* MSCI Asia ex-Japan steadies after Monday’s 1.5 pct tumble
* MSCI pulled down by India as key govt ally pulls out of coalition
* Nikkei surges 2 pct
* Treasuries, JGBs, ease slightly after sharp rally
* European shares seen extending small losses
By Chikako Mogi
TOKYO, March 19 (Reuters) - Asian shares steadied as investors awaited a parliamentary vote in Cyprus on a bailout plan crucial to avert bankruptcy, but potential political instability in India emerged as a fresh worry.
A 1.3 percent tumble in Indian shares dragged down the MSCI’s broadest index of Asia-Pacific shares outside Japan, erasing earlier gains to hold steady.
The fall in Indian shares followed a key regional ally pulling out of India’s ruling coalition on Tuesday in protest against the government’s position on a U.S.-backed United Nations resolution on war crimes committed during Sri Lanka’s civil war.
European markets are seen extending small losses, with financial spreadbetters predicting London’s FTSE 100, Paris’s CAC-40 and Frankfurt’s DAX to open around 0.2 percent down.
Benchmark indices in Spain and Italy are seen down 0.4 percent and down 0.2 percent respectively. U.S. stock futures were nearly flat, hinting at a calmer start for Wall Street.
Euro zone confidence was partially restored by news on Monday that the Eurogroup decided to give Cyprus more flexibility over a bank levy which is part of the bailout conditions, after a teleconference of euro zone finance ministers.
“The worry about Cyprus is overdone, as the scenario there is unlikely to spread to bigger euro zone countries. Global markets were due for a correction after last week’s long rally,” said Lee Young-gon, an analyst at Hana Daetoo Securities.
South Korean shares led the early gains in the pan-Asian region with a 0.5 percent rise, as bargain hunters drove the market up from Monday’s one-month lows, while Australian shares gave up early gains to fall 0.6 percent, extending Monday’s 2 percent loss after minutes of the Reserve Bank of Australia’s latest meeting were read as reducing the chances of a rate cut.
Japan’s Nikkei stock average gained back 2 percent after shedding 2.7 percent for its biggest one-day percentage drop in 10 months on Monday as the yen rose broadly. Japanese financial markets will be closed on Wednesday for a holiday.
As a knee-jerk flight to safety subsided, the dollar steadied around 82.757 against a basket of major currencies , after inching closer on Monday to a seven-month high of 83.166 hit last week.
A recovery in general risk sentiment supported Asian credit markets, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by five basis points.
The Thai baht on Tuesday hit its strongest since the 1997 Asian financial crisis on sustained inflows as some investors saw the Cyprus/euro zone issue as unlikely to affect appetite for Thai assets.
The key 10-year U.S. Treasury yield inched up 1 basis point to 1.967 percent in Asia while 10-year Japanese government bond yields also added 1 bps to 0.595 percent.
Spot gold eased 0.1 percent to $1,603.58 an ounce after climbing as much as 1 percent to a three-week high on Monday.
“There are worries, but the extent of such worries is limited, reflected in the fact that some investors panicked and others used the opportunity to pick up (risky assets),” said Jiang Shu, an analyst at China’s Industrial Bank.
“After all, the U.S. economy is doing much better than 2009 and 2010, which helped blunt the blow from Cyprus.”
The euro zone’s decision over the weekend to partially fund a bailout of Cyprus by taxing bank deposits, which raised fears the measure could set a precedent for future euro zone bailouts, and destabilise its financial system, rattled investors and alarmed policymakers outside Europe.
“It is, in a way, a prohibited measure. I acknowledge it is a request from the EU and the IMF but it needs to make sure (other nations know) this is an exceptional measure. If this happens to other nations, it would cause significant agitation,” Japanese Economics Minister Akira Amari told reporters on Tuesday.
The euro hit a three-week low of $1.2882 on Monday but was trading at $1.2940 on Tuesday.
Stability in the euro eased pressure on oil prices but they remained vulnerable. U.S. crude oil were nearly flat at $93.75 a barrel while Brent eased 0.2 percent to $109.29.
“While there still is uncertainty over Cyprus ahead of the vote, markets for now see it as a one-off case that will not trigger a contagious run on deposits in other euro zone states,” said a senior official at a Japanese institutional investor.
“But I fear this could elevate hurdles for Germany to approve burden-sharing in future bailouts when the euro zone faces another financial crisis,” he said, referring to how Germany has been pushing for strict conditions in exchange for rescue funds.