Asian stocks advanced on Tuesday and oil hovered near a 27-month high, supported by U.S. data suggesting a recovery in the world's biggest economy was gathering momentum.

Japanese shares hit a 7- month high on Tokyo's first trading session of the New Year, a day after the United States reported manufacturing grew at its fastest clip in seven months in December. U.S. stocks hit new two-year highs overnight. <.N>

The next big test for the U.S. economy comes later this week when the government will publish its December jobs report.

Market players are now focusing on the U.S. payrolls data due on Friday, which will likely have an impact on both Wall Street shares and the dollar/yen rate, said Kazuhiro Takahashi, general manager at Daiwa Capital Markets in Tokyo.

The Nikkei <.N225> rose 1.7 percent, led by shares in resource companies as oil and commodity prices rose on the stronger economic growth outlook this year.

Stocks are also getting a boost from the January effect when fund managers are no longer distracted by year-end window dressing and instead focus on stocks they find attractive, traders said.

The MSCI index of shares excluding Japan <.MIAPJ0000PUS> was 0.21 percent higher, led by advances in the South Korean KOSPI <.KS11> and the Shanghai Composite Index <.SSEC>, where property stocks jumped 5 percent as worries about further monetary tightening eased after surveys indicated that Chinese factory inflation may be abating.

Accelerating inflation and record house prices have led China's central bank to signal time and again in recent months that the country needs prudent monetary policy to curb price pressures and prevent asset bubbles.

But a fall in the official purchasing managers' index in December over the previous month held out hope that inflation, running at its highest in over two years, may be peaking soon.

Still, investor Jim Rogers said inflation remained a top concern for Chinese policymakers.

But I think they'll be more tightening in China because the Chinese do have a serious inflation problem as you mentioned they know what I know and everybody knows it. And they're determined to kill it, he told Reuters Insider TV.

While the mood was upbeat across much of Asia, shares in Australia slipped into negative territory and both the Australian and New Zealand dollars were under pressure because of worries over the impact of floods in northeast Australia.

Heavy flooding in Queensland has cut coal exports and hurt wheat production. Miners such as Rio Tinto have declared force majeure and cut coal exports to a trickle.

The lights were flashing a very verdant green at the start of the session but now it has fizzled. I suspect it will come back a bit later, said Michael Heffernan, strategist at Austock Group.

The floods are likely to have some impact on coal stocks.


The U.S. dollar rose 0.2 percent to 81.93 yen, having pulled up from an eight-week low of 80.93 yen hit on trading platform EBS on Monday. Analysts expect more traction for the greenback in the months ahead as the recovery gathers strength.

The euro eased slightly after last week's short-covering surge, with some traders citing talk of euro-selling by investors related to euro zone bond redemptions. There is lots of talk about German bond redemptions today, said a trader for a European bank in Singapore.

U.S. Treasuries dipped in Asia as investors turned to more riskier assets ahead of a raft of U.S. data including November factory orders and December vehicle sales figures due later on Tuesday and December ADP private-sector employment, which is seen as a precursor to Friday's jobs data.

The benchmark 10-year Treasury notes were down 5/32 in price to yield 3.35 percent, up about 2 basis points from late U.S. trade on Monday.

Oil was steady at $91.60, near its highest levels in more than two years as accelerating manufacturing activity in the U.S. and frigid winter weather fanned optimism that U.S. crude inventories will continue to drain.

Copper futures opened at a record high in London on Tuesday after the New Year break, chasing a rally in New York which touched an all-time high in the previous session.

(Additional reporting by Ian Chua in Sydney, Editing by Kim Coghill)