Tokyo stocks closed a modest 0.38 per cent higher on optimism over Japan's ailing bank sector, but shares in Hong Kong were well down, though off early lows, shaken by the speculation that the Chinese yuan may follow the Brazilian real down the devaluation route.

Elsewhere in Asia, nervous markets fell sharply -- around six per cent in Manila, four per cent in Singapore, Bangkok and Jakarta, three per cent in Taipei and two per cent in Seoul.

A weekend report in the China Daily Business Weekly said a devaluation or float of the yuan might not be a bad thing. ``As the financial market responded positively after the Braziliangovernment let its currency float against the US dollar, some analysts said the devaluation or floating of the renminbi (yuan) would not definitely be a bad thing,'' it said.

However, Chinese analysts said this did not reflect official policy.``There is little possibility that the yuan will be devalued at present,'' said an economist Huang Jinbao at the Bank of China, the country's main foreign exchange bank.

On the prospects for London stocks, the head of equity trading at one leading investment bank said: ``We will probably drift a bit lower but without any real dramas.''

``Hong Kong and Wall Street were both lower and you have to remember we had a good run up.'' The Dow fell for a third straight session on Friday to close down 143.41 points or about 1.5 per cent at 9,120.67, having been down around 107 points at Friday's London close.

London's blue chip FTSE 100 on Friday tumbled 161.1 points or 2.7 per cent as the economic woes of Latin America and Asia undercut stocks around the world andpressured Wall Street.

By the close, the blue chip index was 287.6 points below its record close set on January 6. Bid and merger activity remains at the top of the market's agenda on Monday with investment company 3I confirming on Sunday it is in talks to buy rival Electra Investment Trust.

Weekend newspaper reports raised bid speculation around companies as diverse as engineer LucasVarity, oil explorer Lasmo and Allied Irish Banks. However, disappointing trading news also continued, with fashion retailer monsoon warning of a six per cent drop in like-for-like sales in the six-months ended November 28.

In Frankfurt the early-starting electronic index of share trading was down 1.7 per cent within half an hour as Friday's weak performance on Wall Street and the tumble in Hong Kong prompted selling. Chemicals and metals group Degussa fell 2.31 per cent after it said its Q4 1998 group pre-tax profit fell nine per cent to 132 million marks ($78 million).

Insurer Munich Re also fell following a stocksplit. In early European trading, the dollar was testing the upside against the yen but was looking shaky against the euro at just below 1.16.