(Corrects sixth paragraph to remove reference to India in list of markets closed for holidays)
* U.S. Senators say making progress on deal as Thursday deadline 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 highest in nearly five months on Tuesday on heightened hopes for a deal in Washington to reopen the U.S. government and avert a possible debt default, though investors remained wary with the deadline just days away.
European shares were expected to follow suit, with financial spreadbetters predicting Britain's FTSE 100, Germany's DAX and France's CAC 40 would all open up around 0.5 percent.
"The sudden the u-turn in sentiment has seen the bears blindsided," Capital Spreads trader Jonathan Sudaria wrote in a note to clients.
While investors expect U.S. politicians will reach a deal before Thursday's deadline to raise the U.S. debt ceiling to allow the country to meet its obligations, avoidance of a worst-case scenario of a default is far from assured.
There were positive signals from negotiations between Democrat and Republican Senate leaders, but any deal would still need approval in the House of Representatives, where it is unlikely 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 its highest close in two weeks, but ended off session highs as traders waited to see if U.S. politicians could strike a deal.
"The market is still precarious," said Takuya Takahashi, an analyst 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 been exploring ways in which they might impose limits on the use of short-term treasury bills due in the coming weeks as collateral, the Wall Street Journal reported, citing people familiar with the matter.
Against a basket of major currencies, the dollar was up slightly, moving away from an eight-month low hit after the U.S. government shutdown started earlier this month.
The dollar bought 98.41 yen, slightly down on the day but recovering from a low of 98.05 hit on Monday. It also drifted lower to buy $1.3569 against the euro.
The fiscal plan being discussed by U.S. senators would raise the $16.7 trillion debt ceiling by enough to cover the country's borrowing needs at least until mid-February, according to a source familiar with the negotiations.
It would also fund government operations until the middle of January, though some fear that would just set the stage for another standoff then.
"U.S. policymakers are just kicking the can and we will have another showdown in January. Under such circumstances, it would be difficult for the Fed to reduce its stimulus," said Masafumi Yamamoto, forex strategist at Praevidentia Strategy.
U.S. S&P 500 E-mini futures were slightly higher on Tuesday, indicating a firmer open if the gains were to be maintained. U.S. Treasury futures slipped 11 ticks.
In the commodity markets, gold slipped about 0.2 percent 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 to cover short positions ahead of a possible deal in Washington. (Additional reporting by Ayai Tomisawa and Hideyuki Sano in Tokyo; Editing by John Mair)