Australia c.bank injects cash into tight mkt

SINGAPORE (Reuters) - Australia's central bank on Tuesday provided banks with more cash than expected to try to combat a sharp rise in bank bill rates as the sector felt the impact of the global credit squeeze.

Broader financial markets were showing less stress from the U.S. subprime mortgage sector fallout on Tuesday, with stocks in Asia generally firm and currencies stable as investors focus on data for clues on the outlook for U.S. interest rates.

Investors are shifting some of their focus to the potential damage to the world's biggest economy from the subprime crisis. World economic growth could slow if U.S. consumers decide to tighten their belts.

A major clue will come at 10 a.m. EDT on Tuesday with the release of August manufacturing data from the Institute for Supply Management.

"The nationwide manufacturing PMI (is) arguably one of the first timely monthly indicators to provide us with a gauge of the fallout from financial market turbulence," Jan Lambregts, an economist at Rabobank, said in a note to clients.

The Reserve Bank of Australia added a total A$1.205 billion ($989 million) in cash to the banking system, above the market's estimated cash need of A$976 million.

Money market traders in Japan said the ripple effects from the credit and money market turmoil, stemming from the fallout from U.S. subprime mortgage holders defaulting on their loans, seemed to be subsiding.

A survey by the Nikkei business daily underscored the relatively limited direct exposure of Japanese banks to the turmoil in the U.S. subprime mortgage market.

Japan's 109 regional banks collectively face about 5.4 billion yen ($47 million) in losses from financial products tied to U.S. subprime loans. Combined losses disclosed by Japan's eight big banks have so far been limited to 20 billion yen, the Nikkei said.

August figures for Japan's monetary base showed the first annual rise in 18 months. The monetary base had been falling on a year-on-year basis since March 2006, when the BOJ ended its "quantitative easing" policy of flooding the banking system with excess funds.

Asian markets were quiet ahead of the August U.S. employment report due on Friday, which could bolster expectations for a Federal Reserve interest rate cut.

The U.S. Federal Reserve reassured investors last week it would take any steps needed to shelter the economy from a global credit squeeze, while President George W. Bush promised to help struggling homeowners refinance their mortgages.

But Fed Chairman Ben Bernanke and the U.S. president also made clear that the central bank and the government would not bail out investors who had made mistakes.

Bernanke's comments reinforced the view that the Fed would cut interest rates by a quarter of a percentage point at its next scheduled meeting on September 18.

RIDE IT OUT?

European Central Bank Governing Council member Axel Weber said banks, many of which have been hit by potentially toxic, high-risk debt on their books, can sit out the credit crunch on financial markets by restructuring assets or simply by holding on to their subprime mortgage investments.

"The solution for banks which own conduits is to tap other forms of financing, such as issuing longer-term bonds," Weber said in a transcript of remarks released late on Monday.

"Since the actual default rates on subprime mortgages are relatively low, compared to the current market pricing of their default risk, marking and holding them to maturity and simply riding it out could be a viable option," he said.

The ECB is due to announce its interest rate decision on Thursday, with most economists forecasting interest rates to remain on hold at 4 percent due to the uncertain market conditions.

Some investors see opportunities in the fallout from the U.S. subprime mortgage crisis.

Dubai government-owned Istithmar said on Monday it was considering buying into two U.S. companies hit by their exposure to high-risk mortgages.

The agency, which has bought a stake in Standard Chartered Plc. (LSE: - ), said one of its targets was a financial services firm with potential to expand abroad.

However, Jean-Pierre Mustier, investment banking chief of French bank Societe Generale (Paris: - ), told the Financial Times that while he expected the credit squeeze to ease in coming months, credit would not be as easily available to borrowers as it had been in the past three years.

Asian stock markets outside Japan ( - ) rose for the fifth straight session on Tuesday, gaining more than 0.6 percent, while Tokyo's Nikkei (Osaka: - ) slipped on an unexpected drop in capital spending.

U.S. Treasury futures rose, helped by a slide in Tokyo share prices, while Japanese government bonds also inched up.

($1=1.218 Australian Dollar)