* Australian shares add 0.5 pct, Japan's Nikkei up 0.3 pct
* Investors cheer U.S. March manufacturing activity improvement
* U.S. retail sales post unexpected drop in Feb.
* Sterling takes knock on Brexit uncertainty
* Asian stock markets: https://tmsnrt.rs/2zpUAr4
TOKYO, April 2 (Reuters) - Asia shares extended their rally on Tuesday as positive Chinese and U.S factory activity surveys aided investor confidence, and the ebbing concerns over the global economy spurred selling of safe-haven U.S. bonds as yields rose from 15 month troughs.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2 percent, hitting a seven-month high after rallying more than one percent in the previous session.
Australian shares gained half a percent and Japan's Nikkei advanced 0.3 percent, extending its gains for a third session.
The Shanghai Composite Index climbed 0.1 percent while Hong Kong's Hang Seng Index was flat.
Wall Street shares jumped on Monday, with the S&P 500 and Dow Jones Industrial Average both rising more than one percent, with the Dow lifted by sharp gains in Caterpillar Inc and Boeing Co.
Investors cheered U.S. data overnight showing improvements in manufacturing activity last month and construction spending for February, which overshadowed an unexpected drop in retail sales.
The upbeat readings reinforced positive sentiment garnered from earlier data showing China's manufacturing sector surprisingly returned to growth for the first time in four months in March.
The rare bright news for the global economy comes in the wake of persistent worries over cooling demand across the world, with the Sino-U.S. tariff war, slowing trade and subdued corporate profits prompting investors to dump risk assets over the past several months.
"The market is reacting to the improvement of sentiment in China. Many investors are buying in anticipation of a rise in shares," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Fujito said he expected the market will need to catch up with consumer sentiment in the United States at some point as the below-par retail sales figures indicated it was not as good as thought.
The encouraging data on manufacturing activity in the world's two biggest economies spurred some investors to scale back holdings of safe-haven bonds, triggering the biggest single-day jump in U.S. 10-year Treasury note yields since Jan. 4.
The U.S. 10-year Treasury yield was last at 2.479 percent, not far off a more than one-week high of 2.508 percent brushed overnight.
The rise pushed the yield curve between three-month U.S. Treasury bills and 10-year notes further into positive territory, after being inverted for a week until last Friday, raising fears that it could herald a recession.
BREXIT CHAOS
In the currency market, sterling took a knock after British lawmakers came no nearer to resolving the chaos surrounding the country's departure from the European Union.
The British parliament failed on Monday to find a majority for any proposed alternative to Prime Minister Theresa May's divorce deal, though support for an alternative that included a customs union was far higher than for May's deal.
"The only sensible thing for Theresa May to do is to step aside and let someone else take control of Brexit," said Naeem Aslam, chief market analyst at Think Markets in London, said in a note to clients.
Sterling was last down 0.3 percent at $1.3065, not far from last month's nadir of $1.2945.
The euro struggled near a three-week low of $1.1198 brushed early on Tuesday, and was last trading down a tenth of a percent at $1.1205.
Against the Japanese yen, the dollar was down a tad at 111.31 yen, but 1.5 percent above its 1-1/2-month low of 109.70 touched on March 25.
Oil prices rose to fresh 2019 highs after a U.S. official said Washington is considering more sanctions on Iran and a key Venezuelan export terminal halted operations.
U.S. crude futures traded at $61.79 per barrel, up 0.3 percent on the day. Brent futures were also up 0.2 percent at $69.15 a barrel.
Gold inched up to $1,287.60. (Editing by Simon Cameron-Moore)