Nikkei stages turnaround to outperform Asia; Shanghai skids 2%

Japan's benchmark index staged a dramatic turnaround on Thursday to outperform Asian equity markets but sentiment remained cautious ahead of of next week's U.S. budget vote.

Japan's Nikkei, South Korea's Kospi, Australia's all closed at session-highs while Indian stocks rose 0.3 percent. But the Shanghai Composite underperfomed to hit a two-week low.

TICKER	COMPANY	NAME	PRICE	CHANGE	%CHANGE
.N225	Nikkei 225 Index	NIKKEI	38,920.26	+534.53	+1.39%
.HSI	Hang Seng Index	HSI	19,376.53	+302.82	+1.59%
.AXJO	S&P/ASX 200	ASX 200	7,881.30	+127.60	+1.65%
.SSEC	Shanghai	SHANGHAI	3,122.40	+2.50	+0.08%
.KS11	KOSPI Index	KOSPI	2,753.00	+22.66	+0.83%
.FTFCNBCA	CNBC 100 ASIA IDX	CNBC 100	9,791.74	+131.79	+1.36%

US budget fears

Investors are worried about two looming Washington deadlines. Congress needs to pass a short-term spending bill before October 1 to keep the government funded or risk a shutdown.

(Read more: Here's who might win if DC shuts down)

"The thing is, if we do see a government shutdown, then subsequently government produced data will be held back from release, and thus we won't get the October 4 non-farm payrolls, which is so important to the taper jigsaw; clarity and uncertainty would get that little bit hazier," wrote Chris Weston, market strategist at IG in a note.

In addition, Congress must raise the federal borrowing limit to avoid a debt default by October 17. In a letter to House Speaker John Boehner, Treasury Secretary Jack Lew said that the world's largest economy could run out of cash by that date if the borrowing limit isn't increased.

Nikkei up 1.2%

Japanese stocks reversed losses to close at a one-week high after falling over 1 percent to a one-week low earlier in the session.

Investors cheered reports from Kyodo News that the government is "urgently" considering a reduction in corporate tax rates, which could offset any negative impact from the scheduled consumption tax hike on October 1.

(Read more: Is Abenomics' second arrow missing its target?)

Bathroom equipment maker Lixil Group jumped 4 percent after agreeing to buy Grohe, Europe's biggest bathroom equipment maker, for $4 billion.

Chip equipment maker Advantest closed down 4 percent, paring losses following an earlier 10 percent fall after warning it would post a net loss for a third straight year.

Shanghai down 2%

China's benchmark index fell below 2,160 points to its lowest level since September 9 as investors booked profits on stocks that have rallied ahead of Sunday's Shanghai free trade zone opening.

Shanghai International Port, Shanghai Material Trading, and CTS International Logistics slumped by the daily trading limit of 10 percent after racking up huge gains in recent sessions.

(Read more: No US-style subprime crisis for China: Former CIC Chair)

Meanwhile, sentiment deteriorated after a nation-wide survey of over 2,000 companies, known as China's Beige Book, showed business conditions are worse than recent positive economic data suggests.

Sydney 0.3% higher

Australia's benchmark index erased earlier losses thanks to support from mining stocks while sentiment also rose after data from the Australian Bureau of Statistics showed recovering labor demand.

Job vacancies rose last quarter for the first time in a year, surprising analysts who had expected a decline.

Global miners Rio Tinto, BHP Billiton and Fortescue Metals rallied over 1 percent each as copper prices broke their 3-day losing streak.

Rubber glove maker Ansell added nearly 2 percent on news it has bought South Korean glove manufacturer Midas for $41 million.

Kospi adds 0.5%

South Korea's benchmark pared opening losses to close above 2,000 points as foreign investors extended their buying streak for 22 straight sessions.

Kia Motors fell 1 percent after the Transportation Ministry said Wednesday that the firm will recall over 660,000 vehicles for faulty brake light switches.

Hanwha Group, one of the nation's largest conglomerates, ended 1.5 percent higher after the supreme court overturned a prison sentence for chairman Kim Seung-youn.

India climbs 0.2%

India's benchmark index managed to hold onto modest gains after the Reserve Bank of India (RBI) assured markets it would ensure sufficient liquidity and purchase debt via open market operations if required.

— By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC