Asian shares fall in end to difficult month

HONG KONG (Reuters) - Asian shares fell on Friday, ending a tough month marked by nagging fears about the world economy and the financial system, though Tokyo stocks rose and safety plays such as the dollar pared recent gains.

Stock market gains at the start of the year unraveled further in February and the MSCI index of Asia-Pacific shares outside Japan headed for a 6 percent monthly fall, having hit at one point their lowest since late November.

European shares were set to open sharply lower on Friday, with a retreat in commodity prices such as gold and oil seen hitting some energy-related firms and miners.

Risk aversion in February was reflected in the surge of the dollar, which despite Friday's dip, is on track to its biggest monthly gain against the yen since 1995. Gold had rallied, at one point breaching past the $1,000 an ounce barrier to near a March 2008 record before retreating some.

Grim economic data across Asia, including double-digit export declines and shrinking economic output, are also pummeling currencies such as the South Korean won, which on Friday hit an 11-year low against the dollar.

"The drop in exports in the region continues to take a terrible toll on GDP and the region's economies will continue to decelerate for some months to come," said Calyon in a note to clients on Friday. "The pressure on Asian currencies remains broad based," it added.

The MSCI index of Asia-Pacific stocks outside Japan fell 0.9 percent by 2:10 a.m. EST, losing 13 percent so far this year to reflect pessimism about the U.S. and world economy.

The latest statistics deepened the gloom. Data on Thursday showed the number of U.S. workers continuing to receive state jobless aid jumped to record high in mid-February while durable goods orders hit a six-year low in January.

In Japan, production at factories plunged by a record 10 percent last month, and new jobs proved harder to find, showing the country's worst recession since World War Two is deepening.

Yet Tokyo stocks ended the month on a positive note, with banks lifted by news that, according to a person familiar with the talks, the U.S. government and Citigroup reached a deal to convert up to $25 billion in government-held preferred shares in the bank to common equity.

The Nikkei average closed up 1.5 percent to end a month in which it flirted with 26-year lows as defensive shares such as KDDI Corp climbed.

But pessimists looked at the Citi deal as yet another sign of turmoil plaguing the financial system.

Data on Thursday showed the number of problem banks on a U.S. watch-list jumped in the fourth quarter, while Royal Bank of Scotland reported the biggest corporate loss in British history.

"There's just one problem after another, and we'll simply have to work through them one by one," said Katsuhiko Kodama, senior strategist at Toyo Securities in Japan.

Among the leading decliners in the region, shares in Mumbai, Singapore and Shanghai dropped 1-2 percent each, while Hong Kong fell 0.2 percent.

South Korea's stock index rose 0.8 percent, helped by gains in banks and insurers.

DOLLAR PARES GAINS

The dollar dropped against the Japanese yen as investors booked profits from a recent rally, driven by flight to safety.

Highlighting the staggering costs of containing the worst financial crisis in decades, President Barack Obama forecast on Thursday a $1.75 trillion deficit for the 2009 fiscal year, the biggest U.S. budget gap since World War Two.

The yen rose 0.8 percent to 97.58 per dollar on Friday after hitting a 3- month low on trading platform EBS on Thursday.

The euro fell 0.9 percent to 124.18 yen after touching a seven-week peak the previous day.

The won tumbled to an 11-year low of 1,542.9 per dollar on Friday on investor concern about a shortage of U.S. dollars in South Korea.

In commodity markets, spot gold, another strong performer this month, softened $5.7 to $939.00 an ounce. Prices of the metal had hit an 11-month high above $1,000 a week ago.

Oil retreated 57 cents to $44.61 a barrel after Thursday's jump of more than 6 percent on expectations of further output cuts and signs of a rebound in gasoline demand in the United States.

(Editing by Tomasz Janowski)