* MSCI Asia ex-Japan edges up to 16-month high
* Nikkei eases 0.1 pct but holds above key level
* Euro inches up against dollar after Monti reassures
* Trade lacklustre as liquidity starts to drop
* European shares set to crawl higher
By Chikako Mogi
TOKYO, Dec 11 (Reuters) - Asian shares edged up to a 16-month high on Tuesday and the euro firmed, but prices were capped as investors waited for the U.S. Federal Reserve's policy decision this week and any progress in U.S. budget talks.
European shares were likely to crawl higher too, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX will open as much as 0.3 percent higher. But a 0.2 percent drop in U.S. stock futures hinted at a soft Wall Street open.
MSCI's broadest index of Asia-Pacific shares outside Japan nudged up 0.3 percent to a 16-month high. The index has hit successive 16-month highs since Dec. 5.
Australian shares gained 0.4 percent to a seven-week high, supported by higher commodities prices on bets that the Fed will adopt fresh economic stimulus measures.
"It seems the Christmas rally (in commodities prices) is about getting ahead of the FOMC meeting and staying ahead of any potential Chinese stimulus early next year," said Ben Taylor, sales trader at CMC Markets.
Hong Kong shares added 0.2 percent, after earlier hitting a 16-month high. Shanghai shares were little changed as investors turned cautious ahead of the Fed and also took profits from Monday's rally, partly in response to data showing China's banks lent more slowly than expected in November and the pace of total financing eased.
Japan's Nikkei share average was the region's laggard, closing down 0.1 percent but staying above a key 9,500 level. Investors booked profits on signs that the market is overbought after a 10 percent rally in the past month.
"The 9,500-level is still an important psychological line for both support and resistance purposes," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
After a two-day meeting ending Wednesday, the Fed is expected to announce it will buy $45 billion per month of longer-dated Treasuries beginning in January on top of the $40 billion in mortgage-backed security purchases it announced in September. The new buying will replace the Fed's current programme, Operation Twist, which expires at the end of December.
Under Operation Twist, the Fed sells shorter-dated U.S. government debt and buys longer-dated Treasuries to extend the duration of its balance sheet.
The prospects of Fed stimulus weighed on the dollar and helped to underpin the euro, which traded up 0.1 percent at $1.2956, following a Monday low of $1.2880.
The dollar steadied at 82.32 yen. The yen has also been pressured by expectations for more easing from the Bank of Japan, which meets next week.
The euro rose from Monday's lows after Italian Prime Minister Mario Monti played down market fears over his decision to resign. He said there was no danger of a vacuum ahead of an election in the spring.
"I think people at this point are not sure whether there really will be the risk of Italy not pursuing its fiscal reforms pursued under Monti. So it's hard to really price that news in yet," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
European partners urged the next Italian government on Monday to stick to Monti's reform agenda, after his decision to resign early and Silvio Berlusconi's return to frontline politics rattled financial markets.
Monti had earned market confidence over the past year in indebted Italy, as he spearheaded a reform agenda to rescue the euro zone's third-largest economy from the threat of a Greek-style collapse.
The prospects that Italy's reform agenda could move off track in the absence of Monti at the helm have weighed on markets. Investors also worry about the impact on neighbouring Spain, which is struggling with high debt and studying the need for outside help.
Economists have warned that a failure by the U.S. Congress to avert the "fiscal cliff," some $600 billion of tax hikes and spending cuts scheduled to start in January, could send the economy into recession and weigh on the fragile global economy.
The White House and House of Representatives Speaker John Boehner's office held more negotiations on Monday on ways to break the budget stalemate. The talks picked up pace after Boehner met with President Barack Obama on Sunday, raising hopes of progress.
U.S. crude futures inched up 0.1 percent to $85.65 a barrel and Brent also rose 0.1 percent to $107.40.