analysts remain skeptical that such a trend will continue for long.

Rodrigo Zorrilla, head of markets Asia-Pacific, Citigroup, said some $10 billion of funds had moved from emerging market dedicated funds to the United States during the first two weeks of February.

"The question everybody is asking is whether that is the reversal of a trend of the bullish emerging market story or is that just a rebalancing of portfolio," Zorrilla said, adding that he supported the second view.

"We think the fundamentals are still very strong in Asia. And while there are some scares in the market relating to the political issues in the Middle East and inflation concerns around the world, as soon as the dust settles we will see that trend (of outflows) to slow down and stop."

INFLATION REPORT EYED

Sterling rallied to a 5- month peak against a currency basket after data on Tuesday showed inflation in Britain jumped to 4 percent, twice the Bank of England's target, prompting Governor Mervyn King to acknowledge that rates might rise more rapidly than economists had expected.

Analysts now expect a rate rise in May and the next market focus is the BoE's inflation report due at 1030 GMT.

Yuuki Sakasai, a strategist at Barclays Capital, said the inflation report would support King's comments overnight that suggested an early rate increase.

"But we do think that King is likely to use his news conference later on to warn against aggressively pricing in rate hikes. So the pound could gain on the report and fall on King's comments. On the whole we think risk is skewed to the downside," he said, adding that the pound could fall to around $1.60.

Sterling last traded at around $1.6150, compared with a high of $1.6170 overnight. The pound has gained some 3 percent against the U.S. dollar so far this year.

The euro edged up against the dollar, standing at around $1.3520 as of 0544 GMT.

Against the yen, the dollar last traded at around 83.75, not far from an eight-week high of around 83.90 yen hit the previous day, helped by the recent rise in U.S. Treasury yields.

Sanofi will pay $74 a share in cash and a contingent value right for the U.S. biotechnology company. The CVR is a tradable right to additional payments if Genzyme's multiple sclerosis drug, Lemtrada, reaches regulatory and sales targets or 2011 production volumes of Cerezyme and Fabrazyme are achieved.

Sanofi said the deal would boost business net earnings per share from the first year following its completion, which it expects early in the second quarter, and also predicted it would lift its earnings by 0.75-1.0 euro per share by 2013.

The deal is the second-biggest in biotech history and gives France's Sanofi, which has pursued Genzyme for nearly nine months, a foothold in the market to treat rare diseases. It will help Sanofi compensate for declining revenue from drugs that have lost, or are set to lose, patent protection.

The CVR runs until the end of 2020 and entitles holders to a series of payments worth up to $14 in total, depending mainly on the success of Lemtrada.

Genzyme will become Sanofi's global specialist in rare diseases and maintain a sizeable presence in Boston, where it based, the companies said in a joint statement.

Sterling rallied to a 5- month peak against a currency basket after data on Tuesday showed inflation in Britain jumped to 4 percent, twice the Bank of England's target, prompting Governor Mervyn King to acknowledge that rates might rise more rapidly than economists had expected.

Analysts now expect a rate rise in May and the next market focus is the BoE's inflation report due at 1030 GMT.

Sterling last traded at around $1.6165, nearing a high of $1.6170 overnight. The pound has gained some 3 percent against the U.S. dollar so far this year.

Against the yen, the dollar last traded at around 83.75, not far from an eight-week high of around 83.90 yen hit the previous day, helped by the recent rise in U.S. Treasury yields.

Japan's benchmark Nikkei average .N225 extended gains, rising 0.4 percent, and broke above 10,800 points for the first time since May as a softer yen lifted exporters and countered declines on Wall Street.

Tokyo Electron (8035.T) and Advantest (6857.T) were among the exporters whose shares gained. Both stocks were up by around 1.7 percent. A weaker yen makes Japanese exports cheaper and boosts company profits. .T

"It's a weaker yen that's lifting sentiment, but foreign investors are also picking up domestic-demand stocks," said Shinichiro Matsushita, a market analyst at Daiwa Securities, adding that financials were attracting foreign interest due to the Nikkei's strong performance.

High trade volumes also lifted the mood. The Tokyo stock exchange's first section has seen more than 2.0 billion shares change hands for seven consecutive sessions.

ASIAN STOCKS STEADY

Some traders said Japanese retail investors were behind the yen's recent mild drop. The dollar could rise further as it is seen supported with bids at levels near 84.40 yen and 84.20 yen, they said.

"Bids are starting to emerge on the downside and I wouldn't be surprised if the dollar were to make another try for the upside," said a trade for a Japanese brokage in Tokyo.

The euro edged up against the dollar, standing at around $1.3530 as of 0253 GMT.

