By Alex Richardson
SINGAPORE (Reuters) - Asian stocks mostly fell on Thursday as investors reacted to the prospect of drawn-out negotiations over the looming U.S. "fiscal cliff" by shedding riskier assets, but Japanese equities defied the trend as a sharp slide in the yen lifted exporters' shares.
European shares were seen falling for a second day, hit by U.S. concerns and the continent's own intractable debt crisis, with data due later in the day expected to show the euro zone slid back into its second recession since 2009 in the third quarter.
The retreat from risk also weighed on commodities, although oil held its gains after jumping in the previous session due to rising tensions in the Middle East after Israel launched an offensive against Palestinian militants in Gaza.
"Markets are reflecting worse case scenarios today with investors fleeing in droves," said Ben Taylor, a trader at CMC Markets in Australia, where the main share index fell to a two-month low.
"Tensions escalating in the Middle East added to the panic selling."
MSCI's broadest index of Asia Pacific shares outside Japan fell 1 percent, with shares in South Korea and Hong Kong prominent among the losers.
Financial bookmakers called major European indexes to open down 0.6-0.8 percent. Underlining the euro zone's problems, anti-austerity marches across southern Europe turned violent on Wednesday, while data due at 1000 GMT was expected to show the bloc's output shrank 0.2 percent in the third quarter.
Bucking the gloom, Tokyo's Nikkei rose 1.9 percent as the boost given to exporters such as Toyota Motor Corp <7203.T>, Honda Motor Co <7267.T> and Canon Inc. <7751.T> as the drop in the yen to a six-month low outweighed global concerns.
ELECTION CALL BOOSTS YEN
The yen had fallen the most against the dollar in two months on Wednesday after Japanese Prime Minister Yoshihiko Noda indicated he would call a snap election next month that the opposition Liberal Democratic Party, which favours further monetary policy easing by the central bank, is expected to win.
"Everyone is expecting Shinzo Abe from the LDP to be the next prime minister. He will pressure the BOJ to conduct bold monetary easing by setting a 2 to 3 percent inflation target," said Shun Maruyama, chief Japan equity strategist at BNP Paribas.
"In the near-term, we can be bullish on the Nikkei and bearish on the Japanese yen."
The Japanese currency sank further on Thursday after Abe said he wanted the Bank of Japan to set interest rates of zero or below zero to encourage lending.
His comments pushed the yen to a 6-1/2-month low against the dollar at 80.83, a boost for Japanese exporters who gain when returning overseas earnings to Japan and boosting their competitiveness.
One prominent exporter missed out on the rally, however. Shares in Playstation maker Sony Corp <6758.T> tumbled 8.9 percent after the company said it would raise $1.9 billion through a sale of convertible bonds.
HEADING FOR THE CLIFF
U.S. stocks fell more than 1 percent on Wednesday after President Barack Obama reiterated his call for the wealthy to pay higher taxes, setting the stage for a tough budget battle with Congressional Republicans.
Investors fear that the package of tax increases and spending cuts mandated to come into force next year if a deal is not agreed - the so-called "fiscal cliff" - will pitch the world's biggest economy back into recession, dealing a fresh blow to the fragile global economy.
S&P 500 futures edged up 0.2 percent on Thursday, pointing to a weak rebound when trading on Wall Street resumes.
The euro, which has generally tended to move with riskier assets in recent months, rose 0.1 percent to around $1.2750, having halted a five-day slide that had taken the single currency to its lowest in more than two months.
Benchmark Brent crude firmed 0.1 percent to around $109.75 a barrel, having risen more than 1 percent on Wednesday after Israel launched airstrikes in retaliation from rocket attacks on its territory, killing the military chief of Hamas.
U.S. crude was flat at around $86.35 a barrel.
"The overall economy is weak, but prices are biased to rise because geopolitical risks are going up," said Tony Nunan, a risk manager at Mitsubishi Corp. "That's going to be the story for the rest of the year - a weak economic outlook, but higher prices because of supply worries."
Gold crept lower to just below $1,725 an ounce.
(Additional reporting by Dominic Lau and Lisa Twaronite in Tokyo and Thuy Ong in Sydney; Editing by Kim Coghill)