* MSCI Asia ex-Japan at 16-mth high, policy hopes buoy China
* Euro hits 7-week high, dollar regains vs yen
* Obama firm on 'fiscal cliff', higher taxes for wealthy
* Australia economy grows 0.5 pct in Q3 vs Q2
* European shares likely to climb
By Chikako Mogi
TOKYO, Dec 5 (Reuters) - Asian shares hit a 16-month high on Wednesday, led by surging Chinese equities on hopes for stable growth, but concerns over whether U.S. lawmakers can break a budget impasse before year-end to avert a possible economic slump kept optimism in check.
European shares were expected to rise, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX to open as much as 1 percent higher. A 0.3 percent gain in U.S. stock futures hinted at a similarly firm Wall Street open.
MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.8 percent, gaining momentum as Shanghai shares soared nearly 3 percent to reclaim the 2,000-point level after slumping to near four-year lows last week.
Chinese shares were boosted by remarks late on Tuesday from new Communist Party chief Xi Jinping, who said that the government aimed to stabilise exports and make policies more targeted and effective.
"We are due for a short-term bounce anyway. Xi's comments suggest he thinks the Chinese economy has bottomed and inflation is not going to be a big problem," said Hong Hao, chief equity strategist at Bank of Communications International Securities.
Hong Kong shares jumped 1.5 percent, Australian shares rose 0.4 percent and Japan's Nikkei stock average erased earlier losses to end up 0.4 percent at a seven-month closing high.
"China and the yen are the main drivers," a trader at a foreign bank said.
The HSBC Purchasing Managers Index for China's services sector on Wednesday showed the barometer slipped to 52.1 in November from October's 53.5, but recent indicators from factory output to retail sales and investment reflected positive effects from Beijing's pro-growth policies.
Growth prospects for China, the world's second-largest economy, and a fiscal crisis facing the world's top economy remain underlining market themes. However, daily flows are increasingly being dictated by year-end position reshuffling, with price swings magnified by thinning activity ahead of the holidays, traders said.
The White House and Republicans remain at odds on how to avoid a $600 billion "fiscal cliff" of U.S. budget cuts and tax increases starting from Jan. 1. Despite the uncertainty, markets hope U.S. lawmakers will eventually reach a compromise.
President Barack Obama dangled the possibility on Tuesday of lowering tax rates in 2013 with a broad U.S. tax code revamp, but stood firm on insisting rates for the wealthiest must rise as part of a budget deal with Congress.
His conciliatory tone helped drive the dollar lower and risky assets higher, Sebastien Galy, currency strategist at Societe Generale, said in a note to clients.
"This rally in risk is tempered by a steady profit-taking as investors close their books for the year and some need to lock in their profits ... Short term redemptions are a factor in December after a difficult year," Galy said.
Spot gold inched up 0.3 percent to $1,701.95 an ounce, after falling to its lowest in nearly a month on Tuesday.
"If the U.S. really falls off the 'fiscal cliff', we are likely to see some buying of gold for store of value and also on the outlook that the U.S. dollar may depreciate further," said Lynette Tan, senior investment analyst at Phillip Futures in Singapore.
SUPPORT FOR EURO
Risk sentiment was also supported by receding fears about the contagion risk of the euro zone's debt crisis after a Greek plan to buy back debt pushed the euro to a fresh seven-week high of $1.3125 on Wednesday. The plan spawned optimism that Athens will secure much-needed emergency aid to avert a default.
"The news helped those who were sceptical of Greece cover their short euro positions but at this time in the year, market activity will be influenced by position adjustments before the year-end holidays, with each currency pair moving on its own factor," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.
"Friday's U.S. nonfarm payrolls will be key to market sentiment and the U.S. fiscal issue will be the primary focus for markets," he said.
But other analysts noted that due to the impact of superstorm Sandy on the U.S. Northeast in November, it may be difficult to get a clear picture of the labour market from Friday's data.
The U.S. Federal Reserve is set to announce a fresh round of Treasury bond purchases at its Dec. 11-12 meeting, replacing a programme which expires at the end of the year called Operation Twist, under which it bought $45 billion of longer-dated bonds a month while selling its shorter-date holdings.
The dollar climbed 0.4 percent against the yen to 82.23 yen .
Australia's resource-reliant economy grew a moderate 0.5 percent last quarter, but lower export revenues government cutbacks and a decelerating mining boom painted tougher times ahead.
The Reserve Bank of Australia (RBA) cut interest rates to a record-matching low of 3 percent on Tuesday. The local dollar held around $1.0470.
U.S. crude futures were up 0.4 percent to $88.87 a barrel and Brent futures were up 0.2 percent to $110.04.
A rise in broad assets boosted sentiment for Asian credit markets, narrowing the spreads on the iTraxx Asia ex-Japan investment-grade index by 3 basis points.