By Kevin Plumberg

A slew of reports in the region showed a rapid drop in growth and collapse in export markets in Asia, suggesting it may be a while before a recovery takes hold and provides support for investor willingness to take risks. Chinese economic growth slowed to a seven-year low in 2008 and Japanese exports had a record decline in December.

"Across the region, a collapse in export growth has had direct flow-on effects to industrial production, and we are now seeing this start to impact employment, with household spending the next in line," emerging market strategists at Royal Bank of Canada said in a note.

Sterling fell after rising overnight on speculation UK policy makers may take more aggressive actions to support their economy and perhaps the British currency, which hit a 23-year low on Wednesday, as well.

The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> rose 1.1 percent though remained within spitting distance of a one-month low touched earlier in the session.

Japan's Nikkei average <.N225> was largely unchanged on the day. Shares of large exporters such as Honda Motor Co <7267.T> and Toyota Motor Corp <7203.T> weighed on the index as the yen rose, but brokerages jumped after Credit Suisse upgraded the sector to overweight from market weight.

Hong Kong's Hang Seng index climbed 1.3 percent, powered by a 4.3 percent rise in HSBC stock <0005.HK>. Shares of the largest European bank had plunged for eight consecutive days to the lowest in a decade on concern whether the firm has access to adequate capital.

Although risk taking among investors returned suddenly overnight, knocking down a closely followed market volatility index <.VIX> 18 percent, uncertainty about medium-term corporate earnings, global consumer demand and the banking industry kept the element of fear high.

At the same time, analysts and fund managers also believe though that massive government spending and tax cuts around the world will eventually trickle down to real economies, maybe even as soon as late 2009.

For that reason, and given how badly corporate credit was sold off last year, some large asset managers have begun to sift through corporate bonds and equities in search of bargains.

POUNDED

The British pound resumed a decline against the dollar back toward 23-year lows, cutting gains made after a source told Reuters that its slide will be discussed at the next meeting of the Group of Seven nations. Sterling was down 0.4 percent to $1.3826 after dropping to near $1.36 on Wednesday.

"Sterling still looks far from hitting a bottom with mounting expectations for further and bigger interest rate cuts from the Bank of England to combat the quickly deteriorating economy," said a senior trader at a Japanese trust bank.

The U.S. dollar fell 0.5 percent to 88.96 yen, after rebounding from Wednesday's low of 87.10 yen, the lowest since July 1995. The euro dropped 0.8 percent to 115.84 yen, though remained well above a 7-year low of 112.08 yen hit on Wednesday.

U.S. Treasuries, which have been in hot demand as the credit crisis has kept investors in need of liquidity and safety, rebounded after dropping overnight on worries about upcoming debt supply to finance various U.S. rescue packages.

The yield on the benchmark 10-year note, which moves in the opposite direction of the price, slipped to 2.52 percent from 2.54 percent late in New York.

U.S. crude futures steadied on Thursday, after rallying more than 6 percent the previous day, as traders weighed the impact of recent OPEC supply cuts and a weaker dollar.

Crude futures for March deliver -- which took over as the main front month contract -- rose 32 cents to $43.87 a barrel.

(Additional reporting by Satomi Noguchi in TOKYO)

(Editing by Kazunori Takada)