By Raju Gopalakrishnan
SINGAPORE (Reuters) - Asian financial markets rallied on Wednesday, with Tokyo stocks rebounding 5.7 percent after a steep two-day sell-off on Japan's killer earthquake and unfolding nuclear crisis.
Other Asian stock markets were also higher, but another fire at the earthquake-damaged Fukushima Daiichi nuclear plant north of Tokyo and fears of more radiation leaks kept investors on edge and Tokyo stocks volatile.
European shares were expected to open little changed as investors watched developments in Japan, while U.S. stock index futures were flat.
"The market in general understands that Japanese shares are oversold, but uncertainty over the Fukushima nuclear power plant is clearly making market participants very nervous," said Kazuhiro Takahashi, general manager at Daiwa Securities Capital Markets.
Asian markets also received a filip from U.S. stocks, which closed down but off lows as a more upbeat view from the Federal Reserve helped limit Japan-related losses. The Fed stuck with its ultra-loose monetary policy but said the economy was gaining traction.
The gains in Tokyo stocks were led by short-covering by hedge funds, analysts said, adding that the market was still extremely volatile.
"The rebound is pretty strong as investors realized they may have panicked a bit too much yesterday," said Fujio Ando, senior managing director at Chibagin Asset Management.
"But it's mostly short covering by both domestic and foreign players, and not honest, active buying, because nuclear worries are still strong. If we hear anything about the nuclear situation improving, investors will aggressively pile into the Nikkei."
Japan's Nikkei average surged 5.68 percent, clawing back about a third of its losses since a massive earthquake and tsunami hit the country on Friday, and closing above the psychologically important 9,000 point level at 9,093.72.
Nikkei futures were up 4.2 percent.
MSCI's index of Asian shares outside of Japan rose 0.9 percent.
Australian shares closed 0.65 percent up, led by a relief rally in uranium producers Paladin and Energy Resources of Australia, which had sunk on Monday on fears that many countries would scale back or suspend their nuclear power programmes in light of Japan's woes.
Paladin rose 13.5 percent and ERA 10.3 percent.
Stock markets in South Korea, Taiwan, and India also gained.
Asian economies will continue to grow strongly this year even as Japan struggles with the aftermath of its natural disaster, ratings agency S&P said.
YEN SLIPS BUT REPATRIATION EYED
The yen slid to around 80.8 to the dollar on fears of intervention by the Bank of Japan after the currency surged toward its 1995 historic high of 79.75. Speculators were betting that the Japanese government and companies would liquidate overseas assets to pay for reconstruction.
The euro was subdued after Moody's downgraded Portugal's ratings by two notches and was last down about 0.2 percent on the dollar for the day.
"Event risk is going to play a huge role in deciding what the yen does this week," UBS currency strategist Gareth Berry told Reuters Insider.
"The key thing to watch really is what happens to the Nikkei index in Japan and if equities rebound from their lows. That will help support risk appetite and that will lead to a slightly weaker yen.
"The other thing to watch is how things unfold at the nuclear power plants. Any deterioration there is probably going to lead to further yen strength and conversely, as we hope the situation resolves itself safely, we could see risk appetite improve and that will naturally lead to a slightly weaker yen."
Brent crude oil futures gained 25 cents to $108.77 a barrel, off a three-week low, as growing tensions in Bahrain offset a move away from riskier assets on Monday that was sparked by the Japanese crisis. U.S. crude was up 47 cents at $97.65.
Spot gold was up at $1,398 per ounce, but was yet to fully recover ground after investors sold off bullion to cover stock market losses.
(Additional reporting by Anuradha Kanwar, Editing by Richard Borsuk & Kim Coghill)