Asian shares pared early gains on Friday after China's first-quarter growth was slower than expected, clouding the outlook for demand, but a better-than-expected outcome for Italy's sovereign debt sale helped investors retain some risk appetite.

While Asian shares held up relatively well, disappointment over China is expected to result in a mixed start for European equities, as major U.S. and European stock indexes jumped over 1 percent on Thursday on the positive outcome of the Italian bond auction and speculation that China's data would top forecasts.

Financial spreadbetters predicted major European markets <.FTSE> <.FCHI> <.GDAXI> would open between 0.2 percent down and 0.1 percent up. U.S. stock futures were down 0.3 percent. <.EU> <.L> <.N>

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.9 percent, easing from a rise of 1.3 percent prior to the Chinese data, while Australian shares <.AXJO> also trimmed earlier gains to stand up 0.8 percent, off a 1 percent rise before the Chinese announcement. The pan-Asia index is set to end the week flat.

The annual rate of China's gross domestic product expansion eased to 8.1 percent in the first quarter from 8.9 percent in the previous quarter, data showed, below a 8.3 percent forecast and the weakest pace in nearly three years.

It was the fifth consecutive quarter of slowing GDP, raising investor concerns that the slowdown has not bottomed and more policy action would be needed to halt it.

We are slightly disappointed, said Kevin Lai, economist at Daiwa in Hong Kong.

We still believe there should be more policy relaxation to add to growth domestically and offset weakness in exports, Lai said, adding that Thursday's stronger-than-expected new Chinese lending data was an indication the government is quite ready to provide more monetary policy support to show that at least the economy is on track for a soft landing.

Hong Kong shares <.HSI> rose on Friday with gains pulling the benchmark index into positive territory for the week as investors focused on improving bank lending and money supply on the mainland.

Japan's Nikkei average <.N225> rose as high as 1.6 percent but retreated to stand up 1 percent. <.T>

NTH KOREA INTIMIDATION IGNORED

The Asian markets shrugged off a rocket launch by North Korea before they opened. South Korea's Defense Ministry said the rocket exploded in the initial minutes of flight, then fell in 20-odd pieces off South Korea's west coast.

Seoul shares <.KS11> kept early gains to stand up 0.7 percent and the South Korean won touched a one-week high.

The launch itself has very limited impact to broad financial markets, said Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyo.

But North Korea has lost face, and this could push them to developing nuclear weapons, keeping medium- to long-term tension, he said. That's the longer-term risk for the markets, and we can't anticipate how that would impact markets just yet.

The Australian dollar fell below $1.040 from around $1.0430 before the Chinese GDP data was released. Australian shares and currency are highly sensitive to economic data from China, which is Australia's top trade partner.

Most emerging Asian currencies were also higher on Friday with the Singapore dollar rising as the central bank surprised markets with unexpected tightening, while the won outperformed regional peers with risks from the North Korea's rocket cleared.

The dollar firmed against a basket of major currencies <.DXY> as a weaker-than-expected Chinese growth spurred some risk aversion, helping to bring gold slightly lower, or down 0.1 percent, to $1,673 an ounce.

Brent crude futures slipped towards $121 as demand growth worries resurfaced after China's economic expansion lagged expectations, while caution ahead of talks between Iran and world powers and North Korea's missile launch capped losses.

EURO DEBT ISSUE REMAINS

Italy's debt rallied for a second day on Thursday after mixed results from its 4.88 billion euro sale, as some had anticipated a weaker auction after Spain failed to draw enough demand for its auction last week.

Thursday's sale brings Italian bond issuance to nearly 37 percent of an estimated yearly target of 215 billion euros, while Spain is almost halfway through its annual funding plan.

The euro eased 0.1 percent to $1.3170, after hitting a 1-week high of $1.3213 on Thursday. The dollar inched up 0.2 percent against the yen at 81.05 yen.

Asian credit markets firmed with the rising equities, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by about 2 basis points.

(Editing by Richard Borsuk and Michael Perry)