HONG KONG - ASIAN stocks fell and gold prices rose on Friday on fears a $700 billion (S$996 billion) financial rescue bill still needing final US congressional approval may not be enough to keep the global economy from falling into recession.

The Senate has passed the measure, but political brinkmanship continued in Washington after the House of Representatives shook markets earlier this week by rejecting the bill, and passage on Friday was not guaranteed.

European stock market futures pointed to a slightly higher open, ahead of the vote.

A second rejection by the House would likely kill the plan and probably unleash panic selling of global equities, blow out credit spreads and drag government bond yields lower.

The flow of credit remained practically frozen in money markets, leading to a scramble for US dollar funding that has the currency on track for its biggest weekly gain in 16 years against a basket of major currencies.

Raw materials prices tumbled on expectations that demand from big consumers such as the United States and China will fall, while a preference for stability pushed up gold by more than 1 per cent.

Copper prices were on track for a record decline this week, down around 14 per cent, and oil was down 12.7 per cent for the week, its biggest 5-day drop since December 2004.

'Japan's economy isn't good, America isn't good, Europe isn't good. The next to be hit may be emerging economies - and this will just increase worries for an export-dependent economy like Japan's,' said Mr Hiroaki Osakabe, a fund manager at Chibagin Asset Management in Tokyo.

Japan's Nikkei share average finished down 1.9 per cent - its worst close in three years - with shares of car makers Honda Motor Co and Toyota Motor Corp among the heaviest drags following a big drop in US sales for September.

The MSCI index of Asia-Pacific stocks outside Japan slipped 0.8 per cent and lost 6.9 per cent on the week. Regional equity markets have outperformed the All-Country World Index, which sank 8.8 percent this week to the lowest in three years.

Hong Kong's Hang Seng index dropped 2.6 per cent, dragged lower by bank stocks as tight lending conditions spread fears that one of Asia's main financial hubs would be hit hard.

Stress and disarray
Credit markets in the Asia-Pacific region reflected stress and disarray as longer-term interbank rates continued to climb and squeeze the financial sector.

The bid on the iTRAXX Asia ex-Japan 5-year credit default index essentially protection against default, rose about 20 basis points to 655 bps. However, the offer was 700, signalling thin trading and a struggle for price discovery.

'Asia and emerging markets are seeing collateral damage to interbank markets as dollar liquidity evaporates. While equities are inexpensive against bonds, investors should prepare for a hard landing for earnings,' said Mr Sean Darby, chief Asia strategist with Nomura in Hong Kong in a note.

Mr Darby believes Asian stocks are oversold but investors should postpone buying until the credit situation clears up.

The euro rebounded after dropping to a 13-month low against the dollar on Thursday on indications the European Central Bank is leaning toward cutting interest rates after bank failures threatened the euro zone economy.

The euro was up 0.3 per cent to 145.95 yen after earlier slipping below 144.88 yen to the lowest in two years.

This week investors have continued to find refuge in the yen and the Swiss franc.

The dollar was steady at 105.30 yen and was down 0.3 per cent to 1.1320 Swiss francs The euro rose 0.3 per cent to $1.3865 after dropping to around $1.3750 on Thursday.

The main focus on Friday would likely be the vote in the House of Representatives on a White House plan to buy up illiquid securities from battered financial firms.

However, the September US employment report will also be released. Investors expect payrolls shrank by 50,000 jobs.

Government debt was still the favourite bet for investors increasingly intolerant of having risk in their portfolios.

The 10-year Japanese government bond future was up 0.6 point at 137.89, rising for a second day.

The 10-year US Treasury note slipped 7/32 in price, for a yield of 3.65 per cent up from 3.63 per cent late on Thursday in New York. The highly liquid bills market, which investors have been using as an alternative source of short-term investment, saw solid demand.

The 1-month bill yield which moves in the opposite direction of the price, slipped 3 bps to 0.22 per cent.

Spot gold climbed 0.8 per cent to $842 an ounce but is well off a 2-month high of $920 an ounce earlier this week.

The November US light crude contract fell 75 cents to $93.22 a barrel, creeping toward a 7-month low of $90.51 hit on Sept 16.

KUALA LUMPUR
Malaysian share prices closed 0.2 per cent lower on Friday led by losses in plantation stocks on lower crude oil prices, dealers said.

The Kuala Lumpur Composite Index dropped 1.98 points to close at 1,016.70.

Turnover was at 329.688 million shares worth 815.8 million ringgit (S$340.1 million) with 270 losers leading 228 gainers and 194 counters unchanged.

Dealers said the plantations sub-index was down 2.5 per cent. For the short trading week the benchmark index was 0.4 per cent lower.

'Players remain jittery over the US bailout package, even if the bill is passed, there is a sense of 'what now?' in the market ... the storm has not passed,' a dealer told Dow Jones Newswires.

The dealer said the KLCI may test the 1,000-point psychological support on Monday with an upside resistance at 1,035.

Among decliners, plantation company IOI Corp ended 2.4 per cent lower at 4.10 ringgit, top lender Maybank was down 4.3 per cent at 6.60 ringgit and another plantation company, KL Kepong, shed 5.7 per cent at 9.05 ringgit.

For the top gainers of the day, lender Bumi-Commerce gained 3.3 per cent at 7.90 ringgit, Puncak Niaga added 16.2 per cent at 3.38 ringgit on speculation that the water concessionaire unit may be sold.

HONG KONG
Hong Kong share prices dropped 2.9 per cent on Friday, on continued certainty about the state of the US economy and doubts about a huge bailout deal for financial markets, dealers said.

The benchmark Hang Seng Index dropped 528.71 points to 17,682.40. Turnover was light at 53.28 billion Hong Kong dollars (S$9.9 billion).

TOKYO
Japanese share prices closed down 1.94 per cent on Friday at a new three-year low on worries about the health of the US economy and uncertain prospects for a huge Wall Street bailout, dealers said.

Financial markets in mainland China, South Korea and Indonesia were closed on Friday for holidays.

South Korea was observing National Foundation Day and trading will resume on Monday, Oct 6.

Chinese markets are closed all week for National Day celebrations and will also start again on Monday.

Traders in Indonesia were off for the Muslim holiday of Eid al-Fitr marking the end of the Ramadan fasting month. -- AFP, REUTERS, BERNAMA, AP