Asian shares and the euro rose on Tuesday, but concerns over funding of euro zone sovereigns ahead of key auctions this week and of the debt crisis spilling into the wider financial system kept investors cautious about taking riskier positions.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.4 percent following a modest gain in global stocks as the materials sector <.MIAPJMT00PUS> outperformed after Alcoa Inc , the largest U.S. aluminium producer, gave a positive outlook for world demand.

Alcoa, seen as a bellwether of broader economic growth because of aluminium's role in producing many goods, on Monday posted a fourth quarter loss due to a steep plunge in aluminium prices, but its revenue beat expectations.

Alcoa partly helped lift Australian shares and also Japan's Nikkei <.N225>, which gained 0.4 percent. <.T>

China's exports and imports grew at their slowest pace in more than two years in December as foreign and domestic demand ebbed, putting export growth in December at 13.4 percent compared with a year earlier.

But immediate market reaction was limited, with Hong Kong's Hang Seng Index <.HSI> up 0.6 percent and Shanghai shares <.SSEC> up 1.5 percent.

With European woes overshadowing recent positive economic data from the United States, market players were looking for signs of how the euro zone debt crisis might affect Asian growth.

Chinese policymakers are expected to offer stimulus to underpin growth but downside risks remain that could make growth lower than the consensus forecast, such as side-effects from the slowdown in the property market, said Andrew Pease, Sydney-based chief investment strategist at Russell Investments Asia Pacific.

It's very hard to make a clear prediction until we start to see the shape of Europe, he said.

Asia being a high-beta market, if the world goes into a risk-off phase on the back of Europe, Asia will underperform. If Europe resolves its problems, Asia will outperform, he said.

Pease said the current environment calls for a neutral stance in allocations and being opportunistic in hunting for bargains, such as a 10-15 percent drop in equities markets, or corporate credit.

He said investors should avoid markets that performed strongly in the past couple of years, such as U.S. Treasuries, and they should be cautious about commodities until China's growth prospects are clear.

EURO VULNERABLE

The euro was up 0.1 percent at $1.2773, lifted by a short squeeze after hitting 16-month lows of $1.2666 on Monday, as players pared extremely bearish bets against the single currency ahead of key events in Europe this week. But the single currency remained vulnerable given no fundamental reasons for its recovery.

EURUSD continues to trade below $1.2800, and prospects for EUR remain bleak, analysts at BNP Paribas said.

Italian and Spanish debt auctions this week are the focus of the market as the two big euro zone economies are seen as most at risk from the crisis.

A plunge in euro zone government bond prices on concern about financing ability eroded capital at European banks which own large amounts of such bonds. Problems faced by a top Italian bank only underscored the difficulties of recapitalising and raised fears about the debt crisis unsettling the financial system.

Shares of UniCredit , Italy's largest bank by assets, plunged again on Monday as it began a rights issue to bolster its capital. Its stock has lost 45 percent since it priced the cash call at a big discount last Wednesday and its market capitalisation has nearly halved.

The bank is the first big lender to tap the market to repair its balance sheet since new capital targets were imposed.

A meeting between the German and French leaders on Monday also added to jitters, as Chancellor Angela Merkel and President Nicolas Sarkozy warned Greece it won't get more bailout funds until Athens agrees with creditor banks on a bond swap and pressed for an early deal to avert a potential default in the euro zone's most debt-stricken nation.

Merkel and Sarkozy also said they aimed to wrap up negotiations among euro zone countries this month on a new fiscal pact tightening budget discipline, to be signed at the latest on March 1.

Asian credit markets were on the defensive side on Tuesday, with spreads on the iTraxx Asia ex-Japan investment grade index sticking to late Monday levels.

(Additional reporting by Ian Chua in Sydney; Editing by Richard Borsuk)