Hong Kong: Oil rose towards a 2-1/2-year high and stocks fell on Wednesday as investors shunned risky assets on concern that escalating tension in Libya would spread in the Middle East and disrupt fuel supplies.

Brent crude's dizzying 15 per cent jump in less than two weeks has fanned worry about a stifling impact on the economic recovery, sending investors into relative safe assets such as gold and government bonds in volatile trading.

Though Asian stocks have gyrated to the swings in oil, markets have been largely resilient this time around compared with January's sell-off when investors dumped shares because of worry about inflation.

While oil's jump has put monetary policy behind the curve in some countries, many Asian central banks have already tightened considerably since the recovery began and therefore policy is not excessively loose in the region, IHS Global Insight said.

Shares in most Asian markets fell after Wall Street's slide overnight and as the CBOE Volatility Index VIX, the so-called fear gauge, jumped sharply.

Tokyo lead the losers with stocks falling more than 2 per cent on futures-led selling. Seoul and Taiwan were down nearly a per cent each.

Yahoo Japan was the notable outperformer with shares surging by 4.5 per cent after sources said Yahoo Inc. (YHOO.O: Quote, Profile, Research) is in advanced talks to wind down its joint venture in Japan with Softbank Corp.

"The market is volatile as oil's persisting gains and civil unrest in the Middle East is negatively affecting investor sentiment," said Lee Sun-yeb, a market analyst at Shinhan Investment Corp.

"But as long as we do not see the turmoil spreading to other countries within the region, current volatility will be contained and will eventually recover," Lee added.

The broader MSCI index of Asia-ex Japan stocks was down more than a per cent. It fell two per cent in February.

In the credit space, Asian sovereign spreads weakened with the Philippines widening the most by 4 bps to 140/143 bps.

Markets will keenly watch developments in the Middle East, especially Saudi Arabia, where stock markets tanked by nearly 7 per cent on Tuesday and CDS spreads jumped.

GOLD, BONDS GAIN

U.S. Treasuries, a safe-haven asset, held near one-month lows with 10-year yields stabilising at 3.40 per cent, well below a peak of 3.74 per cent hit last month.

Japanese government bonds too rose, with futures snapping a three-day losing streak.

Gold held just below a record high of $1,434 an ounce while spot silver hit a 31-year high.

In the currency markets, the euro dipped slightly after failing to break through a key resistance level, though further declines for the common currency may be limited a day before a European Central Bank (ECB) meeting.

Given euro zone inflation holding well above the ECB's target, markets expect the central bank to ramp up its anti-inflation talk with U.S. Federal Reserve Chairman Ben Bernanke's comments reinforcing market speculation that the ECB would raise rates before the Fed.

In Asian FX, the won is among the leading underperformers with the stock market working through a major support level.

The New Zealand dollar fell sharply after Prime Minister John Key said he expected the Reserve Bank of New Zealand (RBNZ) would cut interest rates next week after the devastating earthquake in Christchurch.

The Aussie/kiwi was last at NZ$1.3616 after hitting a high of NZ$1.3667, levels not seen since August 1992.