By Chikako Mogi

TOKYO, Dec 14 (Reuters) - Asian shares steadied on Friday as

a pick-up in China's manufacturing sector calmed investor

sentiment, but gains were capped by concerns that U.S. lawmakers

are still too far apart to avert a fiscal crisis as an

end-of-year deadline looms.

A deteriorating business sentiment survey and expectations

that the Bank of Japan will ease policy further to support the

weak economy next week continued to undermine the yen, helping

Japanese equities pare much of their earlier losses.

China shares outperformed Asian peers after the HSBC flash

purchasing managers' index for December hit a 14-month high of

50.9, the fifth straight monthly gain, showing growth in China's

vast manufacturing sector picked up and underlined a brighter

outlook for the economy in coming months.

The private survey followed recent positive data suggesting

Chinese economic activity has gained some momentum in the fourth

quarter after it slowed for seven consecutive quarters.

A state-backed think tank has also forecast China's GDP

growth next year at around 8 percent -- above the likely

government target -- while calling for an expansion in the

central government's fiscal deficit to offset an uncertain

external environment.

The Shanghai Composite Index jumped 2.8 percent

while Hong Kong shares rose 0.6 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan was little changed after it eked out a 0.1

percent gain, hitting successive 16-month highs since Dec. 5.

'Clearly, growth momentum is improving but remains modest by

historical standards. Overall, the number is consistent with

acceleration of GDP growth in Q4 to 2.4 percent

quarter-on-quarter and 7.9 percent year-on-year, and with annual

growth reaching 7.7 percent,' said Dariusz Kowalczyk, strategist

at Credit Agricole CIB.

'The data highlights lack of need for more stimulus, and

should be well received,' he said.

Australian shares rose 0.3 percent, but the U.S.

budget concerns and a higher local currency weighed. The

Australian dollar traded at $1.0528, not far from a

three-month high of $1.0585 hit on Wednesday. South Korean

shares fell 0.3 percent, narrowing earlier declines.

'Investors are realising that the U.S. fiscal talks are

difficult to resolve, but the index is only paring the big gains

it made in the last few minutes of Thursday's trades on

programme buying,' Han Bum-ho, an analyst at Shinhan Securities,

of Seoul shares.

A seven-day rally in world shares came to a halt and

commodity prices slipped on Thursday after negotiations over the

U.S. 'fiscal cliff' hit a wall.

President Barack Obama and House of Representatives Speaker

John Boehner held a 'frank' face-to-face meeting late on

Thursday in an effort to break an impasse in talks to avert the

'fiscal cliff' of some $600 billion of tax hikes and spending

cuts scheduled to start in January.

Failure to avert the 'fiscal cliff' could derail the

struggling U.S. economic recovery and also snuff out encouraging

signs emerging from China, the world's second-largest economy

after the United States.

Data on Thursday shed some hopeful signs for the U.S.

economy, with new claims for jobless benefits falling sharply to

a near four-year low last week while retail sales rebounded in

November.

YEN SELLING ACCELERATES

In the world's third-largest economy, big Japanese

manufacturers' sentiment worsened in the three months to

December, a Bank of Japan's quarterly tankan survey showed on

Friday, adding to signs that the global slowdown and a

territorial row with China were hurting an economy already seen

to be in a mild recession.

The data will help reinforce market expectations for the

Japanese central bank to further ease monetary policy.

The yen fell to its lowest in nearly nine months against the

dollar of 83.91 yen. The euro stood at 109.77 yen , its highest in more than eight months and looked set

to end the week more than 3 percent higher on the yen.

Japan's Nikkei share average was down 0.1 percent

but held above 9,700, a level reclaimed on Thursday for the

first time in eight months.

'We forecast more yen weakness in 2013 ... eventually, the

yen must weaken because the economy needs help so badly, but we

have seen many years of policy timidity and frequent policy

disappointments,' said Kit Juckes, strategist at Societe

Generale.

Oil prices rebounded from Thursday's fall, with U.S. crude

futures up 0.6 percent at $86.41 a barrel and Brent up 0.3 percent at $108.28.

Spot gold steadied near $1,696 an ounce after

tumbling 1 percent the previous session to push prices below

$1,700 for the first time this week. Gold was set for a third

weekly decline.

The Federal Reserve's announcement earlier this week of

fresh liquidity measures underpinned sentiment in shares and

commodities initially, but gold investors focused on the Fed's

new approach of linking its policy to a drop in jobless rates,

fearing the Fed might withdraw its economic stimulus if the job

market improved dramatically.

Liquidation by large institutional investors in gold futures

on fears of tax hikes in the new year also pressured prices,

traders said.

Sluggish stocks weighed on Asian credit markets, widening

the spreads on the iTraxx Asia ex-Japan investment-grade index by two basis points early on Friday.

(Additional reporting by Ian Chua in Sydney and Somang Yang in

Seoul; Editing by Jacqueline Wong)

((chikako.mogi@thomsonreuters.com)(+813 6441 1871 Reuters

Messaging: chikako.mogi.thomsonreuters.com@reuters.net))

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