(Corrects fourth paragragh to read China is now the world's third-, not fourth-largest economy)
* Hopes grow for more China stimulus to help region
* US dollar index at 3-yr high as global growth views darken
* Australia GDP shrinks for first time in 8 years (Repeats to more subscribers; recasts, updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, March 4 (Reuters) - Asian stocks rallied on Wednesday on hopes Beijing will step up efforts to support the Chinese economy, helping the entire region, while the U.S. dollar rose to a three-year high as investors scrambled to limit risk.
Major European stock markets were expected to open up as much as 1 percent, according to financial bookmakers, after the FTSEurofirst 300 index fell to a record low on Tuesday.
Australian shares bucked the trend and dropped to the lowest since August 2003 after gross domestic product unexpectedly shrank in the fourth quarter for the first time in eight years, adding to the damage that is tearing through Asia-Pacific economies as the global downturn worsens.
Many policymakers and investors have their eyes set squarely on China, hoping the government can reverse cooling growth in the world's third-largest economy and spur global demand.
A senior Chinese economic planning official offered a spot of hope on Wednesday, saying the government will increase spending in areas such as infrastructure and manufacturing on top of the 4 trillion yuan ($584.7 billion) stimulus package unveiled in November.
The news sent Shanghai's stock index up 6.1 percent and helped reversee early losses in Hong Kong.
"The China news is positive as it's the only country that's helping the global economy today," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management in Tokyo.
Shares of Hitachi Construction jumped 7 percent and together with the rest of the machinery sector lifted Japan's Nikkei share average 0.9 percent. The Nikkei hit a 25-year low on Tuesday.
The MSCI index of Asia-Pacific shares outside Japan fought back from a three-month low and was up 1.3 percent. So far this year, the index has fallen 16.3 percent compared with a 22.6 percent decline in MSCI's all-country world index
Hong Kong's Hang Seng index climbed 2.6 percent, on the back of stronger Chinese industrial, banks and real estate-related stocks.
HSBC shares, however, remained weak, at one point hitting their lowest since the Asian financial crisis of 1997-1998, after Europe's largest bank launched a heavily discounted rights issue this week.
WHAT ABOUT THE BANKS?
However, hopes for a turnaround in China were tempered by persistent worries about the stability of banks in the developed world.
Days after American International Group posted the largest U.S. corporate loss ever and received a $30 billion government bailout -- its second rescue -- Federal Reserve Bernanke left open the possibility that even more money may be needed to stabilise the banking system, 19 months after the financial crisis broke out globally.
"There are concerns about revenue growth for banks due to slowing global and domestic economies," said Savanth Sebastian, equities economist at broker CommSec in Australia.
The IntercontinentalExchange's U.S. dollar index, which measures its value against a basket of six major currencies, was up 0.3 percent, having risen to the highest since April 2006.
The index has gained 10 percent so far this year, as investors cash out of foreign assets and seek the dollar's liquidity as uncertainty about the global economy grows.
The Australian dollar fell 1 percent on the day to $0.6312 after data showed the domestic economy shrank by 0.5 percent on a quarterly basis in the last three months of 2008, putting the country on the brink of recession.
Upward pressure on the U.S. dollar pushed down the euro to a three-month low around $1.2455
Currency strategists at Standard Chartered Bank said despite doubts about the U.S. dollar being able to sustain strength in 2009 on the basis of valuation, the clearest trade is still on dollar strength against Asia ex-Japan currencies.
"As long as global growth expectations are turning down, Asian export growth will deteriorate further and Asia ex-Japan currencies will remain under pressure. We continue to focus on that especially small open economy currencies should be hit further," they said in a note.
U.S. Treasuries remained under pressure, pushing up the yield on the benchmark 10-year note to 2.94 percent from around 2.90 percent overnight, on expectations for a flood of supply this year to finance countless bank rescues and economic stimulus measures.
U.S. crude slipped 0.7 percent to $41.34 a barrel after rising nearly 4 percent overnight on expectations OPEC will cut output again to place a floor under prices. Brent was down 0.9 percent at $43.29.