RPT-GLOBAL MARKETS-Asia stocks cut losses, China shock wears off

* Dollar trims gains, commodity prices stabilise

* Some say reaction to China move may be overblown

* Focus shifting back to Fed (Repeats to more subscribers)

By Sugita Katyal

SINGAPORE, Oct 20 (Reuters) - Asian stocks pared early losses on Wednesday as markets recovered from an initial shock to China's first rate rise in nearly three years that had investors fretting it may be embarking on a policy tightening cycle.

European shares were mostly flat after opening lower.

The dollar dipped against a basket of currencies, trimming gains it made after the surprise rate hike by China spurred the market to lower risk exposure, while commodity prices steadied after falling sharply on Tuesday.

"China's tightening came as a shock, but the country's intention doesn't seem to be a cooling of its economy, Instead it has moved to prevent bubbles from bursting. It's rather natural, if you look at it in the longer term," said Tomomi Yamashita, senior fund manager at Shinkin Asset Management in Tokyo.

"Financial markets are still supported by expectations of further easing by the United States, with ample liquidity helping assets such as bonds and commodities. The focus from now on is whether these money flows will change course."

The MSCI index of Asia Pacific stocks outside Japan <.MIAPJ0000PUS> was down 0.1 percent at 0725 GMT, after trimming some of its losses suffered earlier in the day.

Japan's Nikkei average <.N225> pared earlier losses but still closed down 1.65 percent to book its lowest close in two weeks after investors rushed to take profits on China's unexpected tightening and after worries about some U.S. banks pushed Wall Street lower.

Shanghai stocks <.SSEC> ended flat after a volatile session while Hong Kong <.HSI> came off its lows in the morning session as investors took China's first interest rate hike since 2007 in stride.

Property stocks led the drop in China, with those in Hong Kong <.HSNP> down 1.2 percent and the Shanghai property sub-index <.SSEP> falling 4.6 percent.

FED BACK ON RADAR

The dollar index dipped 0.4 percent <.DXY> after climbing more than 1.6 percent the previous day while the commodity-sensitive Australian dollar rebounded 0.8 percent after sliding more than 2 percent on Tuesday.

Some analysts said the market's reaction the previous day was overblown, and with the Federal Reserve set to ease monetary policy further as early as next month, any dollar rebound would be short-lived.

"What I think will be short-lived is the weakness in Asian and commodity currencies in particular," said Greg Gibbs, a strategist at RBS in Sydney.

"I don't think the hike in China is too significant in terms of actually slowing down growth there. I wouldn't view that as a factor to be getting bearish on risk or bearish on Asian growth."

The People's Bank of China, the central bank, said it would lift its benchmark one-year lending and deposit rate, effective on Wednesday, in a move some analysts said may suggest Beijing and Washington are working together to ease global currency tensions. [nSGE69I0HU] [nN19266020]

Crude oil prices rebounded after falling more than 4 percent on the rate rise, while spot gold also stabilised at $1,340.00 after sharp falls. [nSGE69J01A] [nSGE69J015]

The yuan fell by more than 100 pips in morning trade to 6.6558 per dollar, after the PBOC set the currency's mid-point weaker in what was seen as an effort to prevent the interest rate rise from attracting more inflows of speculative capital. (Editing by Kazunori Takada)