The Nikkei, which on Thursday tumbled 7.3 percent, was up 2.65 percent, or 383.92 points, at 14,867.90 by the break after jumping more than three percent in the first few minutes of trading.

The broader Topix index of all first-section shares was up 2.52 percent, or 29.90 points, at 1,218.24.

The morning rebound came after Wall Street slipped marginally overnight and the dollar held steady against the yen.

"The signs indicate that yesterday's sell-off is not symptomatic of more endemic weakness," said SMBC Nikko Securities general manager of equities Hiroichi Nishi.

Kenji Shiomura, strategist at Daiwa Securities, said Thursday's plunge was a temporary correction to the recent fast-paced advances with investors taking a cue from weak Chinese data and other market-negative news.

"There has not been any grave event that could change corporate earnings outlooks and what happened yesterday should be a correction to the recent excessive rises," he said.

"Looking ahead, the market will likely be on an uptrend on expectations of a recovery in company earnings."

Japan Inc. wrapped up its latest corporate earnings season on a high note, with a weaker yen helping inflate earnings at some of the nation's top exporters, making them more competitive overseas and increasing the value of repatriated foreign income.

The Nikkei has gained nearly 60 percent over the past six months under the pro-spending, pro-growth policies led by Prime Minister Shinzo Abe who took office in December after landslide elections.

Aggressive monetary easing by the Bank of Japan has helped pushed down the yen, which in turns tends to lift shares of Japanese firms.

Despite the upbeat sentiment among some analysts, others warned that Tokyo's meteoric rise may stall going forward with a correction overdue.

The "slump is not necessarily the end of the bull market in Japanese equities, but the next few months will be much harder going", London-based Capital Economics said in a note.

"We continue to expect the Nikkei to fall further, probably below 13,000, before the end of 2013."

In New York the Dow Jones Industrial Average slipped 0.08 percent to 15,294.50 Thursday, little affected by a sharp sell-off in Asian and European markets led by the plunge in Tokyo.

"The steadiness in the US market was helped by better-than-expected data out of the US, including better than expected US new home sales... higher US house prices and a welcome pullback in jobless claims after last week's unexpected rise," National Australia Bank said.

In currency markets the dollar was trading at 102.28 yen in Asia morning trade, up from 101.82 yen in New York late Thursday.

The euro fetched $1.2915 and 132.11 yen against $1.2935 and 131.72 yen in US trade.

Sharp, which lost 13.14 percent the previous day, jumped 9.96 percent to 574 yen by the break, while Panasonic gained 3.38 percent to 916 yen.

Sony rose 1.62 percent to 2,194 yen as the electronics giant announced plans to raise 150 billion yen ($1.5 billion) by issuing five-year bonds.

Nissan rose 1.88 percent to 1,190 yen although the carmaker on Thursday announced plans to recall 841,000 compact cars worldwide due to a steering wheel problem.

The benchmark Hang Seng Index fell 45.47 points to 22,624.21 on turnover of HK$26.50 billion ($3.41 billion).

The benchmark Shanghai Composite Index rose 14.11 points to 2,289.78.

US shares ended mildly lower after a volatile session, bucking the trend of overseas indexes, which fell sharply as weak data in Europe and China underlined the uncertain growth outlook.

While US stocks tracked that weakness at multiple times throughout the session, analysts said Wednesday's steep decline, triggered by questions over Fed policy, may have been overdone, allowing investors to seek bargains and helping equities modestly rebound.

Fed chief Ben Bernanke on Wednesday broached the possibility of reducing stimulus if US economic conditions improve. While Fed officials stressed that no action was likely for months, investors are anxious about the timing of any change in monetary policy, which is widely credited with fueling massive gains in stocks and high-yield corporate bonds this year.

Bernanke's comment "was very benign and wasn't anything unexpected; the sell-off came because we were looking for an excuse to correct after the big moves this year," said Eric Green, senior portfolio manager at Penn Capital Management in Philadelphia.

