* Dollar demand seen strong from Japanese funds
* U.S. Treasuries firm on extended Fed rate pause bets
* Silver takes a beating, pulling down gold and oil
* Nikkei down about 1 percent, KOSPI hovers below record high
By Saikat Chatterjee
HONG KONG, April 26 (Reuters) - Silver tumbled on Tuesday and Asian shares pulled back from recent three-year highs in a bout of profit-taking before the Federal Reserve meeting this week where investors are seeking clues on when it plans to begin existing its ultra-easy monetary policy.
The drop in silver, triggered by an options expiry later in the day, spread to the gold and oil markets with U.S. crude futures dropping more than a $1 after Saudi Aramco's chief executive said the kingdom was not comfortable with current oil prices. [ID:nL3E7FQ09J]
"There is some risk reduction because the market wants to watch if Bernanke will say anything about a change of stance," said Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments.
"Any change of stance is highly unlikely."
Fed Chairman Ben Bernanke will hold the first news conference ever by a Fed chief after the two-day policy committee meeting ends on Wednesday.
The euro also slipped after European Central Bank Governor Jean-Claude Trichet said that a strong dollar is in the interest of United States, though the prospects of widening interest rate differentials between the Fed and the ECB may check losses for the single currency.[ID:nEBE7DA00T]
Equity markets across the region were in the red with Japan's Nikkei ending down more than 1 percent. Shares outside Japan , which last week hit their highest level since early 2008, were down about 0.8 percent.
European shares were set to start weaker, tracking falls on Wall Street and in Asia, with key indices set to open 0.3-0.5 percent lower. [ID:nLDE73K1C7]
Credit markets, too, reflected the overall cautious sentiment with credit spreads widening slightly as the broader market was wary of a heavy pipeline after a recent flood of issuances.
Issuance of dollar-, euro- and yen-denominated bonds from Asia ex-Japan have already exceeded $30 billion year-to-date, clearly ahead of the pace set in 2010, which saw record issuance of more than $83 billion.
AND THE WINNER THIS MONTH IS..
South Korea's KOSPI dipped 0.4 percent after hitting yet another record high earlier, though it is set to outperform regional indices in a big way this month.
The KOSPI's near 5 percent rise in April has been led by automakers and chipmakers with the former benefiting from the production hit suffered by Japanese competitors in the wake of last month's earthquake and tsunami and the latter getting a boost from strong earnings by Intel and Apple.
While the broader market appeared overbought on some technical indicators, automakers offered attractive valuations, with Hyundai Motor shares trading at 10 times its 12-month forward price earnings multiples, compared with Toyota's around 21, according to Starmine data.
EXTENDED PAUSE
In currency markets, the greenback came under a bit of selling pressure versus the yen in early trade but losses were limited on expected dollar demand from Japanese asset management firms as a number of investment trusts, or toushin, are due to be launched on Tuesday.
Trade was volatile as investors were reluctant to make big bets before the April 26-27 Federal Open Market Committee meeting while rate markets reflected that any tightening measure was going to be a long slow grind.
In fed fund futures markets <0#FF:>, the contract expiring in December 2011 has fully priced in a target interest rate of 0.25 percent, the top end of the central bank's current rate range of zero to 0.25 percent but the January 2012 contract only implied a slim 6 percent chance of another hike to 0.5 percent.
Such bets on a glacially slow increase in rates have kept traders interested in buying U.S. Treasuries, pushing the 10-year U.S. yield down more than 20 basis points from this month's highs of 3.36 percent, despite a recent warning of a ratings cut by ratings agency Standard & Poor's.
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http://blogs.reuters.com/hedgehub (Additional reporting by Rujun Shen in SINGAPORE, Hideyuki Sano in TOKYO and Umesh Desai; Editing by Ramya Venugopal)