Asian shares made solid gains and the euro rose on Tuesday, but concerns over euro zone sovereign funding ahead of key auctions outweighed some optimism on the economic outlook elsewhere and kept investors cautious about taking riskier positions.

MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 1.6 percent as the materials sector <.MIAPJMT00PUS> outperformed after Alcoa Inc , the largest U.S. aluminium producer, gave a positive outlook for world demand.

Alcoa partly helped lift Australian shares and also Japan's Nikkei <.N225>, which closed up 0.4 percent.

European markets were expected to open higher.

Financial spreadbetters expected Britain's FTSE 100 <.FTSE> to open as much as 0.9 percent higher, Germany's DAX <.GDAXI> to open with a gain of up to 1.2 percent, and France's CAC-40 <.FCHI> to start up as much as 0.9 percent.

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 for the month at 13.4 percent compared with a year earlier.

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

External demand is expected to shrink due to the festering debt crisis in Europe, China's largest export destination, adding uncertainties to the export outlook in 2012, said Nie Wen, analyst at Hwabao Trust in Shanghai.

Still, China shares jumped on Tuesday on hopes for an easier monetary policy, pushing Hong Kong's Hang Seng Index <.HSI> up 1.0 percent and Shanghai shares <.SSEC> more than 2.3 percent higher, in part also due to an improved technical outlook.

ASIA HELD HOSTAGE

Despite anticipated policy stimulus, downside risks for China remain including 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.

London copper rose 1 percent to $7,574 a tonne, after the trade data showed copper imports by China, which accounts for 40 percent of the refined metal's global consumption, rose 12.6 percent in December from November.

EURO VULNERABLE

The euro rose 0.2 percent to $1.2790 on short covering, recovering from 16-month lows of $1.2666 hit on Monday, but was vulnerable given no fundamental reasons for its rebound.

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 UniCredit , Italy's largest bank by assets, only underscored the difficulties of recapitalising and raised fears about the debt crisis unsettling the financial system.

Shares of UniCredit , the first big lender to tap the market to repair its balance sheet since new capital targets were imposed, plummeted 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.

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)