By Umesh Desai HONG KONG (Reuters) - Asian stocks made a tentative recovery after last week's steep sell-off over the Dubai debt crisis as investors nerves steadied on hopes that the fallout of a potential default will be limited. South Korean stock and currency markets received an additional boost from the government's pledge to stay vigilant while a marginal pullback toward close at Wall Street also helped the recovery. The dollar resumed its weakening trend surrendering its gains against big currencies last week, while the yen retreated from a 14-year high hit last week. "Our feeling has been that this would not lead to contagion and that markets did not react rather nervously at the outset," said who oversees about $11 billion as Asia-Pacific chief executive of RCM, a unit of Allianz Global Investors. In Seoul, Vice Finance Minister Hur Kyung-wook said the government would maintain a daily monitoring system until the Dubai incident was resolved. South Korean markets have been especially sensitive to international financial instability mainly because the highly leveraged local banking system is heavily exposed to the global credit market situation. On Friday U.S. stocks recovered slightly toward close after a slide of more than 2 percent at the open with the flight to less risky assets seemed to be subsiding. "The fall in U.S. stocks wasn't as bad as expected and that has lifted one of the biggest Dubai-related concerns, given that worries about that don't seem to be as bad as they once were," said Masayoshi Okamoto, head of dealing at Jujiya Securities. Financial markets shuddered last week after Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill agreement as a first step toward restructuring billions of dollars of debt. The MSCI index of Asia Pacific stocks traded outside Japan was up 2.3 percent while the Thomson Reuters index of regional shares was 2.2 percent higher. Leading the recovery were bank and construction shares, which were the big losers last week. The MSCI index of banking shares in Asia Pacific outside Japan .MIAPJFN00PUS was up 2.9 percent while the materials index was 2.7 percent. Japan's Nikkei average .N225, which hit a four-month closing low last Friday, was up 2.4 percent as the yen's fall from a 14-year high against the dollar lifted exporters. (Additional reporting by Elaine Lies in TOKYO; Editing by Jan Dahinten)

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