HONG KONG - ASIA stocks rebounded and oil extended gains to more than US$3 (S$4.30) a barrel on Wednesday after the Federal Reserve said it would take over American International Group (AIG) in a dramatic about-face as victims of the financial crisis kept piling up.

The Fed will provide AIG, once the largest insurer in the world, a bridge loan of US$85 billion and take an 80 per cent stake in the ailing company, shouldering the US taxpayer with more liabilities following the government takeover of Fannie Mae and Freddie Mac about a week ago.

After reports about the plan surfaced, investors bought back equities and US dollars while selling the government bonds they had accumulated in the wake of Lehman Brothers' chapter 11 filing on Monday. However, the stock market rally across the region was still rather tame.

'People were a bit worried about their effective savings. So relieving that pressure helps some,' he said.

Japan's Nikkei share average rose 2.1 per cent after closing at a three-year low on Tuesday. Shares of Japan's top bank Mitsubishi UFJ Financial Group outperformed the broad market, rising 2.3 per cent.

The MSCI Asia Pacific ex-Japan stocks index rose 2.4 per cent after hitting a two-year low on Tuesday. It is down 36 per cent so far this year.

The rescue of AIG is the latest event in what has already been one of the most tumultuous weeks in the history of finance that has changed the face of the US banking sector. Merrill Lynch agreed on Monday to be bought by Bank of America for US$50 billion.

Investors knocked the MSCI All-Country World equities index to the lowest since December 2005 on Tuesday as a flight from anything resembling risk in markets reached a fever pitch. The driving fear was a bankruptcy by AIG would trigger a catastrophic chain reaction of defaults in the global credit market.

AIG shares have plunged 94 per cent year-to-date. 'If AIG had gone belly up, you would have an unknown, humongous number of default swaps cut off. What would that lead to? We were already approaching some market disruption,' said Mr Dan Fuss, vice-chairman of Loomis Sayles in Boston. 'This is a huge relief to many parts of the financial markets.'

The US dollar rose 0.8 per cent against the yen to 106.20 yen (S$1.43) after sinking to a four-month low of 103.54 yen on Tuesday.

The euro was up 0.7 percent at US$1.4212, boosted mainly by the 15-nation currency's 1.5 per cent recovery against the yen to 150.97 yen.

Two-year Treasury notes fell 12/32 in price, driving yields up to 1.99 per cent, from 1.79 per cent late in New York on Tuesday. Yields on 10-year notes rose to 3.56 per cent, from 3.44 per cent.

The November US light crude future was up US$3.20 to US$94.35 a barrel after hitting a seven-month low on Tuesday. -- REUTERS