Asian stocks fell on Friday on concern that problems in the U.S. housing and credit markets could push the world's biggest economy into recession, while the yen steadied against the dollar and euro.

The uncertainty helped boost the Japanese government bond market, with futures edging up following a sharp slide the previous day, mirroring slight gains in long-term U.S. Treasuries.

Shares of financial firms and exporters, whose largest market is the United States, led markets lower from Sydney to Seoul, putting Asia on track for its first losing session since a major tumble last Friday.

Sentiment has improved compared to where it was a week or two ago but the subprime issue will keep bubbling away under the surface, said Michael Heffernan, senior client advisor and strategist at Austock Stockbroking

MSCI's measure of Asia Pacific stocks excluding Japan was down 0.6 percent at 0304 GMT.

The index has rebounded 13 percent since hitting a five-month trough last Friday and is on track for its biggest weekly gain this decade. But is still more than 10 percent below its July 24 record high.

Year-to-date, the index is still up more than 14 percent.

Shares on Wall Street fell on Thursday after the head of Countrywide Financial Corp, the biggest U.S. mortgage company, said the housing downturn could create a recession.

The Dow Jones industrial average ended flat, while the Standard & Poor's 500 Index slipped 0.11 percent and the Nasdaq Composite Index shed 0.43 percent.

Financial stocks were among those leading declines, with the sector bearing the brunt of dwindling investor confidence in recent weeks as fallout from the meltdown in subprime mortgages spread to other corners of the credit market.

SUBPRIME SURFACES IN CHINA

The subprime crisis spilled over into Hong Kong's market after state-controlled Bank of China, the country's fourth-largest lender, revealed late on Thursday that it held US$8.965 billion in U.S. subprime mortgage-backed bonds and US$682 million in collateralized debt obligations at the end of June.

Shares of the bank and subsidiary BOC Hong Kong fell on worries the higher-than-expected exposure would weigh on performance. This contributed to a fall of more than 1 percent Hong Kong's benchmark Hang Seng Index.

Financials also weighed on Japan's Nikkei average, which fell 0.3 percent from a one-week closing high hit in the previous session. Exporters and U.S.-exposed firms contributed to declines in Australian and South Korean shares.

Bucking the regional trend, China's main stock index, which has more than quadrupled since the start of last year, rose more than 1 percent to a record high. The market was boosted by a flood of new money from recently established mutual funds and optimism China's booming economy will fuel corporate profit growth.

In currency markets, the yen edged lower against the dollar, but losses were limited by persistent fears that losses linked to the U.S. subprime mortgage woes could cause more market turmoil.

Market participants fear nothing has fundamentally changed in the problem that started from the subprime mortgage woes, said a trader at a Japanese bank.

The yen fell in the last two sessions as easing global credit concerns prompted speculators to dump long yen positions piled up last week, when unwinding of risky trades financed by borrowing at low Japanese interest rates boosted the Japanese currency.

The dollar was steady from Thursday's late U.S. trade at 116.39 yen at 0259 GMT. The dollar fell from the previous day's session high of 117.15 yen but stayed well above a 14-month low of 111.60 yen struck last Friday.

In energy market,oil prices steadied at below $70 a barrel after Mexico's state oil firm said Gulf oil rigs suffered only minor damage from powerful Hurricane Dean and worries over the subprime mortgage woes in the U.S. weighed.

U.S. light crude for October delivery dipped 5 cents at $69.78 a barrel by 0232 GMT, after gaining 57 cents on Thursday, ending a three-day losing streak that had knocked prices to their lowest since late June.

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