San Francisco Frontiers - Markets reverse after recent gains as bank fears linger

Pledges by authorities to provide support to troubled lenders and depositors provided stability for investors worried that the collapse of two US banks and the takeover of Credit Suisse could usher in a new financial crisis.

The turmoil has also forced the US Federal Reserve and other central banks to change their monetary policy game plan to avoid further problems in the finance industry.

On Wednesday, the Fed announced a quarter-point rate hike -- half what was expected before the latest upheaval -- and indicated it could pause soon, while there is growing talk it could even begin cutting by year's end.

Observers said an expected tightening of credit in the finance sector -- caused by wary banks lending less -- would allow the Fed to step back.

But SPI Asset Management's Stephen Innes cautioned: "A Fed rate cut would likely require more turmoil in the banking sector, but more importantly, how intensely the expected tighter credit market crunch will negatively impact the real economy."

The increase came as central banks in Britain, Switzerland and Norway also raised rates, with the European Central Bank having done so last week.

Analysts said the moves indicated officials were confident the banking crisis could be contained and were still focused on bringing inflation down.

But data indicating the US jobs market remained tight highlighted the need for the Fed to stick to its policy of battling prices.

Jim Baird, at Plante Moran Financial Advisors, warned the troubles were not over yet.

"The push-and-pull between financial market stability and inflation that is receding more slowly than anyone would prefer will further complicate an already significant challenge for the Fed, increasing the risk of a policy misstep and keeping the door open for a potential recession on the horizon," he said.

Those ongoing concerns about the economic outlook weighed on equities in Asia, despite gains on Wall Street.

Hong Kong was dragged by heavy losses in heavyweight HSBC, while Tokyo, Shanghai, Sydney, Seoul, Singapore, Mumbai and Wellington were also down.

However, Taipei, Manila, Jakarta and Bangkok rose.

London, Paris and Frankfurt opened slightly lower.

Concerns about the impact on demand from a possible recession or further banking upheaval continued to weigh on oil prices, though both main contracts edged up slightly Friday, a day after falling more than one percent.

- Key figures around 0820 GMT -

Tokyo - Nikkei 225: DOWN 0.1 percent at 27,385.25 (close)

Hong Kong - Hang Seng Index: DOWN 0.7 percent at 19,915.68 (close)

Shanghai - Composite: DOWN 0.6 percent at 3,265.65 (close)

London - FTSE 100: DOWN 1.0 percent at 7,424.29

Euro/dollar: DOWN at $1.0784 from $1.0840 on Thursday

Pound/dollar: DOWN at $1.2246 from $1.2286

Euro/pound: DOWN at 88.08 pence from 88.20 pence

Dollar/yen: DOWN at 130.07 yen from 130.86 yen

West Texas Intermediate: DOWN 0.1 percent at $68.87 per barrel

Brent North Sea crude: DOWN 0.2 percent at $75.37 per barrel

New York - Dow: UP 0.2 percent at 32,105.25 (close)

-- Bloomberg News contributed to this story --

A.Smith--SFF