Shanghai rallies over 2% to 7-week high on economic optimism

China's benchmark index shot up to a seven-week high on Monday, boosting Asian stocks across the board on optimism that the world's second-largest economy may be stabilizing, but Japan bucked the trend after weak growth data.

Amid gainers, Australia's S&P ASX 200 ended at a one-week high while the Shanghai Composite outperformed to rally over 2 percent. But the Nikkei fell to a six-week low and South Korea's Kospi index was rangebound.

A weak lead from Wall Street late last week dented sentiment in Asia. U.S. stocks posted their biggest weekly decline in two months on Friday, led by the Dow Jones Industrial Average's 1.5 percent weekly loss amid worries about when the Federal Reserve may start to wind down its stimulus program.

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Shanghai up 2.4%

Positive economic data boosted sentiment in China and helped the benchmark index extend last week's winning streak to close at its best levels since mid-June. The index ended last week with a weekly gain of 1 percent.

A key measure of China's money supply, known as the M2, increased 14.5 percent in July from the year earlier, according to Xinhua's official news agency while new bank loans grew better-than-expected. The data was released late Friday and is the latest sign of a rebound in China's economy following last week's upbeat industrial production figures.

(Read more: China data blitz points to stabilizing economy)

Mid-sized banks rallied on the news. China Minsheng Banking jumped 5.5 percent while Shanghai Pudong Development Bank rose nearly 4 percent.

Environmental stocks got a boost after Beijing announced unveiled plans to ramp up investment in green industries. Tianjin Capital Environment rose 3 percent while Beijing Capital added 2.2 percent.

Nikkei slips 0.7%

Japan's benchmark index widened its losses choppy trade to close at its lowest levels since June 28 as dollar-yen traded around the 96 handle after briefly falling below that level on the back of weak gross-domestic-product (GDP) figures.

Second-quarter GDP came in at an annualized rate of 2.6 percent, lower than market forecasts for a 3.6 percent gain but Japanese officials said the data added to growing optimism over the success of "Abenomics" as it marked a third straight quarter of expansion.

"We're definitely going to see some [dollar-yen] depreciation here. It's an aspect of the fact that you're going to have some sentiment that is going to be harder for Abe to get through his increase in consumption tax," said Gavin Parry, managing director of Parry International Trading.

Manufacturers weighed on the index with camera make Nikon and Nintendo down 2.5 percent each, truck maker Isuzu Motors fell 3.4 percent and index heavyweights Softbank lost 4 percent .

(Read more: Here's the missing piece in Japan's growth puzzle)

Australia crosses 5,100

Australia's benchmark index closed at its highest level in a week thanks to positive economic sentiment in China and a rally in mining stocks.

Rio Tinto and BHP Billiton added over 2 percent each, Fortescue Metals increased 7.5 percent and Atlas Iron surged nearly 10 percent. The world's fifth-largest golf producer, Newcrest Mining, added 8 percent on the back of higher gold prices, despite posting it's first annual loss in eleven years.

Engineering firm UGL rose 1.6 percent despite reporting a 73 percent fall in annual profit while electronics retailer JB Hi-Fi rallied 3 percent after posting a better-than-expected 11 percent rise in full-year profits.

"The key debate that is going on among traders and investors alike is whether the RBA [Reserve Bank of Australia] has finished its easing cycle. We would put the probability of a November cut at 50:50, but a lot is now fully dependant on the upcoming employment reports and more importantly, the October CPI print," said Chris Weston, market strategist at IG in a note.

Kospi 0.2% higher

South Korea's benchmark index approached the key 1,900 level as industrial stocks got a lift from the stronger Japanese currency, which gives them a competition advantage in overseas markets.

Automakers SSangyong Motor rallied 8 percent, Kia Motors and Hyundai Mobis added nearly 1 percent each while shipbuilder Posco rose 1.3 percent.

Samsung Electronics inched up 0.2 percent after the U.S. International Trade Commission (ITC) decided to ban the import and sale of some of its products in the U.S. on Friday.

Carrier Asiana Airlines lost 2 percent after it reported a deeper-than-expected operating loss on Friday, stating that North Korean tensions hurt travel demand.

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