Asian stocks and the Australian dollar edged higher on Tuesday but shares in Shanghai were highly volatile, keeping nerves frayed about whether another bout of profit taking would hit global markets.

The Shanghai composite index <.SSEC> opened lower but soon turned higher after suffering its biggest single-day drop in nine months on Monday. Fears that China is slowly tightening its easy money policies are haunting investors.

The drop in China's market had a domino effect on other markets, spreading nervousness that rallying asset prices have run ahead of economic fundamentals and weak earnings prospects.

U.S. markets posted their worst loss in seven weeks on Monday, with profit taking also hitting commodities. <.N>

I think macroeconomic indicators in general suggest that things are improving globally and there's no reason to be so pessimistic, but there's not a lot we can do about market sentiment as long as stocks keep on falling, said Noritsugu Hirakawa, a strategist at Okasan Securities in Tokyo.

Japan's Nikkei share average <.N225> edged up 0.3 percent as dealers covered their bets against the market, benefiting a mixture of technology and retail companies.

The MSCI index of Asia Pacific stocks traded outside Japan <.MIAPJ0000PUS> rose 0.5 percent after tumbling 3.7 percent on Monday, the biggest daily decline since March 30.

The Shanghai index <.SSEC> was up 0.6 percent by mid-morning, helping to pull Hong Kong's Hang Seng Index <.HSI> out of the red. Profit taking has pulled the Shanghai index down by around 18 percent in the last two weeks after it jumped more than 90 percent since the start of the year.

But the IPO boom in China gained pace, with shares of China brokerage Everbright Securities Co <601788.SS> rising as much as 42 percent in their debut in Shanghai before slightly paring early gains.

The Australian dollar, which has had a tight relationship with equity markets, rose 0.5 percent to US$0.8250 after minutes from the Reserve Bank of Australia meeting underscored that policy would be tightened as a recovery took hold.

The U.S. dollar and the yen both retained broad gains on uncertainty over the strength of a global economic recovery.

The dollar index -- the dollar against a basket of six currencies-- was up 0.38 percent, not far from a two-week peak of 79.514 hit on Monday. On the yen, the dollar was slightly weaker at 94.38.

The euro rose 0.3 percent to $1.4113 after dropping to a two-week low around $1.4045 on Monday.

U.S. crude oil futures also steadied, rising 50 cents to $67.25 a barrel after falling to a two-week low on Monday.

(Additional reporting by Elaine Lies in TOKYO)

(Editing by Kim Coghill)