* South Korea's Kospi up more than 10%; Nikkei rises 4.5%

* Investor fears over heavy AI spending ease but sentiment

still fragile

* Yen reverses some of its intervention gains as markets

test Tokyo's resolve

* Long-end Treasury yields remain elevated

(Updates with China, Hong Kong markets)

By Rae Wee

SINGAPORE, July 31 (Reuters) - Asian markets rallied hard

with Wall Street on Friday as South Korea's battered market made

a record comeback, stirring hopes that the recent selloff in

AI-linked assets may be near an end.

The yen was also firmly in the spotlight, holding

some distance away from a 40-year trough after suspected

coordinated intervention from various authorities, which came

ahead of the Bank of Japan's (BOJ) rate decision later in the

day.

Long-end U.S. Treasury yields held near 19-year highs while

short-end yields eased, steepening the curve as doubts grow over

the Federal Reserve's ability to anchor inflation expectations.

South Korea's Kospi leapt more than 10% on Friday,

reversing steep losses from earlier in the week. Japan's Nikkei

similarly advanced 4.5% and MSCI's broadest index of

Asia-Pacific shares outside Japan rose 4.6%.

That followed surges in AI heavyweights Microsoft ( MSFT )

and Amazon ( AMZN ) overnight, lifting chip stocks broadly after

upbeat earnings and forecasts from the pair eased concerns over

hefty capital spending.

"Both the earnings as well as the sentiment are kind of

coming back a bit after the really overexaggerated move in the

earlier part of the week," said Fabien Yip, a market analyst at

IG.

"The AI demand story didn't really decelerate, it seems like

it's still sustainable. So the selloff that we saw... is maybe

the market overreacting to some of those concerns around (capex

spending)."

Despite Friday's turnaround, the Kospi was still set to lose

over 25% in July, marking its largest monthly loss since 1997.

The wild swings in the market had prompted South Korean

authorities to rein in the leveraged products that have wreaked

havoc and wiped out the savings of some retail investors.

"(The market sentiment) is fragile around the AI debate,"

said Ji Young Park, senior EM equity portfolio manager at

Amundi.

"The market performance has been narrow in Asia ex-Japan,

mostly related to AI... given the sharp correction we've had

across the markets that have AI exposure, we believe we are

close to the end of this prolonged volatility."

Nasdaq futures were up 0.6% and S&P 500 futures

added 0.3%. In Europe, EUROSTOXX 50 futures

advanced 0.5%, while FTSE futures and DAX futures

rose 0.25% and 0.34%, respectively.

Chinese markets followed suit. China's CSI AI index

rose more than 7%. The Hang Seng Tech index

advanced 0.5%.

TESTING TOKYO'S RESOLVE

The yen was 0.6% weaker at 160.55 per dollar,

reversing some of Thursday's 2.4% surge after Japan intervened

in the foreign exchange market to haul the currency away from

40-year lows.

In a rare move, South Korea's foreign exchange authorities

also conducted dollar-selling intervention on Thursday, while

the Nikkei reported that U.S. authorities also conducted

so-called "rate checks", pointing to a possible coordinated

intervention.

"The brutality of the move - USD/JPY falling from near-164

to sub-160 in a sharp jolt - is as poignant as the timing, just

ahead of today's BOJ meeting," Vishnu Varathan, head of APAC

macro strategy at Mizuho, said of Thursday's sharp rise in the

yen.

"The timing is no coincidence. Clearly the authorities are

pre-emptively warning or insuring against JPY selloff on an

expected BOJ hold."

A trader, who declined to be named because they were not

authorised to speak to the media, said dollar/yen liquidity was

thin on Friday due to nerves over further action from

authorities.

The strength in the yen in turn kept pressure on the dollar,

leaving the euro perched near an over one-month high at

$1.1514, while sterling bought $1.3457, holding to most

of Thursday's 0.7% gain.

MIDDLE EAST UNCERTAINTY LINGERS

Oil prices fell on Friday, with Brent crude futures

were down 1.2% at $88.00 per barrel, while U.S. crude

dropped more than 2% to $81.82 a barrel.

A drone strike on gas vessels in Egypt's Mediterranean port

of Damietta signalled a potential new front in the U.S.-Iran

war, raising the prospect of threats to navigation through the

Suez Canal, one of the last remaining export routes for Saudi

oil.

"The striking feature of the market reaction is that energy

prices did not panic despite the deterioration in the conflict,"

said Rodrigo Catril, senior FX strategist at National Australia

Bank.

Elsewhere, spot gold was down 0.5% at $4,082.88 an

ounce.