The Dow Jones industrial average ended down 12.67 points, or 0.08 percent, at 15,294.50. The Standard & Poor's 500 Index was down 4.82 points, or 0.29 percent, at 1,650.53. The Nasdaq Composite Index was down 3.88 points, or 0.11 percent, at 3,459.42.

Thursday's measured US rebound continued a recent trend of investors using any equity market decline as a buying opportunity. A rally in shares of Hewlett-Packard Co., which jumped 17 percent to $24.86 a day after raising its profit outlook, helped limit losses and keep the Dow in mildly positive territory.

Still, overseas markets were sharply lower, driving investors to safe-haven currencies. At the session peak, the yen rose more than 2 percent against the dollar and the euro, which both lost 1 percent against the Swiss franc , also seen as a safe haven.

Chinese factory activity shrank for the first time in seven months, adding to concerns that the world's second-biggest economy had stalled. European factory sentiment dropped, suggesting that the euro zone's economy was likely to contract again in the second quarter.

Japanese shares were hit hardest in overnight action, with the Nikkei losing 7.3 percent, its biggest one-day fall in two years. European shares ended 2.1 percent lower and MSCI's world equity index lost 1.3 percent.

"Even though we were overdue for a correction, the Chinese data certainly didn't help things. If it proves to be part of a trend, that's very concerning for the global economy," said Green, who helps oversee $7 billion in funds.

US light crude oil, which is closely tied to the pace of economic growth, rose 0.1 percent after previously falling more than 1 percent. The US dollar index fell 0.78 percent.

The Euro STOXX 50 Volatility Index, Europe's widely used measure of investor risk aversion, surged 13 percent to a three-week high. The CBOE Volatility Index rose 2.1 percent.

Concern the Fed will wind down its stimulus initially took its toll on bonds, but investors' sales of equities caused money to flow into safer government debt, leaving yields on US Treasuries and German Bunds down from their highs. The benchmark 10-year US Treasury note was up 6/32, the yield at 2.0157 percent.

Investors expect the bond market will adjust to changing Fed policy, and that suggests higher yields in the coming months.

Demand for riskier euro zone debt softened, although bonds remained underpinned by expectations the European Central Bank may yet ease monetary policy further. That would contrast with any tightening by the Fed but follow a massive stimulus package launched by the Bank of Japan.

Weakness in Toronto-Dominion Bank further weighed on the market after the country's No. 2 lender reported earnings slightly below expectations.

Investors were nervous after Fed Chairman Ben Bernanke told Congress on Wednesday that a decision to scale back massive bond buying each month could come at one of the US central bank's "next few meetings" if the economy looked set to maintain momentum.

The benchmark Canadian index, which tracked weak global markets, eased from gains made in the previous four sessions.

"It's the fallout of Ben Bernanke's testimony," said Gavin Graham, chief strategy officer at Integris Pension Management. "That's the first concrete suggestion that maybe they'll reduce the bond buying program."

The Toronto Stock Exchange's S&P/TSX composite index closed down 94.41 points, or 0.74 percent, at 12,658.09.

"We all know that at some point, the Fed's going to have to do something to withdraw some of that liquidity they put in the marketplace," said Irwin Michael, portfolio manager at ABC Funds.

"It's a game of chicken," he added. "People are waiting to find out when, and they will probably react in the short run."

Other negative market factors included surveys showing China's factory activity shrank for the first time in seven months in May and that the euro zone economy was likely to contract again in the second quarter.

All of the 10 main sectors in the index were in the red.

Shares of energy producers fell 0.6 percent. Suncor Energy Inc, Canada's largest energy company, was down 0.6 percent at C$32.32.

Financials, the index's most heavily weighted sector, lost 0.4 percent. TD Bank gave back 0.5 percent to C$83.65.

The materials sector, which includes mining stocks, was down 0.9 percent despite a rise in shares of gold companies.

Miner Teck Resources Ltd fell 4.3 percent to C$28.20, and fertilizer giant Potash Corp slipped 2.1 percent to C$43.01.

