Asian shares clawed their way back from early lows on Tuesday following wild swings in Shanghai, as investors worried whether more bouts of profit taking will spell the end of the bull market that emerged from the financial crisis.

Major European stock futures pointed to a slight rebound after cash markets posted their biggest daily drop in six weeks on Monday. U.S. stock futures also showed some life, rising 0.4 percent, suggesting markets would open higher later.

Pressured by worries that the global economy may take longer than expected to recover and disheartened by mounting losses in Shanghai, U.S. stocks posted their biggest one-day fall in seven weeks on Monday, with profit taking also hitting commodities. <.N>

Chinese shares remained highly volatile on Tuesday, with the Shanghai composite index <.SSEC> rising more than 1 percent by midafternoon after earlier hitting a two-month intraday low and dragging most Asian bourses into the red.

The index suffered its biggest single-day drop in nine months on Monday, with investors haunted by fears that China is slowly clamping down on easy money policies and aggressive bank lending.

The drop in China's market had a domino effect on other markets, fueling worries among some analysts that rallying asset prices have run too far ahead of economic fundamentals and weak earnings prospects.

However, one of the main drivers of the equity rally in Asia, piles of money that monetary authorities pumped into banking systems, may still have a supportive effect in coming weeks, even with asset prices extended.

History tells us when markets rise as much as they did in the second quarter, they should come down. It's hard to say where the floor is, but I don't think it's far from where we are now, said Mark Matthews, Asia Pacific strategist with Fox-Pitt Kelton in Hong Kong.

This is a liquidity-driven bull market. It's not a market being driven by valuations.

Most Asian share markets recouped early losses as the Shanghai index rebounded and investors hunted for bargains after the recent selloff.

Japan's Nikkei share average <.N225> finished up 0.2 percent on some late session buying of technology shares, while the MSCI index of Asia Pacific stocks traded outside Japan was up 0.3 percent.

The ex-Japan index tumbled 3.7 percent on Monday, its biggest daily decline since March 30.

It is still up 67 percent since March 9, when a global equity rally began and signaled a marked improvement in investors' comfort with taking risks for bigger returns.

The Shanghai index's intraday 30-day volatility has jumped to the highest since April 7 in the last three weeks, though still remains well below levels reached in the days after the collapse of Lehman Brothers last September.


I think macroeconomic indicators in general suggest that things are improving globally and there's no reason to be so pessimistic, but there's not a lot we can do about market sentiment as long as stocks keep on falling, said Noritsugu Hirakawa, a strategist at Okasan Securities in Tokyo.

Profit taking has knocked the Shanghai index down around 18 percent in the last two weeks after it jumped more than 90 percent since the start of the year.

But the IPO boom in China gained pace, even if broader investor demand was cooling. Shares of China brokerage Everbright Securities Co <601788.SS> rose as much as 42 percent in their debut in Shanghai before slightly paring early gains.

The tight relationship that the Australian dollar had had with equities loosened some, with the currency up 0.4 percent to US$0.8240 after minutes from the Reserve Bank of Australia meeting underscored that policy would be tightened as a recovery took hold.

The U.S. dollar and the yen both retained broad gains on uncertainty over the strength of a global economic recovery.

The ICE Futures U.S. dollar index <.DXY>, which tracks the dollar's value against a basket of six currencies, was largely unchanged, not far from a two-week peak of 79.514 hit on Monday.

The lack of follow-through selling in equity markets pushed down U.S. Treasuries.

The benchmark 10-year note edged down 6/32 in price to yield 3.50 percent, up about 3 basis points from late New York trade on Monday when the yield fell to 3.47 percent, its lowest since July 22.

U.S. crude oil futures also steadied, rising 0.4 percent to $67.05 a barrel after falling to a two-week low on Monday.

(Additional reporting by Elaine Lies in TOKYO)

(Editing by Kim Coghill)