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By Chikako Mogi
TOKYO (Reuters) - Asian shares extended losses on Thursday as investors worried about the fiscal crisis in the United States and the European economy's further deterioration, underpinning the safe-haven dollar and yen as well as U.S. Treasuries on safety bids.
MSCI's broadest index of Asia-Pacific shares outside Japan slid 0.9 percent, retreating from a near eight-month high on Wednesday.
South Korean shares and Hong Kong shares led the declines while Australian shares <.AXJO> fell 0.9 percent after all major U.S. stock indexes slumped over 2 percent overnight.
Japan's Nikkei average dropped 1.3 percent to a one-week low as the yen firmed, weighing on exporters.
The benchmark U.S. 10-year Treasury yield stood at 1.68 percent in Asia, after ending down 11 basis points at 1.6246 percent for its biggest single-day drop since May 30 on Wednesday when stock markets tanked.
"Although we expect a compromise to be reached in the end, negotiation will likely be very difficult and drag on until the end of year. Uncertainty over the fiscal cliff is likely to support bonds," said Shinichiro Kadota, non-yen fixed income analyst at Barclays in Tokyo.
World sharemarkets and the euro slid on Wednesday on concerns over U.S. fiscal challenges. Congress must avert the "fiscal cliff" of nearly $600 billion worth of spending cuts and tax increases set for early 2013. There is also the issue of a debt ceiling, which needs to be raised to avoid a government shutdown.
"The general trend of weaker equities, higher bond prices and a weaker dollar will likely continue," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ.
"A key gauge to risk appetite is how far U.S. equities will decline and whether U.S. 10-year yields will drop to 1.5 percent, as some had predicted," he said.
The dollar was up 0.1 percent to hover near a two-month high against a basket of major currencies <.DXY> of 80.924 hit on Wednesday, benefiting from the U.S. currency's safe-haven appeal. The dollar fell 0.2 percent against another safe-haven currency, the yen, to 79.80.
Top U.S. Republican John Boehner said on Wednesday that Washington should find a short-term solution to avoid the fiscal cliff and then work on a substantive debt reduction plan in 2013.
The U.S. sovereign credit rating will not be affected for the time being as Moody's Investors Service said on Wednesday it will hold off on its judgment of whether to cut the rating until after the 2013 budget process is completed.
EURO FACES GLOOM
The euro stayed pressured at $1.2753, although it was off Wednesday's two-month low of $1.2736.
Sentiment was dented by a gloomy outlook for Europe after the European Commission said the euro zone economy would barely grow next year.
Greece's parliament narrowly voted to approve an austerity package early on Thursday to unlock vital aid and avert bankruptcy, despite internal rifts in both ruling New Democracy and PASOK parties and violent demonstrations.
"The Greek vote is gone by, the flash Obama panic has forced ... investors to close down their positions to lock in profits," said Societe Generale analyst Sebastien Galy in a note to clients. "We are left with the usual story of flatter US Treasuries helped by renewed reserve activity."
The European Central Bank holds its policy meeting later in the day, and is expected to keep interest rates unchanged.
The Chinese congress started on Thursday to usher in a once-in-a-decade leadership change against a backdrop of growing social unrest, public anger at corruption and a yawning gap between rich and poor.
Oil rebounded after tumbling more than $4 on Wednesday amid concerns about weak demand for fuel as the U.S. and European economies face the risk of a prolonged slowdown.
U.S. crude rose 0.5 percent to $84.84 a barrel, after settling at its lowest level since July at $84.44 while Brent also rose 0.5 percent to $107.31.
Sluggish equities sapped sentiment in Asian credit markets, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 5 basis points.
(Additional reporting by Hideyuki Sano in Tokyo; Editing by Eric Meijer)