HONG KONG - Asian markets fell in New Year's Eve-shortened trade on Monday as hopes that US lawmakers will reach a deal to avert the fiscal cliff faded just a day before a deadline.
However there was some bright news out of China, where a survey by HSBC showed manufacturing activity hit a 19-month high in December.
Hong Kong lost 0.20 percent, Sydney was 0.28 percent lower and Singapore shed 0.92 percent but Shanghai jumped 0.46 percent.
Tokyo, Seoul, Taipei, Jakarta, Bangkok and Manila were all closed for public holidays.
Republicans and Democrats on Capitol Hill ended Sunday without reaching a compromise deficit-cutting budget that would be less painful than the deep spending cuts and tax hikes due to take effect on Tuesday.
Leaders remained locked in talks that appeared to be making little headway, with each side blaming the other as analysts warned the measures could tip the economy into recession.
Senate Republican Minority Leader Mitch McConnell warned that, despite through-the-night talks, negotiators were still a long way from success, with Democrats not responding to a "good faith offer" from his party.
Senate Democratic Majority Leader Harry Reid agreed talks were at a standstill, adding: "There is still significant distance between the two sides, but negotiations continue."
If talks fail on Monday President Barack Obama has demanded a vote on his fallback plan that would preserve lower tax rates for families on less than $250,000 a year and extend unemployment insurance for two million people.
But Stan Shamu, a market strategist at IG in Sydney, said he expected some sort of plan to come out.
"No one knows how this will play out, but the most likely scenario is a patch-up deal to avoid a fiscal catastrophe in the New Year," he told Dow Jones Newswires.
Concerned investors began moving out of the dollar as recent upbeat sentiment evaporated.
The euro rose to $1.3227 from $1.3217 in late US trade Friday, while the dollar also eased to 85.88 yen from 85.98 yen.
The euro bought 113.57 yen from 113.62 yen.
News out of Beijing was better, however, with banking giant HSBC saying its final purchasing managers' index (PMI) of the year hit 51.5, up from 50.5 in November and a fourth straight month of improvement.
A reading above 50 indicates expansion in the key sector, while one below signals shrinkage.
The figures reinforce recent indications that the world's second-largest economy is finally emerging from its slumber.
"Such a momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise," Qu Hongbin, HSBC's chief economist for China, said in the release.
On oil markets New York's main contract, light sweet crude for delivery in February, shed 16 cents to $90.67 a barrel and Brent North Sea crude for February delivery slipped 22 cents to $110.40.
Gold was at $1,660.00 at 0205 GMT compared with $1,658.90 late Friday.