GLOBAL MARKETS-Asian shares retreat, dollar gains respite

* Bank of Japan says positive business cycle is beginning

* Asian stocks retreat from 13-month highs

* Investor caution takes pressure off the dollar

* European and U.S. equities set to start lower

By Susan Fenton

HONG KONG, Sept 18 (Reuters) - Asian stocks retreated from 13-month highs on Friday as a conflicting picture about the strength of U.S. economic recovery stopped investors from extending this week's rally but gave some respite to a battered U.S. dollar.

European stocks futures were down 0.4 percent while U.S. equity futures were 0.3 percent lower, pointing to a weak start for shares in Europe and the United States.

Investors in Japan were cautious ahead of a stretch of public holidays early next week even though the Bank of Japan deputy governor, Hirohide Yamaguchi, said a positive business cycle was starting and signalled the central bank could soon withdraw emergency support for corporate funding. [ID:nT109247]

"A pickup in the global economy is expected to continue for some time," Yamaguchi told a forum in Tokyo.

The Nikkei index <.N225> fell 0.7 percent, breaking a three-day rally.

Shares in Shanghai <.SSEC> were down 1.7 percent by early afternoon as investors fretted about the prospect of a sharp rise in shares from upcoming IPOs and worried that recent gains may be overdone.

Stock market jitters took pressure off the dollar, which held above one-year lows reached on Thursday against a basket of currencies <.DXY>, although analysts said its respite could be temporary.

"We are seeing a bit of a pullback but the broader U.S. dollar weakness remains intact as it turns to be the currency for carry trades," said Jonathan Cavenagh, currency strategist at Westpac in Australia.

OPTIMISM TEMPERED

Investors across Asia stood back after equities hit their highest level in 13 months on Thursday. While there is growing confidence the global economy is on an uptrend there is uncertainty about the strength of that recovery.

Data on Thursday showed U.S. housing starts hit their highest level last month since November, but a rise in the number of Americans drawing long-term unemployment compensation tempered optimism for a sharp rebound in the world's biggest economy.

The MSCI index of Asia Pacific stocks traded outside Japan <.MIAPJ0000PUS> dipped 0.6 percent, after surging 80 percent since mid-March when markets started to rally on investors' hopes that the financial crisis had bottomed out.

Shares in Korea bucked the region as the KOSPI index <.KS11> eked out a 0.3 percent gain, helped by foreign investors picking up shares before global index compiler FTSE promotes South Korea's share market to developed market status, from advanced emerging market, from Monday.

Japanese government bond futures rebounded in early trade as Tokyo stocks fell, but December 10-year JGB futures <2JGBv1> were virtually flat by late afternoon at 138.55.

Finance Minister Hirohisa Fujii said the government could cut new JGB issuance this fiscal year when the new government reviews an extra budget compiled by the previous government, but gave no details. [ID:nT112846]

Gold edged up to $1,012.20 an ounce from its New York close at $1,011.45, but below an 18-month high of $1,023.85 on Thursday.

Seen as a hedge against potential inflation, gold is likely to stay firm and many market participants still expect it to break through its record high of $1,030.80.

Otherwise, commodity <.CRB> prices slipped on uncertainty about the strength of the global economic recovery and the oil price edged down 34 cents to $72.13 a barrel.

Weaker commodity markets put pressure on shares of Australian resources companies, such as mining giant BHP Billiton which fell 2.3 percent, and helped push the Aussie dollar below Thursday's one-year high.

But shares in Qantas Airways jumped 3.7 percent after positive comments on the carrier from broker RBS.

Qantas was also reported to be teaming up with American Airlines and British Airways to expand an alliance with cash-strapped Japan Airlines <9205.T>, whose shares rose 2.4 percent. (Additional reporting by Anirban Nag in Sydney and Leika Kihara in Tokyo; Editing by Jan Dahinten)