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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)

Assets perceived as safe-haven such as gold and the yen firmed, and the euro steadied, but the growing financial strains dampened Asian credit markets.

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 0.5 percent on Wednesday, after rising to its highest point since September 16 the day before. The index has risen 16 percent from its lows hit on October 4.

The FTSEurofirst 300 .FTEU3 index of top European shares also climbed 16 percent since hitting its lows in late September.

"Sentiment has not turned to risk-on from risk-off despite recent gains, with investors now eyeing whether Europe can actually deliver its comprehensive package," said Hirokazu Yuihama, senior strategist at Daiwa Capital Markets.

"Until investors are convinced that the sovereign debt crisis is shunned from contagion, money is unlikely to return to the markets fully. This uncertainty prompts profit taking from the recovery in stock markets which began in late September in Europe and early October in Asia," he said.

The EU summit remains scheduled for Wednesday but the gathering of finance ministers -- known as Ecofin -- was canceled because details of the meeting had not been finalized, sources told Reuters.

The leaders were expected to adopt a plan to reduce Greece's debt burden, recapitalize European banks to help absorb bond losses and strengthen the euro zone rescue fund, or the European Financial Stability Facility (EFSF), to stave off contagion in the bond market.

But there were divisions over the extent of losses that private holders of Greek bonds would have to incur and the size of a planned bank recapitalization, and the scope for leveraging the bailout fund remained uncertain.

FOCUS ON FUNDAMENTALS

The Nikkei fell 0.6 percent as the yen hit a record high against the dollar of 75.73 yen on Tuesday, fuelling concerns about its damage to corporate earnings. .T

MSCI's all-country world stock index .MIWD00000PUS fell 1.1 percent on Tuesday after earlier hitting its highest since early September on signs euro zone policymakers were close to an agreement.

The euro retreated from a six-week high of $1.3959, but the drop has been relatively shallow, with the single currency ticking up 0.1 percent to $1.3922 after finding initial support at the overnight low of $1.3847.

"Since little is now expected out of today's summit, the market impact should be limited," analysts at BNP Paribas wrote in a note. "In fact, given the recent price action and market reaction to mere speculation, a sheer commitment from policymakers may be enough to ignite a fresh risk rally. $1.4000 before the weekend remains viable."

The Australian dollar dropped half a cent as a tame consumer price data cleared the way for a cut in interest rates as early as next week. Australia has kept rates at the highest in the developed world for almost a year, as it worried about inflationary pressures amid a once-in-a-century mining boom.

The move may lend some support as Australia joins a number of countries seeing inflationary pressures falling under control, when concerns mount about a global slowdown on top of the euro zone risks.

U.S. consumer confidence unexpectedly fell to its lowest level in two-and-a-half years in October. House prices were unchanged at low levels in August, suggesting the consumer is still struggling but the economy was not headed for a recession.

On Tuesday, Hong Kong said its exports fell 3 percent in September, the first year-on-year contraction in almost two years as the impact of Europe's deepening debt crisis and a stalling U.S. economy weighed on demand for Asian exports.

"These data will raise concerns about corporate earnings. As Europe makes progress in providing a direction to solving its debt crisis, market focus will gradually shift to fundamentals and earnings forecasts," Yuihama said.

JGB, GOLD PREFFERED

Worries about slower growth and European debt woes hurting corporate earnings sapped appetite for riskier assets, as investors sought safe havens such as gold, the yen and government bonds.

Gold rose 0.8 percent to $1,715 an ounce on Wednesday. It has been moving in tandem with riskier assets, but resumed its allure as stocks and the euro fell, posting its biggest one-day rise since early September on Tuesday.

The yield on 10-year cash Japanese government bonds fell 1.5 basis points to 1.000 percent. U.S. Treasury bond prices rallied on Tuesday, with benchmark 10-year notes up 1-1/32 in price for a yield of 2.12 percent.

As strains returned, the spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, widened by seven points.

"The market has waited a long time for this summit but given the overnight headlines, one doesn't expect any resounding announcements later today so investors are happy to be sidelined," said a Hong Kong based trader at a European bank.

"But the street is lightly positioned and inflows have turned positive, so unless equities dive I don't see credit capitulating."

Some issuers have tapped the region to raise funds in recent weeks, with the latest from Fortescue Metals Group (FMG.AX), which on Wednesday said it had raised $1.5 billion of senior unsecured notes to help fund its infrastructure expansion.

The offering was upsized to $1.5 billion from $1 billion due to strong demand, Australia's No. 3 iron ore producer said.

Signs of slower growth in China and India, and developed countries as well as turbulent European markets, are prompting cash-rich Japanese retail investors to steadily diversify their emerging-markets exposure to ASEAN nations.

Japanese investors pulled out an estimated $366 million from stock funds dedicated to popular India, China and Brazil in September, but invested $624 million last month in global emerging market equity funds, or about a tenth of the total assets of such funds, data from fund tracker Lipper showed.

(Additional reporting by Ian Chua in Sydney and Umesh Desai in Hong Kong; Editing by Kavita Chandran)

Though European Union and euro zone leaders still planned to hold a summit on Wednesday, markets were spooked by news that a meeting by euro zone finance ministers was canceled.

The news fed fears that leaders will be unable to come up with the detailed plan for ending the crisis that investors want.

"There have been a number of different statements coming out that seem to suggest Europe is having a hard time coming to any real hard conclusions at solving their debt issues," said Gail Dudack, chief investment strategist at Dudack Research Group in New York.

"That alone has added a big wave of disappointment to today's market."

The S&P 500 has rallied nearly 9 percent for the month on optimism European leaders will succeed in tackling the region's debt crisis. Investors fear the impact that an uncontrolled fiscal crisis in the euro zone could have on the global economy.

On Tuesday the Dow Jones industrial average .DJI lost 205.18 points, or 1.72 percent, to 11,708.44. The Standard & Poor's 500 Index .SPX.INX fell 24.96 points, or 1.99 percent, to 1,229.23. The Nasdaq Composite Index .IXIC dropped 61.02 points, or 2.26 percent, to 2,638.42.

Adding to the pessimistic tone, 3M Co (MMM.N) reported quarterly profits that missed expectations and cut its 2011 forecast. The Dow component said the crisis in Europe was weakening consumer demand and taking a toll on profit, sending shares down 6.3 percent to $77.04.

In after-market activity, Amazon.com Inc (AMZN.O) slumped 15 percent to $193.10 after the world's largest Internet retailer reported weaker-than-expected results as it spent heavily on a new tablet computer and other long-term projects.

Other companies reporting on Tuesday included engine manufacturer Cummins Inc (CMI.N), which fell 5.1 percent to $93.81 after cutting its outlook. United Parcel Service (UPS.N) shed 2.1 percent to $69.35 after the company's chief executive said he sees the slow-growing economy continuing.

The S&P industrials index .GSPI lost 2 percent.

Netflix (NFLX.O) plunged 34.9 percent a day after the movie rental company said it lost more customers than it anticipated in the third quarter and warned of still more departures. The stock sank to $77.37.

Economic data showed U.S. consumer confidence unexpectedly dropped to its lowest level in 2 1/2 years in October, while house prices were unchanged at low levels in August, suggesting the consumer is still struggling.

Volume was light, with about 7.78 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, slightly below the daily average of 8.01 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,491 to 520, while on the Nasdaq, decliners beat advancers 2,033 to 462.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)