Among other active stocks, Nordion Inc jumped 11.6 percent to C$8.16 after the major provider of isotopes used in medical imaging said it will sell its targeted therapies division.

Trading was choppy as many traders were adjusting their positions ahead of the long holiday weekend. Markets will be closed on Monday for Memorial Day.

Hewlett-Packard shares jumped more than 17 percent to a fresh 52-week high a day after the world's largest PC maker raised its outlook. The stock's surge supported the Dow and helped limit the S&P 500's decline.

For most of the morning, the market had been pulled lower by worries that the Fed's stimulus may be scaled back sooner than hoped and after weak factory data in China.

"People are using any kind of weakness as a buying opportunity and that's why you see a fairly quick snapback throughout the day (after) what was some broad selling in the morning," said Alan Lancz, president of Alan B. Lancz & Associates Inc, based in Toledo, Ohio.

"Investors are limited with their alternatives just because it's such a low interest-rate environment.

The Dow Jones industrial average fell 12.67 points, or 0.08 percent, to 15,294.50 at the close. The Standard & Poor's 500 Index slipped 4.84 points, or 0.29 percent, to finish at 1,650.51. The Nasdaq Composite Index dropped 3.88 points, or 0.11 percent, to close at 3,459.42.

Hewlett-Packard Co shares surged 17.1 percent to end at $24.86, a day after the computer maker raised its 2013 earnings outlook following quarterly results that beat low expectations. The stock touched a new 52-week high of $24.95 earlier in the session.

Signs of improvement in the housing and labor markets also helped indexes come off their lows by midday.

Earlier, the S&P 500 traded below its 14-day moving average before bouncing back above it. Holding above that level would be positive sign to investors as it would suggest the uptrend is still intact.

Ralph Lauren Corp shares lost 2.3 percent to $183.69 after the fashion company reported sales below its own projections.

On Wednesday, the S&P 500 posted its biggest decline in three weeks after minutes from the US Federal Reserve's latest meeting showed some officials were open to tapering large-scale asset purchases as early as at the June meeting.

The minutes came in the wake of comments from Fed Chairman Ben Bernanke, who said the Fed could scale back the pace of its bond purchases at one of the "next few meetings" if the economic recovery looked set to maintain forward momentum.

When the Fed may decide to slow or halt its program of buying $85 billion of bonds a month has become one of the biggest questions on investors' minds. The central bank's stimulus efforts have helped propel markets to all-time highs this year and investors are trying to gauge whether a change in the program could spell the end of the rally.

"It isn't their absolute level of involvement in buying bonds that's going to determine the stock market. It's going to be the perception of whether they're there or not," said Uri Landesman, president of Platinum Partners in New York.

"Once they really meaningfully step away, investors are going to realize they're just not going to be there and that the market's going to have to stand on its own feet."

On the economic front, the number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting strength in the labor market. New home sales rose in a sign that the sector's rebound is still intact. But separate data showed manufacturing slowed for a second straight month in May.

Volume was roughly 7 billion shares on the New York Stock Exchange, the Nasdaq and the NYSE MKT, exceeding the year-to-date average daily closing volume of about 6.4 billion.

On the NYSE, decliners beat advancers by a ratio of about 17 to 12. On the Nasdaq, the opposite trend prevailed, with about 13 stocks rising for every 12 that fell.

London's FTSE 100 index of leading shares fell 2.10 percent to 6,696.79 points, while in Frankfurt the DAX 30 index also dropped 2.10 percent to 8,351.98 points.

In Paris the CAC 40 shed 2.07 percent to 3,967.15 points, while Milan plunged 3.06 percent and Madrid slid 1.40 percent.

European equities pulled back sharply after recent record and multi-year highs for some indices on the back of improving world economic data despite ongoing eurozone strains and some still weak numbers out of the United States and China.

Tokyo's main index ended down more than seven percent on Thursday as investors took profits also after strong recent gains.

