By Hideyuki Sano and Nichola Saminather
TOKYO/SINGAPORE (Reuters) - Asian stocks fell and the British pound tumbled more than 2 percent on Monday as markets grappled with deep uncertainty sparked by Britain's decision to leave the European Union.
European markets look set for a bleak open, with financial spreadbetter CMC Markets expecting Britain's FTSE 100 to fall 2.7 percent, and Germany's DAX to start the day down 2 percent.
Sentiment remained weak even as the volatility seen earlier in the session receded, but it was a far cry from the turmoil seen on Friday when the shock of Britain's exit vote drove global stocks to their biggest decline in nearly five years.
"Things are so uncertain that investors still do not have a clear idea how much of their risk assets they need to sell," said Hiroko Iwaki, senior foreign bond strategist at Mizuho Securities.
"But it is safe to assume investors are not yet done with all the selling they need to. I wouldn't be surprised to see another 10 percent fall in share prices," she added.
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Among many questions Brexit triggered are just how much UK and European economies will slow, how the EU and Britain will negotiate their new relationship, and what European leaders will do to shore up the crumbling union.
U.S. S&P mini futures, the world's most traded stock futures, were flat at 2,018.20, erasing earlier declines, but hovered near Friday's 3-1/2 month low of 1,999.
MSCI's broadest index of Asia-Pacific shares outside Japan shrank losses to 0.3 percent. Companies with UK exposure in particular came under pressure.
Financial shares led declines in Australia and Hong Kong with the financial sector seen the among worst hit by Brexit if the City of London's investment products and services lose their prized "EU passports" allowing them access to the single market.
"We think Brexit could just be the first surprise in a re-calibration of the world away from globalisation towards more inward-looking policymaking," Ajay Singh Kapur, equity strategist at Bank of America Merrill Lynch in Hong Kong, wrote in a note.
"Brexit has now possibly opened up more uncertainty about the European Union project, and the already beaten down Asian and emerging markets equity markets could receive asset allocation flows from Europe," he added.
Chinese shares extended gains, with the CSI 300 index and the Shanghai Composite both up about 1.2 percent. Hong Kong, more vulnerable to global swings, slid 0.4 percent.
Japan's Nikkei also raced ahead to close up 2.4 percent, a partial rebound after Friday's hefty 7.9 percent fall. Japanese stocks were helped by stronger warnings from Japanese officials that they may intervene in currency markets to stabilise the yen.
Still, the safe-haven yen strengthened 0.3 percent to 101.89 per dollar.
The dollar index, which tracks the greenback against six major peers, advanced 0.6 percent to 95.987, remaining near its three-month high of 96.703 touched on Friday.
For developing economies, "the main risk is that the U.S. dollar strengthens from here and remains strong, which would sap emerging markets of liquidity via the trade and capital accounts, and hurt the pricing environment," Citi Strategist Markus Rosgen wrote in a note.
"A stronger U.S. dollar would also bring back fears of potential emerging market currency devaluations, which would not help the asset class."
The British pound fell 1.8 percent to $1.3432 , still some distance from the 31-year low of $1.3228 touched during Friday's wild trade.
The euro also came under further pressure, falling 0.6 percent against the dollar, amid investor concern that Brexit could feed the anti-establishment mood in Europe and even stoke talk of disintegration of the union.
"(There will be) sell-off in the euro as talk of other exit referenda builds," said Jerome Booth, chairman of New Sparta Asset Management in London.
"This sell-off will be more profound and long-lasting and will be not just against the dollar and yen but also against the pound. It will also raise fears of significant loss of value for holders of Euro-zone government bonds."
The euro fell to $1.1050, edging closer to Friday's 3-1/2-month low of $1.0912.
The euro's weakness helped to push the Chinese yuan to its weakest level against the dollar since December 2010 on Monday. It was last trading at 6.6389 per dollar after opening at 6.6360 per dollar, compared with the 5 1/2-year low midpoint level of 6.6375 set by the central bank, and after touching an intraday low of 6.6469.
But in a sign Britain's shock decision to leave the European Union may be encouraging Europeans to seek the safety of the status quo, support for Spain's conservative People's Party (PP) surged in Sunday's general election.
Oil prices reversed earlier losses to trade higher, making up some of the ground lost on Friday. International benchmark Brent futures, which lost 4.9 percent on Friday, rose 0.5 percent to $48.65 per barrel. U.S. crude edged up 0.1 percent to $47.70, after a 4.9 percent loss on Friday.
Demand for safe haven assets such as government debt and precious metals remained strong.
The 10-year U.S. debt yield dropped to 1.5105 percent. On Friday, it fell as low as 1.406 percent, near its record low of 1.381 percent marked in July 2012.
U.S. interest rate futures have completely priced out any chance of a rate hike by the Federal Reserve this year and are pricing in less than 50 percent chance of a rate hike even by the end of 2017.
Gold rose 0.8 percent to $1,326.44 per ounce.
(Reporting by Hideyuki Sano and Nichola Saminather; Editing by Lincoln Feast and Eric Meijer)