By Shinichi Saoshiro
TOKYO (Reuters) - Asian shares fell on Wednesday and most emerging currencies retreated as China allowed the yuan to weaken further, stoking fears about its slowing economy, while a North Korean nuclear test heightened geopolitical tensions.
Souring sentiment toward riskier assets in turn lifted safe-havens such as the Japanese yen and U.S. Treasuries.
MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1 percent, hurt after the People's Bank of China set the yuan's midpoint rate at its weakest level in 4-1/2 years.
China has guided the yuan lower since a surprise devaluation of the currency last summer, rattling traders who fear it could eventually set off a round of competitive devaluations which will put further pressure on other emerging economies.
Some see the tactic as a desperate attempt by China to shore up growth, prompting concerns that the world's second-biggest economy could be even weaker than imagined, though others say further yuan weakness is inevitable in the face of the strong U.S. dollar.
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A weaker yuan in theory improves the competitiveness of Chinese exports but the import cost increase it inflicts on the country's manufacturers would be an unwelcome side effect.
The latest worrying news on China came in a private survey which showed activity in China's services sector expanded at its slowest rate in 17 months in December, bucking robust findings in an official survey and a further indication that the world's second-largest economy may be losing steam.
Policymakers and economists have been hoping that growth in services would offset persistent weakness in Chinese manufacturing and keep the economy from cooling too sharply.
Elsewhere in North Asia, South Korea's KOSPI and the won both fell on suspicions North Korea had conducted a nuclear test on Wednesday morning, which Pyongyang later confirmed.
"We've been seeing dollar-long positions form from the beginning of the year and this North Korea news is not good for the market," a Bank of Korea official told Reuters.
"However, when we consider previous cases we don't feel this will have a sustained influence on markets," he said. It was North Korea's fourth nuclear test.
Japan's Nikkei extended early losses to 1.4 percent at one point on the news but was off 1 pct by afternoon.
Chinese equities saw modest gains as authorities continued unveiling stock-supportive measures after a 7 percent plunge on Monday rattled global markets.
The yuan's weakness and renewed stock market volatility have put China's policymaking decisions clearly at the forefront of global risks at the start of 2016, along with the pace of expected U.S. interest rate rises.
Shanghai shares were last up 0.7 percent after a report that China will keep in effect a ban on share sales by listed companies' major shareholders until new rules are promulgated.
The dollar touched a near three-month low of 118.35 yen and the euro slid to a nine-month trough of 127.465 yen. The benchmark 10-year U.S. Treasury note yield fell by about three basis points to 2.22 percent.
The common currency steadied at $1.0746 as the dollar dipped against the yen, although it remained in distance of a one-month trough of $1.0711 hit overnight.
Kathy Lien, managing director of FX strategy at BK Asset Management, wrote that the U.S. and Japanese currencies were being bought because "China is in trouble, U.S. data has been disappointing, Japan refuses to increase stimulus and oil prices continue to fall, but everyone's greatest fear is that stocks have finally peaked."
In commodities, crude oil prices struggled near 11-year lows and added to the risk-off mood, with the market giving more attention to the stronger dollar and swelling U.S. inventories rather than growing tensions between Saudi Arabia and Iran.
Relations between the two major oil producers collapsed in acrimony this week after Saudi Arabia's executed a Shi'ite cleric, setting off a storm of protests in Tehran.
Brent crude inched up 0.3 percent to $36.51 a barrel, still in reach of the 11-year trough of $35.98 hit late last month.
(Additional reporting by Christine Kim and Yena Park in Seoul; Editing by Eric Meijer & Kim Coghill)
