* Ex-Japan Asia MSCI at highest since late 2007
* Damages from Irma seen smaller than initially forecast
* Dollar rises on higher U.S. yields, yuan hampered by Beijing
TOKYO, Sept 12 (Reuters) - Asian shares hit a 10-year peak on Tuesday with investors breathing a sigh of relief as North Korean fears eased slightly and the worst-case scenario from Hurricane Irma looked to have been avoided.
MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.2 percent to its highest level since late 2007. Japan's Nikkei added 1.0 percent.
On Wall Street on Monday, U.S. S&P 500 Index surged over 1 percent to a record high close of 2,488 while MSCI's broadest gauge of the world's stock markets covering 47 markets also hit a new record high, having made its biggest gains in about two months.
Insurers were among the biggest winners, with the MSCI World's insurer index rising 1.5 percent on Monday, as insured property losses from Hurricane Irma's are expected to be smaller than initially forecast.
Downgraded to a tropical storm early on Monday, Irma had ranked as one of the most powerful Atlantic hurricanes recorded. It cut power to millions of people.
Adding to an uptick in risk appetite was relief that North Korea did not test-fire missiles or conduct nuclear tests over the weekend as some had feared.
The United Nations Security Council unanimously stepped up sanctions against North Korea on Monday over the country's sixth and most powerful nuclear test on Sept. 3, imposing a ban on the country's textile exports and capping imports of crude oil.
Still the measures were less severe than Washington's initial proposal and U.S. Ambassador to the United Nations Nikki Haley said the United States was not looking for war with North Korea and that Pyongyang had "not yet passed the point of no return."
"The measures did not include an outright ban on oil supplies to the regime, so the threat of an immediate military confrontation appear to have eased for now," said Mutsumi Kagawa, chief global strategist at Rakuten Securities.
Yet many investors are wary of possibile retailiation by North Korea against the latest U.S. sanctions following its nuclear test earlier this month.
UNWINDING SAFE-HAVEN BUYING
Safe-haven assets such as U.S. Treasuries and gold gave back some of their recent gains.
The 10-year U.S. Treasuries yield jumped to 2.129 percent from 2.061 percent, the biggest rise in a month and a half.
"The markets have been alternating between optimism and pessimism. If U.S. bond markets drop further today, it's quite unusual to see them falling for two days in a row so we could say the latest cycle of pessimism, which has lasted two months, may be coming to an end," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank Corp.
Sharp gains in U.S. bond yields also prompted buy-back in the battered dollar.
The euro dipped to $1.1958, retreating further from Friday's peak of $1.2092, which was its highest since January 2015.
The dollar jumped back to 109.35 yen versus Friday's 10-month low of 107.32.
The Chinese yuan stepped back further from Friday's 21-month high versus the dollar to 6.5432 per dollar, after China's central bank on Monday scrapped two measures that were put in place to support the yuan when it was under significant selling pressure.
Gold dropped to $1,325 per ounce, compared to Friday's one-year peak of $1,357.4.
Oil prices held firm as key U.S. refineries began restarts following Hurricane Harvey, which may help revive crude oil processing.
The possibility of an extension to the 15-month production pact between members of the Organization of the Petroleum Exporting Countries and non-OPEC producers also helped to support prices.
Brent crude futures stood at $53.78 per barrel while U.S. crude futures stood flat at $48.04 per barrel, having risen 1.2 percent on Monday.
(Editing by Shri Navaratnam)