Asian shares kicked off the second quarter with a modest gain on Monday, as surprisingly firm China manufacturing data dispelled fears of a hard landing in the world's second biggest economy, but caution capped prices before U.S. and European factory data.

MSCI's broadest index of Asia Pacific shares outside Japan rose as much as 0.7 per cent but last stood up 0.1 per cent. It climbed nearly 12 per cent in the January period for its best showing since the third quarter of 2010 and best first quarter in 21 years.

Japan's Nikkei average rose as much as 1.1 per cent to approach the one-year high hit last week, after rising more than 19 per cent in its best first quarter in 24 years.

"The Chinese reading was much better than most were expecting and that optimism has flown into risky assets now. If China is still in a big growth stage then Australian commodities will be in demand," IG markets strategist Stan Shamu said.

Data on Sunday showed China's official Purchasing Managers' Index (PMI), which covers large factories, jumped to an 11-month high of 53.1 in March, beating forecasts.

While the official PMI soothed doubts about China's resilience, a private sector survey of smaller factories by HSBC raised concerns that small manufacturers were struggling and contributed to a fizzling of a rally in riskier assets.

The Australian dollar soared more than a full U.S. cent to a peak of $1.0470 before slipping to $1.0399.

"Investors will watch PMI readings from other regional economies, including Korea, Taiwan and India. If they also improve, the story of Asia regaining momentum in Q2 would provide more lasting support for markets," said Credit Agricole CIB in a research note.

South Korea's manufacturing sector growth accelerated to a one-year high in March as new export orders continued to expand, a purchasing managers' survey showed on Monday.

Later in the session, U.S. and European manufacturing data will be released, offering clues on global factory activity.

Market activity may be subdued in this holiday-shortened week, with Shanghai markets closed through Wednesday while European, U.S. and some Asian markets will be closed on Friday for the long Easter weekend.

EUROPE MAKES PROGRESS
The euro steadied at $1.3340 from Friday's broad rally after budget cuts in Spain boosted hopes the country could stick to an austerity path.

Euro zone finance ministers also agreed on Friday to combine its two rescue funds to make 500 billion euros of new funds available in case of emergency until mid-2013, on top of 200 billion euros already committed to bailouts for Greece, Ireland and Portugal.

While it marked a step towards fortifying the safety net to prevent the debt crisis from spilling wider, it remained unclear if Europe's G20 partners would see the boost as sufficient.

Credit Suisse said it was upgrading its view of Japan to 'tactical overweight', saying Japan is 'typically a late cycle play' and recommending a focus on Japanese stocks with U.S. exposure.

Credit Suisse added it continued to overweight Italy, and domestically focused German stocks, but underweight Spain and domestic France.

Data on Friday showed U.S. consumer spending rose by the most in seven months in February and consumer confidence rebounded to its highest in more than a year in March, but a separate report showed the pace of business activity in the U.S. Midwest slowed more than expected in March.

Oil prices extended gains, with U.S. crude futures up 0.2 per cent to $103.19 a barrel while Brent rose 0.2 per cent to $123.10 a barrel. Oil was underpinned by the growing threat of a disruption of Iranian exports.

Barclays Capital analysts said that easing of three key worries - fiscal austerity in Spain, oil price spikes and growth slowdown in China - would represent a meaningful positive drive for equities.

Asian credit markets firmed, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 5 basis points.