By Rafael Nam

But European shares were set for a tepid start, with Britain's FTSE 100 seen between down 4 points to up 3 points.

The yen edged up from sharp falls a day earlier and gained against major currencies, but some traders said the Japanese currency could stall in the near term if investors continued to return to battered equity markets and other riskier assets from so-called safe havens such as bonds.

Oil prices retreated below $54 after surging more than 9 percent in the previous session, a rally that was big enough to send regional commodity-related stocks such as BHP Billiton sharply higher.

But plenty of near-term risks remained, including whether other global lenders are in need of rescue, the fate of U.S. auto makers and indicators that continue to signal a rough road ahead for the global economy.

China's growth could well slow to its weakest pace in almost two decades next year, the World Bank said, the latest grim prognosis for a global economy buckling despite the concerted efforts of policymakers.

"What we are seeing is just short-term optimism and hope. Economic data from the U.S., Japan is not encouraging. So, the future is not promising," said Amitabh Chakraborty, president-equities at Religare Securities in India.

The MSCI index of Asia-Pacific stocks excluding Japan rose 3.8 percent as of 2 a.m. EST, heading toward a third consecutive daily gain.

Japan's Nikkei average jumped 5.2 percent, resuming trade after a public holiday on Monday.

The broader market rally comes after an initially tepid Asian reaction to the U.S. plan, announced early on Monday Asian time, to shoulder most potential losses on about $306 billion of Citigroup's risky assets and inject capital into the struggling lender.

But a subsequent Wall Street rally, which capped the best two-day run since the aftermath of the 1987 stock market crash, put some of those doubts to rest, sparking optimism the U.S. government could similarly step in to support other big banks.

The rally in global markets was also helped after U.S. President-elect Barack Obama promised to jolt the faltering U.S. economy with a stimulus package, raising the outlook for beleaguered exporters worldwide who depend heavily on U.S. consumer demand.

Shares in Australia and Hong Kong rallied 4-5 percent each, while markets in Taiwan, Singapore and India rose over 2 percent.

The world's largest miner, BHP Billiton, ended 12.2 percent higher in Sydney, but after the market close it announced that it was pulling the plug on its long-standing $58 billion bid for rival Rio Tinto, citing worsening conditions in metals markets and demands for asset sales from European competition regulators.

South Korea's KOSPI index advanced 1.4 percent, but Shanghai's index fell 0.4 percent.

Gains in Asia were led in part by banks such as South Korea's KB Financial Group and Commonwealth Bank of Australia, which recovered from steep falls on Monday as worries about slowing economic growth and rising bad debts weighed on the battered financial sector.

REDISCOVERING RISK?

Investors went from buying assets perceived as safe havens during the uncertainty in the lead-up to Citigroup's rescue to shunning them on Tuesday. The question is how long it will last.

Data continues to confirm the weakness of the global economy. South Korea on Tuesday said consumer confidence slumped to a four-month low in November, while in Germany, corporate sentiment plunged to its lowest level in nearly 16 years this month.

The World Bank also cut on Tuesday its 2009 growth forecast for China, which along with the United States, is a key export market for Asia.

On the corporate front, Australia's Qantas Airways, and Japan's Honda Motor were among the latest companies in the region to warn of a toughening outlook.

"Though U.S. shares may rise a bit more, these gains are likely to be limited by concern about more bad indicators that will show the poor state of the economy," said Yutaka Miura, senior technical analyst at Shinko Securities in Japan.

Still, regional bonds largely fell.

December 10-year Japanese government bonds (JGB) futures dropped by as much as 0.54 point before recovering to be down 0.26 from the prior close at 139.04. The benchmark 10-year JGB yield rose 1.5 basis points to 1.405 percent.

The yen rose though some traders attributed that to adjustments after the currency fell around 5 percent on Monday.

The euro was down 1.6 percent against the yen at 123.92 yen after the single currency rose on Monday from a low around 119.60 yen to a high above 126 yen.

The dollar was down 1 percent at 96.31 yen.

Oil prices retreated 86 cents to $53.65 a barrel after surging more than 9 percent on Monday when OPEC President Chakib Khelil said a further cut in crude output would be necessary. Oil had tumbled to a 3- year low on Friday.

Gold fell $5.75 to $813.80 on Tuesday, on profit-taking after bullion surged to their highest in almost six weeks on Monday amid the initial cautious reaction to the Citigroup rescue.

(Additional reporting by Elaine Lies in Tokyo, Ami Shah and Prashant Mehra in Mumbai)

(Editing by Kim Coghill)