Asia Rebounds Sharply as China, Fed Fears Ease

Asian stocks enjoyed a relief rally on Thursday as markets in Shanghai and Tokyo snapped a three day-losing streak on signs of improvement in China's strained money markets and as fears of a U.S. stimulus withdrawal eased.

Japan's Nikkei and South Korea's Kospi both rallied 3 percent, and Australia's benchmark S&P ASX 200 crossed the 4,800 mark to hit a one-week high. However, the Shanghai Composite pared gains in the last hour to trade flat.

ASX 200
CNBC 100

Traders took their cue from a strong lead on Wall Street overnight. The Dow and S&P 500 rallied 1 percent after weak U.S. first-quarter gross domestic product growth showed that the economy was not yet strong enough for the Federal Reserve to withdraw its stimulus anytime soon.

Upbeat economic data from China also helped bolster sentiment. Industrial profits unexpectedly rose over 15 percent in May from the same month last year, defying expectations of a slowdown amid worries of overcapacity.

"Any China data carries significant weight these days as investors are desperate for signs that the world's second biggest economy is still ticking along," wrote Stan Shamu, market strategist at IG in a note.

Sydney Jumps 2%

Domestic politics were in the spotlight in Australia after Julia Gillard lost her position as Prime Minister to former leader Kevin Rudd in a crucial leadership vote of Labor Party lawmakers late Wednesday. The vote was aimed to improve the party's chances at winning the Federal elections scheduled for September.

"I don't think it's going to change the situation at the next poll. It seems to us that the opposition leader Tony Abbott is probably going to win the September election, and therefore, the Rudd change of leadership is perhaps an attempt to salvage the party base," said Kingsley Jones, founder and CIO at Jevons Global.

(Read More: Can Rudd Stop the Rout in the Aussie Dollar?)

Gold miner like Newcrest Mining ignored weakness in yellow metal prices to add 6 percent, while coal miner White Energy rose over 7 percent. Banks were also higher with a near-3 percent gain in Commonwealth Bank of Australia.

Shanghai Pares Gains

Banks rebounded after the benchmark seven-day repo rate - a gauge of the availability of funds in the interbank market - eased for a fifth straight session to around 6 percent, well-off last week's 11 percent high.

The People's Bank of China announced that it would not drain or inject funds from money markets on Thursday, and analysts said that this signaled a pause in its campaign to rein in informal lending. Agricultural Bank of China and China Construction Bank rose nearly 2 percent each.

(Read More: Is the Nikkei Taking Its Cue From China Markets?)

The Shanghai Composite still remains in bear market territory, down 20 percent from February's ten-month high, despite hitting an intra-day high of 1,980.

Nikkei Above 13,000

Japan's benchmark index tracked the positive momentum in Chinese markets, with gains underpinned by a weaker currency . The yen rose to the 98 handle against the U.S dollar after trading below those levels for most of the session.

(Read More: Reality Will Clobber Japan: Peter Schiff)

Real estate stocks led the gains with Mitsui Fudosan, Mitsubishi Estate and Tokyo Tatemono surged over 9 percent each.

Investors are looking ahead to Friday's raft of economic reports, which includes retail sales data and industrial output for the month of May, for the impact of Abe's economy-boosting policies, known as "Abenomics."

Kospi Rallies 3%

Seoul's benchmark breached the 1,820 level to its highest level in a week, led by a rebound in technology shares that have been sharply sold-off in recent sessions.

(Read More: Guess Who Was Buying Amid the June Sell-Off)

Market heavyweight Samsung Electronics surged 6 percent after hitting a ten-month closing low in the previous session. Chip makers LG Display added 3.4 percent and LG Electronics rose over 2 percent.

Automakers also rose with Hyundai Motor adding nearly 5 percent and Kia Motors rallying 4 percent.

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