Japan's Nikkei share average hit a five-month high and the euro stayed within sight of overnight highs on Thursday ahead of a European Central Bank meeting that investors speculate could yield new measures to contain the euro zone's fiscal crisis.

Even after Ireland's bailout, investors have been losing confidence that Portugal and Spain can escape a similar fate, leading to expectations the ECB will announce backstop measures to keep cash flowing in its financial system, though it may disappoint investors by not being ready to increase bond purchases just yet.

The sovereign debt crisis has shown early signs of transforming into a banking and liquidity crisis, Todd Elmer, currency strategist with Citi in Singapore, said in a note.

A breakdown in market function is likely to drive risk reduction among investors, which should favor sharp dollar strengthening vs euro.

Such price action could eventually force a stronger response from both fiscal and monetary authorities in Europe, but expectations for imminent action are probably premature.

Wall Street's 2 percent rally on Wednesday led by companies most sensitive to economic turning points and a U.S. Treasuries sell-off after reports showed strength in labor and industrial sectors also sparked further equity buying in Asia. <.N>

There were limits though on how the seeming optimism was feeding through to greater risk taking. For example, the high-yielding Australian dollar slid 0.5 percent after retail sales posted the biggest monthly decline in 15 months in October.

Also, shares of Toyota Motor Corp <7203.T> fell 1 percent and were the most active in early trading in Tokyo after the company's U.S. sales dropped 3 percent in November compared with the 17 percent rise in U.S. auto industry sales.

The Nikkei led Asian markets higher, rising 1.9 percent <.N225> to the highest since June 2010. Turnover has been picking up as well, with the 5-day moving average of total turnover holding above the 20-day moving average for longer than a month. <.T>

The MSCI index of Asia Pacific stocks outside Japan was up 1 percent <.MIAPJ0000PUS> after hitting a two-month low on Monday, with the materials and technology sectors outperforming.

The euro was at $1.3130, nearly unchanged on the day. The currency ended the New York session above its 200-day moving average at $1.3122 and Wednesday's highs and closing level were both higher than the prior day -- usually a signal of more gains ahead.

With so much hinging on the whims of policymakers though, the risk of disappointment was high and therefore a resumption of the euro slide a strong possibility.

I'd think the euro is quite possibly going to return to below $1.30, said Sean Callow, currency strategist at Westpac Bank in Sydney.

The Australian dollar was down 0.4 percent to US$0.9648 but holding well above a base of support in the $0.9530 area, the two-month low plumbed overnight.

Anticipation of how European policymaker action, or inaction as it may be, would affect how risk taking moves asset prices was having a mixed impact on commodity prices.

U.S. crude for January delivery was down 0.4 percent in early trade at $86.42 a barrel after having jumped 3.1 percent on Wednesday. The next target for oil bulls is the November 11 high of $88.63.

Three-month copper traded on the London Metal Exchange edged up 0.9 percent after a 2.7 percent rise on Wednesday.

(Additional reporting by Ian Chua in Sydney)