By Kevin Plumberg

Panic that U.S. and European governments have not yet found a solution to the plague sweeping through the global financial system had pushed Asian stocks to a near 3-year low earlier.

The fury with which global equity markets have sold off in recent weeks and the worsening condition of the financial system has made the upcoming Group of Seven rich nations meeting even more important.

Investors have begun to anticipate some kind of cooperation among countries to solve the crisis, especially after the Reserve Bank of Australia delivered a full percentage point rate cut, the biggest cut in rates since 1992.

"Investors believe global central banks could do anything," said Tsutomu Soma, senior manager of foreign assets at Okasan Securities in Tokyo. "The next step could be coordinated interest rate cuts, interventions in the foreign exchange market or more fund injections into money markets. Who knows?"

The MSCI Asia-Pacific excluding Japan stocks index rose 1.4 percent, rebounding from the lowest since December 2005.

Australia's benchmark S&P/ASX 200 index jumped 2.3 percent, bouncing from a 3-year low, while Singapore's Straits Times index rose 2.2 percent.

The Nikkei was down 1.3 percent after earlier slipping as much as 5 percent to its lowest since December 2003.

FEAR RULES

South Korea's KOSPI fought back to trade 0.5 percent higher after closing at the lowest in 21 months on Monday.

The country's regulator said it was considering steps to reduce volatility in the equity market, helping to stem some of the day's losses.

Hong Kong's markets were closed for a public holiday.

The $700 billion U.S. rescue fund, ad hoc measures by European governments and massive injections of funds by central banks around the world have not been able to stop confidence in the financial system from evaporating or growing fears the global economy is on path to recession.

On Monday, the Dow Jones industrial average closed at a 4-year low after dipping below 10,000 points for the first time since October 2004, and Europe's FTSEurofirst 300 index chalked up its biggest percentage decline ever, shedding 7.8 percent.

With the G7 meeting on Friday though, market participants have begun to brace for broader, international action that might include monetary policy action.

"The key issue is coordination of policies, since individual country policies aimed at shoring up confidence of domestic institutions can actually exacerbate systemic risk by altering relative risk between countries," said Ashley Davies, currency strategist with UBS in Singapore. "As such, a coordinated global approach by the major financial powers may be critical to containing the destructive aspects of global deleveraging," he said in a note.

WILL CENTRAL BANKS WORK TOGETHER?

In other markets, dealers picked up the pieces a day after the Chicago Board Options Exchange Volatility index, better known as the VIX, vaulted to a record high of 58.24 as investors scrambled to buy protection against plummeting stock markets.

The benchmark 10-year U.S. Treasury note yield which moves in the opposite direction of the price, ticked up to 3.51 percent after dropping to 3.46 percent late on Monday in New York. It was still down sharply from 3.60 percent late last week, reflecting the heavy demand for government debt as a relatively safe haven from market shockwaves.

Japanese 10-year government bond futures were down 0.5 point to 138.11 after rising for three straight days.

Frozen interbank lending markets and bank rescues remained a feature in the United States and Europe. But the bailout of two big European banks and a decision by several European governments to guarantee bank deposits in emergency moves in the last several days have done little to dispel intense waves of fear.

"At this point, all we can do is to wait and see how effective the U.S. financial rescue plan or any other coordinated government efforts will be in thawing global capital markets," said Lee Kyoung-su, a market analyst at Taurus Investment & Securities in Seoul.

After a massive surge on Monday, the yen dropped after the Australian rate encouraged some cautious willingness to take risks and unwind pure safety trades.

The dollar rose as much as 0.8 percent against the Japanese currency to 102.62 yen pulling further away from a six-month low of 100.22 yen hit on trading platform EBS the previous day.

The euro was up 0.8 percent to 138.60 yen

The Australian dollar surged 4 percent against the yen, rising to around 75 yen

The South Korean won dropped 5 percent to the lowest in more than 7 years against the U.S. dollar as investors focused on the country's relatively high level of debts, despite assurances from the government that Asia's fourth-largest economy was not facing a currency crisis.

Gold climbed in the spot market up 0.6 percent to $863.50 an ounce after rocketing nearly 4 percent on Monday on a flight to anything resembling safety.

(Additional reporting by Park Jung-young in SEOUL and Rika Otsuka in TOKYO; Editing by Lincoln Feast)