Asian shares rose Thursday as optimism over Europe's efforts to aid the euro zone's financial sector and U.S. data suggesting the economy could avoid recession spurred short-covering and value-hunting.

An easing of risk aversion, after an intensive selloff earlier this week on fears that Europe's debt problems could trigger a new global financial crisis, helped boost commodities and saw Asian credit markets tighten sharply.

The U.S. data supported a view that despite the recent deterioration in sentiment, the financial turmoil so far has not had a serious material damage to the economy, at least in the United States, Hiroki Shimazu, senior market economist at SMBC Nikko Securities, told Reuters.

Shares are being bought back as the recent selloff had brought the market to levels reflecting a recession, and a sharp loss in corporate profits, which is now seen as overdone.

MSCI's broadest index of Asia Pacific shares outside Japan rose 3.1 percent, recouping more than half the steep losses made this week and moving away from a two-year low hit on Tuesday.

The Nikkei share average rose 1.9 percent and was on track to break a four-day losing streak on Thursday on short-covering rally -- when investors realize gains by buying back borrowed stock they had sold in a bet on falling prices -- with commodity- and tech-sector shares in demand.

Hong Kong shares also rose from oversold conditions, lifting the Hang Seng Index up over 4 percent.

Overall market volatility as measured by the VIX index Wall Street's so-called fear gauge, fell 7 percent to 37.81 on Wednesday, down sharply from this week's peak of 46.88, lending support to investors cautiously putting some risk back on in the near-term.

The VIX has traded in a 30-48 range after breaking higher in August, and failures to test the highs this week may raise the prospect for a swing lower in the near-term. A clear break in either direction would indicate the next major move.

MARKETS EYE ECB DECISION

Asian credit markets reflected easing strains, with the iTraxx Asia ex-Japan investment grade index narrowing by about 10 points after a sharp widening at the start of this week.

Investors were likely to remain cautious about whether the market relief would be sustained, ahead of key events including the European Central Bank's policy meeting later this session, the last meeting to be held under the presidency of Jean-Claude Trichet, and Friday's U.S. non-farm payrolls.

The ECB was expect to hold rates at 1.5 percent and restore long-term lending to banks, preparing the ground for a rate cut before the year-end. The rate decision was due at 1145 GMT, with Trichet's news conference at 1230 GMT.

The euro was steady around $1.3330 ahead of the ECB meeting, well off a nine-month trough of $1.3144 struck this week.

In a Reuters survey taken last week, 56 out of 75 economists said they expected the ECB to hold rates this time around, though 13 saw a 25 basis points cut and 7 predicted a 50 bp cut. A rate cut could reignite market jitters about the euro zone's sovereign debt woes hurting the economy, and resume selling pressures.

German Chancellor Angela Merkel said Wednesday that Berlin was ready to recapitalize its banks if needed, adding some more reassurance following an agreement on Tuesday by European finance ministers to safeguard banks in the face of mounting concerns about a Greek default.

Further adding to positive sentiment was data showing growth in the U.S. service sector stood steady in September and private hiring picked up, suggesting the economy was not yet slipping into recession.

U.S. crude oil steadied above $79 a barrel on Thursday as a surprise drawdown in U.S. crude inventories helped offset pressure from the euro debt crisis. Brent crude was above $102.

(Additional reporting by Reuters FX analyst Krishna Kumar; Editing by Alex Richardson)

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