Elsewhere in Asia, MSCI's Asia Pacific share index excluding Japan .MIAPJ0000PUS edged up 0.1 percent.

Hong Kong stocks rose 0.7 percent, while the Korea Composite Stock Price Index (KOSPI) .KS11 advanced 0.3 percent.

Its forecast for a 5 to 9 percent rise in current fiscal-year revenue also modestly surpassed Street targets.

Dell executives expressed full confidence that the company could sustain the boost in profitability, but some analysts questioned that premise. Dell posted a gross margin of 21.5 percent -- about 15 percent above the average forecast -- aided in part by falling prices of items like memory chips and LCD screens.

Shares of Round Rock, Texas-based Dell leapt nearly 6 percent to $14.70 after hours, following a brief trading suspension, from a regular Nasdaq close of $13.91. It had spiked briefly as much as 8 percent after the news.

Shares of larger rival Hewlett-Packard Co, which would also benefit from lower input costs and better corporate spending, gained more than 1 percent to $48.54 after hours.

Dell's servers and networking revenue climbed 16 percent, while commercial personal computer revenue rose 10 percent, as businesses spent to upgrade outdated hardware.

"There's still a majority of our customers who have not begun the corporate refresh, or who have started and still have a long way to go," Chief Financial Officer Brian Gladden said in an interview.

Although Gladden said he expects component costs to remain favorable through the first half of the new year, he downplayed input cost declines as the central factor in Dell's improved profitability. He stressed supply chain improvements and disciplined pricing. Dell's quarterly operating income was its highest in 5 years.

But many analysts still need convincing that Dell's turnaround effort is bearing fruit.

"I still don't think in the long term they can sustain gross margins based on lower input costs because that will get competed away," said Michael Holt, an analyst at Morningstar.

Dell still pulls in most of its revenue from selling PCs. It has benefited from a surge in spending as businesses of all sizes spend again on equipment after two years of recession.

Dell is waging an uphill battle to diversify its revenue base: it wants to become a larger player in the data center equipment market, a provider of IT services, and gain a toehold in the fast-growing mobile space with tablets and smartphones.

But it faces stiff competition in those markets from the likes of International Business Machines Corp, HP and Apple Inc

Investors have remained on the sidelines as Dell's turnaround plan proceeds in fits and starts. Analysts say they are still looking for the company to prove it can sustain higher levels of profitability.

(For a graphic comparing Dell's share price performance and other key metrics with rivals, click r.reuters.com/kyr97r)

Energy and basic materials stocks led the slide in the S&P 500's worst day since January 28, and billionaire investor Ken Fisher told Reuters he is "more neutral on stocks than I've been in years."

Volume remained light with 7.1 billion shares changing hands on the combined New York Stock Exchange, NYSE Amex and Nasdaq, below last year's estimated daily average of 8.47 billion.

U.S. retail sales data cast doubts on a rebound in consumer spending, a vital part of the economic recovery, and import prices jumped, while a gauge of manufacturing in New York State climbed to its highest in eight months.

The S&P retail index .RLX closed flat after being down earlier in the day.

"More and more companies are worried about the price of input," said Kim Caughey Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

"There's a lot of conflicting data. Low volume means there's no conviction either way: whenever you really don't have an idea, you're not trading," she said.

The Dow Jones industrial average .DJI lost 41.55 points, or 0.34 percent, at 12,226.64. The Standard & Poor's 500 Index .SPX fell 4.31 points, or 0.32 percent, at 1,328.01. The Nasdaq Composite Index .IXIC slipped 12.83 points, or 0.46 percent, at 2,804.35.

Shares of JDS Uniphase Corp (JDSU.O) dropped 10.2 percent to $25.05 after brokerage Bernstein cut its rating on the stock to "market-perform" from "outperform." An index of chipmakers' shares .SOX was down 1.1 percent.

The S&P energy sector .GSPE carried most of the day's losses, falling 1.1 percent. Brent crude oil fell more than 1 percent on the U.S. retail sales data and as China continued to struggle to keep inflation at bay.

Exxon Mobil (XOM.N) was down 2.3 percent to $82.97, following a 2.5 percent gain on Monday.

The S&P 500 has nearly doubled from lows hit in March 2009, but waning volume suggests investors are having a harder time finding value.

"I'd not be overly optimistic right now," said Fisher, chief investment officer and founder of Fisher Investments, a money management firm in Woodside, California that oversees about $43 billion in assets.

The spread between daily winners and losers has been narrowing for months, suggesting more of the market's gains are coming from fewer stocks -- generally a sign of a weakening market.

On Tuesday, declining stocks outnumbered advancing ones on the NYSE and the Nasdaq by a ratio of about 8 to 5.