Other Asian indices slumped, with markets taking their lead from Wall Street, where stocks fell overnight after Federal Reserve chief Ben Bernanke had told Congress on Wednesday that the US central bank could scale back stimulus measures soon if economic conditions improved.

While US stocks also opened sharply lower Thursday, they had recovered much of the ground by midday, with the Dow showing a loss of just 0.03 percent to 15,303.33.

The S&P 500 was off 0.34 percent to 1,649.75 points, while the Nasdaq slipped 0.19 percent to 3,456.62.

"Fed chairman Ben Bernanke's much anticipated testimony...certainly initiated the volatility" on stock markets, said Spreadex trader Max Cohen.

He added that while share prices initially rose after Bernanke spoke of a need to be cautious when winding down stimulus, sentiment changed when the Fed chief suggested that the US central bank's massive bond purchases could be scaled back in the next few policy meetings.

"To heap further bad news on the markets, China's manufacturing output unexpectedly contracted resulting in the yen strengthening," Cohen said.

The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies.

Meanwhile the slump in global share prices came also after HSBC bank said that manufacturing activity in China contracted in May for the first time for seven months in another sign of the weakness of the recovery.

-- Reaction to Bernanke's testimony --

In foreign exchange activity, the European single currency climbed to $1.2915 from $1.2855 on Wednesday. The dollar slid to 101.66 yen from 103.10 yen.

The euro was higher despite news of a downturn in eurozone private sector business activity.

The Markit Eurozone Composite Purchasing Managers Index registered 47.7 points in May, a three-month high and well up on April's 46.9 points albeit still below the threshold of 50 points indicating growth or recession.

On the London Bullion Market, the price of gold dropped to $1,380.50 an ounce from $1,408.50 late in New York on Wednesday.

"The main focus is all about the reaction in the financial markets to Ben Bernanke's testimony," said Neil MacKinnon at VTB Capital financial group.

"In my view it says more about an equity market that is 'overheated' and due a correction rather than any suggestion from the Fed that monetary stimulus is about to be withdrawn," he wrote in a note to clients.

"To believe that the Fed is imminently about to tighten policy would be a mistaken assessment. Why do that when the US economy is in a soft patch and when CPI inflation is falling below target?" MacKinnon added.

Julian Jessop at Capital Economics said the sell off "backs our view that the rally had become overly dependent on expectations of further support from monetary policy."

David White at Spreadex said "the heavy selling seen last night and this morning had participants running for the exits, banking solid returns from the past six months as they go."

At the closing bell, the Dow Jones Industrial Average was down 11.13 (0.07 percent) to 15,296.04. The Dow rallied after opening sharply lower and hitting an inter-session low of 15,180.

The broad-based S&P 500 followed a similar trajectory, losing 1.1 percent in opening trade but closing at 1,650.69, off 4.66 (0.28 percent).

The tech-rich Nasdaq Composite Index ended 3.88 points lower (0.11 percent) at 3,459.42.

The losses were far more modest than in France, Britain, Germany and Hong Kong, each of which fell more than 2 percent, and the Nikkei's huge fall, sparked by data showing manufacturing activity in China contracted in May for the first time in seven months, another sign of the weakness of China's recovery.

Hugh Johnson of Hugh Johnson Advisors said investors concluded the US Federal Reserve will not cut back its stimulus measures "suddenly and all-together," after some concern about the Fed's direction following chairman Ben Bernanke's testimony Wednesday.

In addition, the recovery of US markets fits into a pattern of recent months, said Dan Greenhaus of BTIG.

"What you've seen during this entire six- or seven-month rally is the inability of a sell-off to go deeper than 2 to maybe 3 percent."

The Toronto Stock Exchange's S&P/TSX composite index was down 113.30 points, or 0.89 percent, at 12,639.20 shortly after the open.

The IPC stock index shed as much as 1.62 percent to 39,468 points, hitting near a key support that held up last September during a drop.

The IPC has shed more than 5 percent in the last four sessions, on track to post its worst four-day slump since September 2011.