* U.S. govt working on plan to deal with toxic assets
* Dlr up, US Treasury debt prices fall as risk aversion
eases
* China govt efforts propel stocks in Shanghai, Hong Kong
(Adds European outlook, Tokyo stocks close, updates prices)
By Kevin Plumberg
HONG KONG, Sept 19 (Reuters) - Asian stocks and the U.S.
dollar rose sharply on Friday as U.S. policymakers worked on a
plan investors hope will provide a longer-lasting fix to a
crisis that has devastated banks and shaken the global
financial system.
Major European stock markets were expected to open up as
much as 5.8 percent, according to financial bookmakers, as a
relief rally made its way around the world.
Government debt prices, used by investors as a safe harbour
throughout the 13-month-old credit crisis, tumbled on news of
the plan, which could reportedly involve setting up a fund to
buy distressed assets.
However, U.S. Treasuries with maturities of less than a
year and Japanese government bonds held stable, reflecting how
a sense of caution remains embedded in markets ahead of the
weekend.
U.S. Treasury Secretary Henry Paulson and Federal Reserve
Chairman Ben Bernanke would work through the weekend on a plan
that congressional leaders said would focus on illiquid assets
-- the toxic source that has shattered balance sheets, pushed
Lehman Brothers <LEHMQ.PK> to file for bankruptcy protection
and prompted the U.S. bailout of American International Group
<AIG.N> this week. []
However, analysts wondered what the price tag would be and
whether there was enough time for a law to be passed as some
members of Congress are expected to leave by the end of the
month to campaign for the presidential election.
"The U.S. government's stance that it would do everything
in its power to help is good, though we still don't have
details," said Takahiko Murai, a general manager of equities at
Nozomi Securities in Tokyo.
"The market reaction could still change depending on the
nature of the new entity."
The impact of the Wall Street upheaval have been felt
globally.
The Chinese government was actively trying to stabilise its
markets on Friday, saying it would buy shares in three of the
biggest state-owned banks. It ditched a tax on stock purchases.
The measures helped propel Shanghai's composite index
<> up 9.5 percent after it closed on Tuesday at a 22-month
low.
Hong Kong's Hang Seng index <> rose 6.6 percent, led by
a revived financial sector.
Shares of Industrial and Commercial Bank of China
<1398.HK>, China's largest lender which has a listing in Hong
Kong, surged 14.2 percent and was among the biggest gainers on
the index.
Japan's Nikkei share average <> rose 3.8 percent,
after plumbing a three-year low on Thursday. Shares of the
country's top bank Mitsubishi UFJ Financial <8306.T> leapt 11.5
percent after a volatile week.
Outside Japan, Asia-Pacific stocks were up 5.9 percent,
chalking up the largest single-day rally since August 2007,
when the U.S. financial sector became engulfed by spiralling
mortgage defaults, according to an MSCI index <.MIAPJ0000PUS>.
Still, the index was down 3.2 percent on the week and hit a
2-year low on Thursday.
RELIEF, AGAIN
The plan under discussion by U.S. policymakers reportedly
could involve setting up a fund to buy distressed assets from
the banks, something like the Resolution Trust Corp that was
formed to buy and then sell impaired assets during the Savings
and Loan Crisis a decade ago.
In addition, efforts to thwart the crisis have become
multi-pronged and global.
Central banks in the United States, Europe, Japan and
elsewhere have injected massive amounts of liquidity into money
markets, culminating in a coordinated offer on Thursday of $180
billion in funding.
Further, the top U.S. regulatory body was working with
Britain to crack down on abusive short selling. []
"These actions definitely mean some relief for the market,
at least temporarily," strategists at Calyon in Hong Kong said
in a note. "In particular, there must be some quick follow-up
on this U.S. bank recapitalisation initiative for it to
contribute to calm the market on a sustained basis."
However, the one-month yield on U.S. Treasury bills was
still close to zero, reflecting heavy demand for short-term
liquidity. The overnight U.S. dollar lending rate has eased but
was still volatile, trading between 2 percent and 5 percent
<USDOND=>.
Also, the spread <TED> of the interest rate on three-month
U.S. dollar-denominated deposits used outside the United States
over the three-month U.S. Treasury bill yield moved above 300
basis points this week, the highest since the credit crisis
began.
This is significant since it shows the premium the market
demands over a so-called "risk-free" rate.
"You can talk to the market for a while, but the action in
the market doesn't show they are that successful," said Sean
Darby, chief Asia strategist with Nomura in Hong Kong.
The dollar rose broadly on hopes for a crisis resolution.
The euro dropped 0.7 percent to $1.4225 <EUR=>, and the
dollar climbed 1.1 percent to 106.80 yen <JPY=> after hitting a
3-1/2-month low around 103.50 yen on Tuesday.
In the bond market, the 10-year U.S. Treasury note
<US10YT=RR> dropped 11/32 in price, lifting its yield to 3.60
percent from 3.53 percent late on Thursday in New York.
The 10-year Japanese government bond yield <JP10YTN=JBTC>
was relatively unchanged at 1.485 percent.
Gold edged up 0.4 percent in the spot market <XAU=> to
$850.90 an ounce after rising to a six-week high above $902 on
Thursday.
