Early jitters pulled the Hang Seng Index lower but a surge in Hong Kong futures put it back into positive territory at 13,055.42, up 0.45 per cent, by the mid-day break. "Investors are reacting to news that NATO missiles hit China's embassy in Belgrade and China-related shares including Citic Pacific and Shanghai Industrial tumbled," said Terry Cheung, sales director at Core Pacific-Yamaichi securities.

The markets worst hit by Friday's NATO bombing of the Chinese Embassy in Belgrade, which killed four people, were the Shanghai B Index, down 5.43 per cent at 28.687, and China's Shenzhen Stock Exchange.

In Shenzen the hard currency B Share Index slumped 4.24 per cent to 54.80, while the A Share Index was down 2.66 per cent at 350.58. "Due to the bombing of our embassy, people are worried about Sino-US relationship andtrade," said a broker at Ping An Securities.

The official Xinhua News Agency said today China had suspended military exchanges and a human rights dialogue with the United States in retaliation for the bombing, which NATO said was a "tragic mistake".

Worries over the repercussions of the NATO bombing initially dragged Taiwan stocks lower but bargain hunting after the early falls pulled the TAIEX up 0.2 per cent to 7,484.37 by the close.

Japanese stocks ignored the growing diplomatic troubles between China and the US-led alliance and were flat by afternoon trade as investors unloaded stocks to erase morning gains on the back of the Dow Jones record close of 11,031.59 on Friday. The Nikkei 225 average was at 16,952.62, up 0.04 per cent.

Australian shares were also helped by the Dow as well as a improving bond market which spurred major bank shares. By late afternoon trade, the All Ordinaries Index was up 0.25 per cent at 2995.1.

In South-east Asia, Thailand's benchmark Composite Set Index was up 1.77per cent at 496.97 with investors basking in Wall Street's glow. In Malaysia, the composite index was up 2.11 per cent at 706.26 by midday, while in Manila the 33-share main index closed up 1.51 per cent at 2,564.83.