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Investors hunkered down Tuesday ahead of a US presidential vote that could be pivotal to the handling of the financial crisis, as central banks kept up efforts to bolster the ailing world economy.
Hopes were high that the next US leader will take further action to tackle a looming recession in the world's largest economy, with opinion polls giving Democrat Barack Obama a sharp edge over Republican rival John McCain.
Central bankers continued their efforts to restore stability to world markets and stop the global economy slipping into a long downturn.
The Reserve Bank of Australia on Tuesday slashed its key lending rate by a bigger-than-expected 75 basis points to 5.25 percent. The European Central Bank (ECB) and the Bank of England are expected to follow suit later in the week.
The mood was cautious on Asian markets ahead of the US elections.
The Nikkei stock index rose 3.74 percent by lunch in Tokyo, where markets were closed on Monday, as a weaker yen eased concerns about exports.
But turnover was low and elsewhere in the region stocks lost ground as investors moved to take profits.
Stocks fell 3.4 percent in Hong Kong, 0.54 percent in Shanghai and 1.65 percent in Singapore. Stocks opened lower in Sydney but pared their losses after the rate cut.
Hopes for additional public spending to boost the economy could support global markets, particularly if Obama wins Tuesday's election, said analysts at the investment bank Calyon.
But the recent "post-panic rally may be more difficult to sustain," they added.
Stocks closed almost flat on Wall Street Monday as fresh data underscored the deterioration in the US economy.
The government last week reported the economy contracted in the third quarter, adding to fears of a painful recession.
Fresh data on the US manufacturing sector showed activity fell for the third month in a row in October. A business survey also painted a gloomy snapshot of the corporate sector. Key US employment data due on Friday is expected to show that the US economy lost a further 200,000 jobs in October.
Some analysts said growing worries about the health of the global economy could put the brakes on the recent rally in world share prices.
"We believe that the recovery has gotten ahead of itself," Dariusz Kowalczyk, chief strategist at CFC Seymour in Hong Kong, wrote in a note.
"We expect another major episode of risk aversion to take hold of markets in the near future, with the potential for commodities and stocks to hit new lows for the year," he warned.
The European Commission on Monday forecast a short and shallow recession for the 27-nation European Union, predicting its combined economy would shrink 0.1 percent in both the third and fourth quarters of 2008.
Even so European markets ended higher Monday. London's FTSE 100 index closed up 1.51 percent at 4,443.28, the Paris CAC 40 gained 1.17 percent to 3,527.97 points and Frankfurt's DAX rose 0.62 percent to 5,018.85.
There was speculation that the ECB and Bank of England will both lower their key interest rates by half a point on Thursday, in the wake of cuts by the US Federal Reserve and other central banks to unblock frozen credit markets.
Reports said South Korea was in talks with China for a currency swap deal worth up to 30 billion dollars to help build up its ammunition against the ongoing crisis.
The two countries currently have an agreement to swap up to the equivalent of four billion dollars in local currencies. A new deal would involve up to 30 billion dollars, Yonhap news agency said.
The dollar fell slightly against the yen but rose against the euro as investors focused on the US election.
The greenback was at 98.85 yen in Tokyo morning trade, down from 99.13 in New York late Monday. The euro dropped to 1.2561 dollars from 1.2635.
