- U.S. government bonds extended sharp losses on Wednesday over U.S. tax proposals, boosting the appeal of the dollar as yields spiked and sending many investors fleeing for the sidelines.

European shares fell in early trading after a strong run. The FTSEurofirst 300 <.FTEU3> index of top European shares was down 0.2 percent. It rose 0.9 percent on Tuesday, when it hit its highest intraday level since September 2008.

U.S. Treasury prices plunged in response to President Barack Obama's proposal to extend tax cuts that could support economic growth in the short term but raise national debt levels longer term. Debt prices around the world fell in the wake of the U.S. selloff.

The yield on 10-year Treasuries rose more than 10 basis points in Asia to 3.25 percent, its highest level since late June and adding to an increase of more than 20 basis points on Tuesday.

The tax cuts have changed the market's landscape, said Arihiro Nagata, fixed income manager at Sumitomo Mitsui Banking Corp.

A lot of people are now changing their scenarios. Many economists are saying the tax cuts will push up U.S. growth by 0.5 to 1.0 percentage point.

But the cost of the tax cuts would probably swell the U.S. budget deficit, which prompted investors to sell bonds and drive up the risk premiums on U.S. debt.

The dollar strength pushed the euro toward important support levels around $1.3200 as the European bloc comes under pressure over high debt levels.

It's becoming increasingly clear the U.S. is taking a very different approach to the Europeans in dealing with their debt overhang ... they're reflating their way out of it and the Europeans are going the opposite way, said Grant Turley, strategist at ANZ.

The dollar rose broadly, including against the yen and most other Asian currencies. The dollar index <.DXY>, which measures the unit against a basket of major currencies, gained 0.45 percent.

The weaker yen gave Japanese stocks a boost on the prospects of improved earnings for exporters.

The benchmark Nikkei average <.N225> rose more than 1 percent to hit its highest level in almost seven months, before closing up 0.9 percent.

Exporters, such as Sony Corp <6758.T> and Hitachi Construction <6305.T>, were among the biggest gainers, both adding more than 1 percent.

The selloff in Treasuries and the Nikkei's rise spurred further losses in Japanese government bonds, which were already under pressure from the previous day's weak 30-year debt auction. The yield on 10-year JGBs rose to its highest since June.

A further rise (in Treasuries yields) would put pressure on some of the higher correlated bond markets in Asia such as Singapore, Hong Kong and Thailand which have seen yields rising in recent weeks due to inflationary pressures and year-end profit taking, said Kenneth Akintewe, a fund manager at Aberdeen Asset Management, who helps manage$5 billion inAsian fixed income assets.

Still, inflows into the region are very strong ... which would mean any sharp selloff would be temporary and offer attractive entry points.

German government bonds fell, with two-year yields up 2 basis points in early dealings and 10-year yields up almost 6 basis points.

Several Asian stock markets stumbled as the suddenness and size of the U.S. bond selloff added to uncertainty heading into the end of the year.

South Korean stocks <.KS11> and the won fell briefly on a report North Korea had fired an artillery round, but partially recovered when it emerged it was a military exercise, while weak resources stocks dragged Hong Kong stocks <.HSI> down more than 1.5 percent.

The MSCI Asia index excluding Japan <.MIAPJ0000PUS> was down 1.4 percent, but with a year-to-date gain of around 12 percent was still well ahead of the main MSCI world index.

Asia has been one of the chief beneficiaries of flows of capital from the United States, where the Federal Reserve is pursuing a policy of printing more cash.

Gold, which has gained almost one-third since the start of the year, traded around $1,390 per ounce, down from a record high of more than $1,430.

The precious metal's fall is expected to be temporary, as it is firmly supported by its traditional appeal as a 'safe haven' when investors perceive so much uncertainty globally.

The stronger dollar weighed on commodities.

U.S. crude oil futures fell for the second day in a row, losing nearly a dollar to $87.73 per barrel, while benchmark industrial metal copper slid more than 1 percent to $8,770 per ton after hitting a fresh peak of $9,044 on Tuesday.

(Additional reporting by Saikat Chatterjee in Hong Kong, Hideyuki Sano in Tokyo and Ian Chua in Sydney)

(Editing by Neil Fullick)