US stock futures rose 1 percent on Thursday after a sharp drop on Wall Street overnight, limiting losses in Asian share markets.

However, the focus is shifting to how Europe reacts to a sovereign debt crisis that is now threatening its banking system.

Major European markets also looked set to draw some comfort from the US futures bounce, with financial bookmakers predicting British, French and Germany stocks would open up as much as 1.6 percent.

The Australian dollar, often a measure of investors' willingness to take risks, bounced above $1.02 as Asian equities pulled back from their lows, suggesting traders and investors were being nimble rather than selling with blinders on in the face of risks to global growth.  

Trading was whippy and positions were built, slashed and then rebuilt within an hour. The euro crept higher, but Europe's devolving crisis was too complex and disturbing to make any long-term bets.

Fast-moving rumours about a sovereign debt downgrade of France as well as talk doubting the health of French banks swirled in Europe caused the biggest widening in the benchmark index of European credit default swaps on Wednesday since the credit crunch in 2008.

The three major rating agencies later reaffirmed France's AAA rating, and said its outlook was stable, but markets remain concerned that French banks are among the most exposed to a worsening of Europe's government debt crisis.

European policymakers have been struggling to keep the euro zone's government bond markets from being savaged, but Wednesday's price action suggested the problems may be rapidly spreading to the private sector.

"The market is in a bit of heat-seeking missile mode looking for vulnerabilities around the world, and Europe is obviously in its sights at this point in time," said Grant Turley, senior strategist at ANZ in Sydney.

As S&P 500 futures firmed, Japan's Nikkei share average trimmed initial losses of 2.2 percent and was down 0.7 percent by midday, but still not far from a five-month low hit on Tuesday.

Carmakers and machinery makers fell as investors continued their shift into domestic-demand related and defensive sectors such as pharmaceuticals and retail from cyclicals, on worries over the state of the global economy and the strong yen.

Expectations the Bank of Japan would continue to step into the market to buy Nikkei exchange traded funds also limited the selloff in Tokyo.

By 0500 GMT, S&P futures were up 1.4 percent after the cash index tumbled 4.4 percent overnight on Europe's crisis and fears that the US economy could slide back into recession.

Tuesday's intraday low at 1,101 is major support for the index since it is also the 38.2 percent retracement of the 2009-2011 rally.

The benchmark MSCI Asia Pacific ex-Japan stocks index also pared early losses and was down 0.3 percent by midday, helped by outperforming telecommunications and consumer-related shares. The index has fallen 13 percent so far in August, in line with the all-country world index, suggesting investors were not being so discriminating in the equity sell-down.     

Institutional fund managers were mostly confident about Asian assets and some have been trying to position their portfolios to gain when equities bounce and bond yield spreads over Treasuries tighten. - Reuters