The yen neared a 7-1/2-month high and Asian stocks slid on Thursday after comments by the head of the Federal Reserve added to concerns about the U.S. economy, causing investors to dump riskier assets ahead of European bank stress test results.

The conclusion of the European Union examination of banks' financial strength is due on Friday and is expected to show generally positive results for Greece, Italy and Ireland and a few failures in Portugal and Spain.

However, if investors perceive the test results as credible, do not expect risk-taking to bounce back for long, given that Europe's fundamental backdrop remains relatively grim, especially with fiscal austerity the norm, U.S. fund managers and analysts said.

Ben Bernanke, the head of the Federal Reserve, said on Wednesday that policymakers expected U.S. growth to be sustained despite recent signs of softening. He described the outlook as unusually uncertain but gave no indication that specific actions to deal with it are imminent.

Those who had expected more were disappointed after Bernanke only said the Fed stands ready to ease monetary policy further, said Hiroichi Nishi, general manager of equity marketing at Nikko Cordial Securities in Tokyo.

Japan's Nikkei share average <.N225> fell 1 percent, on course for a fifth straight session of losses. The Nikkei has fallen 2.1 percent so far in July, underperforming the S&P 500 <.SPX>, which is up 3.8 percent, and the FTSEurofirst 300 <.FTSE>, which has risen 2.5 percent.

Short-term indicators pointed to oversold conditions, though persistent yen strength has dominated equity trading lately. As long as currency dealers keep aiming for 85 yen per dollar, Japanese equities could be under pressure.

The MSCI index of Asia Pacific stocks outside Japan <.MIAPJ0000PUS> slid 0.7 percent, with healthcare and technology stocks the main drags.

The tech sector was weighed down after South Korea's Hynix Semiconductor, the world's No. 2 memory chip maker, said DRAM prices would fall in the current quarter, even though shipments were expected to grow. Hynix shares <000660.KS> fell 4 percent.

CURRENCIES

The yen rose across the board, benefiting from the increased risk aversion in financial markets. The U.S. dollar fell 0.5 percent to 86.48 yen, closing in on the 7-1/2-month low hit last week of 86.27 yen.

Japanese policymakers have been trying to talk the yen lower, fearing the country's exporters would be hurt. Deputy Finance Minister Motohisa Ikeda on Thursday said Japan wants to avoid excessive rises in the yen but market reaction was muted.

However, traders appeared intent on testing what many believe to be the line in the sand at 85 yen per dollar, beyond which they expect Japan would take action to defend.

The yen has already risen more than 7 percent against the dollar so far this year.

Long maturity U.S. Treasuries crept higher, pushing down the 10-year yield to 2.87 percent, not far from the 15-month low of 2.86 percent hit overnight. The 2-year yield was at a record low of 0.56 percent.

The U.S. dollar has steadily suffered over the past month after a stream of weak economic data spurred fears that its recovery may be stalling, with its short-term yield advantage against the euro disappearing.

The difference of the U.S. 2-year yield over same maturity euro zone paper was at 29 basis points at the beginning of June but now favors Europe by 17 basis points.

U.S. economic data due later on Thursday are expected to show persistent weakness in labor and housing markets -- sore points for investors that exacerbate a shift out of risky assets. Investors were also awaiting Bernanke's second day of testimony to Congress (starting at 1330 GMT).

Bernanke is testifying again, and focus will be on whether he gives any extra hint of potential Fed action if the economy continues to soften. Lack of such suggestion on a day of poor data releases would further strain investors' nerves, Dariusz Kowalczyk, senior economist with Credit Agricole CIB in Hong Kong, said in a note.

U.S. crude futures stood little changed at $76.59 a barrel after dropping 1.3 percent on Wednesday on Bernanke's comments.

Gold prices fell 0.5 percent, bringing month-to-date losses to 4.5 percent. The metal was roughly $10 away from a two month low hit on Tuesday and could mark a new low soon, with investors cutting gold positions to cover losses in other markets.

(Additional reporting by Aiko Hayashi in TOKYO)

(Editing by Kim Coghill)

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