(Corrects sixth paragraph to remove reference to India in listof markets closed for holidays)
* U.S. Senators say making progress on deal as Thursdaydeadline looms
* Market participants still cautious until deal finalised
* Asia ex-Japan shares hit highest level since late May
* Dollar steady against basket of major rivals
By Lisa Twaronite and Dominic Lau
TOKYO, Oct 15 (Reuters) - Asian shares rose to their highestin nearly five months on Tuesday on heightened hopes for a dealin Washington to reopen the U.S. government and avert a possibledebt default, though investors remained wary with the deadlinejust days away.
European shares were expected to follow suit, with financialspreadbetters predicting Britain's FTSE 100, Germany'sDAX and France's CAC 40 would all open uparound 0.5 percent.
"The sudden the u-turn in sentiment has seen the bearsblindsided," Capital Spreads trader Jonathan Sudaria wrote in anote to clients.
While investors expect U.S. politicians will reach a dealbefore Thursday's deadline to raise the U.S. debt ceiling toallow the country to meet its obligations, avoidance of aworst-case scenario of a default is far from assured.
There were positive signals from negotiations betweenDemocrat and Republican Senate leaders, but any deal would stillneed approval in the House of Representatives, where it isunlikely to sail past conservative Republicans.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9 percent to its highest since May 23.Several markets in the region were closed for holidays,including Singapore and Indonesia.
Japan's Nikkei share average rose 0.3 percent to itshighest close in two weeks, but ended off session highs astraders waited to see if U.S. politicians could strike a deal.
"The market is still precarious," said Takuya Takahashi, ananalyst at Daiwa Securities. "Even if default can be avoided,investors are not ready to take risk at this point."
Citigroup Inc and State Street Corp have beenexploring ways in which they might impose limits on the use ofshort-term treasury bills due in the coming weeks as collateral,the Wall Street Journal reported, citing people familiar withthe matter.
Against a basket of major currencies, the dollar wasup slightly, moving away from an eight-month low hit after theU.S. government shutdown started earlier this month.
The dollar bought 98.41 yen, slightly down on the daybut recovering from a low of 98.05 hit on Monday. It alsodrifted lower to buy $1.3569 against the euro.
The fiscal plan being discussed by U.S. senators wouldraise the $16.7 trillion debt ceiling by enough to cover thecountry's borrowing needs at least until mid-February, accordingto a source familiar with the negotiations.
It would also fund government operations until the middle ofJanuary, though some fear that would just set the stage foranother standoff then.
"U.S. policymakers are just kicking the can and we will haveanother showdown in January. Under such circumstances, it wouldbe difficult for the Fed to reduce its stimulus," said MasafumiYamamoto, forex strategist at Praevidentia Strategy.
U.S. S&P 500 E-mini futures were slightly higher onTuesday, indicating a firmer open if the gains were to bemaintained. U.S. Treasury futures slipped 11 ticks.
In the commodity markets, gold slipped about 0.2percent to $1,269.70 an ounce.
U.S. crude slipped 0.3 percent to $102.10 a barrel,giving up some of Monday's gains as traders bought contracts tocover short positions ahead of a possible deal in Washington. (Additional reporting by Ayai Tomisawa and Hideyuki Sano inTokyo; Editing by John Mair)
- USA News