TOKYO: World markets edged higher Monday after the world's biggest economy shrank less than expected in the second quarter and banks rose on improving earnings.

Underpinning the modest gains was a U.S. government report Friday that showed the contraction in the U.S. economy slowed to 1 percent in the second quarter, adding to hopes the recession is nearly over. The data also beat expectations with analysts forecasting a 1.5 percent drop.

Surveys showing that manufacturing in the world's No. 3 economy China is expanding provided more evidence of economic revival and lifted Chinese shares to a 14-month high.

Banks led Asia's rise following better-than-expected earnings from some big lenders and on optimism that financial institutions are bouncing back from the financial crisis. Auto stocks also rose strongly.

Japan's market bucked the regional trend despite the rally in banks and car makers with the benchmark Nikkei 225 stock average down 4.36 points, or less than 0.1 percent, to 10,352.47. Hong Kong's Hang Seng rose 223.93, or 1.1 percent, to 20,807.26.

Elsewhere, South Korea's Kospi gained 0.5 percent, Australia's benchmark advanced 0.5 percent, and China's Shanghai indiex jumped 1.5 percent. Taiwan's market dropped 0.3 percent.

As trading got underway in Europe, Britain's FTSE 100 gained 1.1 percent, Germany's DAX was ahead 0.9 percent and France's CAC 40 added 0.6 percent. Stock futures pointed to modest gains Monday on Wall Street with Dow futures up 65 points, or 0.7 percent, at 9,191.

"Hopes for good earnings has been driving stocks higher," said Motomi Hiratsuka, head of sales trading at BNP Paribas in Tokyo. "It looks like corporate restructuring efforts are paying off. But it remains to be seen whether companies can start expanding profits now."

Fueling the momentum among Japanese banks was Mitsubishi UFJ Financial Group Inc., which shot up 6 percent. Japan's biggest bank reported Friday that its net profit for the April-June quarter surged 48 percent from a year earlier to 75.9 billion yen ($798 million).

Its two main rivals also rose, with Sumitomo Mitsui Financial Group Inc. climbing 3.2 percent and Mizuho Financial Group Inc. up 6.1 percent.

In Hong Kong, investors bought HSBC Holdings Plc on hopes of good news when the banking giant releases earnings after market close. Its share rose 0.7 percent.

"For HSBC, the expectation is that the worst is over," said Francis Lun, general manager at Fullbright Securities in Hong Kong.

Australian financial issues also rose after Goldman Sachs JBWere raised its ratings on several major banks. National Australia Bank Ltd. rose 2.6 percent and Westpac Banking Corp. jumped 1.9 percent.

Among other strong performers, Japan's Nissan Motor Co. rose 5.4 percent after the automaker unveiled its new zero-emission vehicle on Sunday. The "Leaf" hatchback is set to go on sale in Japan, the U.S. and Europe next year. The world's top automaker Toyota, which releases quarterly earnings Tuesday, rose 2.5 percent.

Before the weekend, traders used the brighter news about the U.S. economy to give the Dow Jones industrials its best July in 20 years.

The Dow rose 17.15 points, or 0.2 percent, to 9,171.61 and the Standard & Poor's 500 index gained 0.73, or 0.1 percent, to 987.48.

Oil prices jumped above $70 a barrel in Asia on investor expectations a recovering global economy will boost crude demand. Benchmark crude for September delivery was up $1.20 to $70.65 a barrel by late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. On Friday, the contract rose $2.51 to settle at $69.45.

In currencies, the dollar rose to 95.03 yen from 94.73 yen. The euro slipped to $1.4236 from $1.4270 late Friday.