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Britain scraps small part of tax plan; markets relieved

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Reserve Bank of Australia surprises with a small hike

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High VIX; Credit Suisse stock slide point to nerves beneath

By Tom Westbrook

SYDNEY, Oct 4 (Reuters) - Asian stocks bounced on Tuesday after Britain scrapped bits of a controversial tax cut plan, tentatively improving global market sentiment and rallying bonds and the pound.

Australia's central bank

added to that sense of relief in markets, surprising investors by lifting interest rates by a smaller-than-expected 25 basis points, saying they had already risen substantially. .

That pushed the Aussie dollar down, lifted the S&P/ASX 200 index by 3.6% and spurred benchmark 3-year bonds for their best day in 13 years.

In trade thinned by holidays in China and Hong Kong, MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.7%, led by gains in Australia.

UK stocks seemed set for a bounce, with FTSE futures up 0.8%.

"It feels short term it's a little bit oversold," said Geoff Wilson, chief investment officer at Wilson Asset Management in Sydney.

"Is this the bottom? It's nearly impossible to pick the bottom, but I don't think so," he said, referring broadly to markets.

Japan's Nikkei rose 2.8%. Sterling drifted up to an almost two-week high of $1.1343, making for a bounce now of almost 10% from a record low hit last week after plans for unfunded tax cuts unleashed chaos on British assets.

"The about-face ... will not have a huge impact on the overall UK fiscal situation in our view," said NatWest Markets' head of economics and markets strategy John Briggs.

"(But) investors took it as a signal that the UK government could and is at least partially willing to walk back from its intentions that so disrupted markets over the past week."

Investors also took heart from stability at the long end of the gilt market, even though emergency purchases from the Bank of England were only relatively modest.

S&P 500 futures rose 1%, following a 2.6% bounce for the index overnight.

British Finance Minister Kwasi Kwarteng released a statement reversing planned tax cuts for top earners. It makes up only 2 billion out of a planned 45 billion pounds of unfunded tax cuts that had sent the gilt market into a tailspin last week.

South Korea's Kospi bounced 2.5%, lifting away from last week's two-year low, despite North Korea's firing a missile over Japan for the first time in five years.

STERLING BOUNCE

The recovery for sterling has settled some nerves in the currency market, though the persistent strength of the dollar still holds a lot of major currencies near milestone lows and has authorities throughout Asia on edge.