Asian stocks rose on Tuesday, the last day of a torrid quarter, as investors added to trades based on a rebound in economic activity, while funds slashed bets against a fall in oil prices to keep crude on track for its biggest quarterly gain in 19 years.

Major European stock indexes followed Asia's example by opening slightly firmer.

The U.S. dollar slid as momentum kept dealers rolling out of trades based on safety after a 7 percent drop on the quarter, keeping commodity prices supported.

Trading volumes for oil in Asia surged 10 times normal levels, with crude for August delivery rising briefly above $73 a barrel to new highs for the year.

Emerging markets have been the big winners so far this year, with the MSCI emerging markets equities index up 32 percent so far in 2009 compared to a 6 percent rise on the all-country world index.

With the worst of the financial crisis now history, a tremendous shift by investors out of cash and low-yielding money market instruments into riskier assets, particularly in Asia, has been driving equity valuations and currencies in the region higher.

However, the third quarter could be a time of reckoning if higher raw materials prices snuff out signs of a nascent recovery.

Just how higher oil prices are a boon to the global economy when consumers are struggling to keep jobs and make payment on negative equity housing loans is a mystery. We are confident that threats to risk appetite and risk assets point clearly toward potential reversal, not extension of gains, said Patrick Bennett, Asia foreign exchange and rates strategist with Societe Generale said in a note.

So far this year, Chinese and Indian stock markets have been the hottest in the region.

The Shanghai composite slipped 0.4 percent on the day after earlier hitting the highest since June 2008, and has risen 63 percent so far this year.

India's BSE index also edged down 0.4 percent but it had gained 52 percent in the first half, with most of it won after a decisive election victory by a Congress-led coalition in May.

Japan's Nikkei share average finished 1.8 percent higher, with firms in the technology sector giving a boost to the index after the government said it would invest 30 billion yen ($312 million) in computer chip maker Elpida Memory Inc.

The index climbed 23 percent in the last three months, the biggest quarterly rise since 1995.

Valuation of the Nikkei on a price-to-book basis has jumped to around 1.3 times, having spent the first quarter below a multiple of one. It is still well below the average of the last decade of 1.9 times.

Hong Kong's Hang Seng index was up 0.2 percent, after earlier gains were wiped out in afternoon trade. However, shares of Asia's top refiner Sinopec were up 4.7 percent after China unexpectedly lifted domestic gasoline and diesel prices to their highest ever.

SHORT COVERING PROPELS CRUDE

Oil rose sharply to 8-month highs, though a lack of news suggested dealers were focused on quarter-end activity. Traders pointed to funds moving into the market to cover loss-making positions.

London Brent led the rally, gaining $1.74 a barrel to $72.73. U.S. crude for August delivery rose to an eight-month high of $73.38 a barrel, but later cooled to trade at $73.06, up $1.57 on the day.

This could be end-of-quarter movement, and traders are trying to push prices higher and then selling before closing their books, said Mark Pervan, senior commodity strategist with ANZ Bank.

A weakening U.S. dollar overnight helped to prop up commodity prices and the dollar continued falling in Asian hours.

The ICE Futures U.S. dollar index fell 0.3 percent, locked in a downtrend since March.

Sterling jumped after data showed UK house prices surprisingly rose a second month in June, a further sign the market may be stabilizing. The pound rose 1.1 percent to the highest in 8 months at $1.6740.

The Australian dollar was up 0.7 percent to $0.8120.

Bets on further strength in the Australian dollar have become significant enough to suggest a near-term move lower, though it has not experienced a loss of momentum in its rise against the U.S. dollar to squeeze short-term investors, said strategists with Banc of America Securities-Merrill Lynch in a research note.

Japanese government bonds gained, with investors hastening to pick up some yield ahead of the end of the first half. The 10-year future was up 0.22 point to a three-month high.

The yield on the 10-year bond has fallen around 16 basis points since June 11, retracing more than half of the rise between March 24 and June.

U.S. Treasuries fell, especially late maturities, ahead of expected purchases from the Federal Reserve. The benchmark yield on the 10-year note rose 3 basis points from late Monday in New York to 3.51 percent.

(Additional reporting by Fayen Wong in PERTH; Editing by Neil Fullick)

Japan China India Nikkei 225