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HONG KONG, Dec 31 AFP

December 31 2012, 9:38PM

Asian markets fell in New Year's Eve-shortened trade as hopes that US lawmakers will reach a deal to avert the fiscal cliff faded just a day before a deadline.

However on Monday 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 closed flat, edging down 9.67 points to 22,656.92, but it closed out the year 22.91 per cent higher.

Sydney closed 0.48 per cent lower, shedding 22.4 points to 4,648.9, although the index is up 14.60 per cent over the past 12 months.

Wellington was 0.35 per cent lower, shedding 14.39 points to 4,066.51, but adding 24.51 per cent for 2012.

In the afternoon Shanghai surged 1.12 per cent.

Tokyo, Seoul, Taipei, Jakarta, Bangkok and Manila were all closed for public holidays.

Despite the losses on Monday all the region's stock markets ended the year higher, with Bangkok the standout performer, surging almost 36 per cent, while Shanghai was the weakest, adding less than three per cent over the 12 months.

Republicans and Democrats on Capitol Hill ended Sunday without reaching a compromise over a 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.

On currency markets the euro rose to $US1.3207 from $US1.3217 in late US trade Friday, but the US dollar rose to 86.06 yen from 85.98 yen. The Japanese unit continued to be weighed by expectations the country's central bank will unveil fresh monetary easing measures next month.

The euro bought 113.67 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 28 cents to $US90.85 a barrel and Brent North Sea crude for February slipped one cent to $US110.61.

Gold was at $US1,660.60 at 0445 GMT compared with $US1,658.90 late Friday.

By Danny McCord