Asian traders took a breather Wednesday after a recent rally, with Tokyo hit by a strong yen following a shock slump in the US service sector that ended prospects of an interest rate rise this month.

The weak reading out of Washington lent support to high-yielding currencies, with the South Korean won sitting at one-year highs.

The Institute for Supply Management said its US non-manufacturing purchasing managers' index (PMI) dived in August to its lowest level in more than six years. The reading follows a slowdown in jobs creation and factory activity.

Stephen Innes, senior trader at OANDA, said in a note: "The significance of the ISM services print cannot go understated as services account for more than 70 percent of the value of US GDP and will likely create jitters" over third-quarter economic growth.

The prospect of continued ultra-low borrowing costs in the world's top economy was cheered on trading floors, sending the Nasdaq in New York to a record high. The Dow also rallied as investors returned from the Labor Day public holiday.

But broad early gains in Asia petered out and Hong Kong eased 0.2 percent after a four-day rally, while Shanghai ended flat.

Tokyo closed down 0.4 percent as the yen extended gains against the dollar following the US PMI reading. Seoul lost 0.2 percent and Manila was off 1.4 percent.

Sydney edged up 0.2 percent after data showed the Australian economy expanded broadly in line with forecasts during April-June, marking 25 years of unbroken growth.

There were also gains in Singapore, Taipei and Wellington.

- 'Quixotic calls' -

On currency markets the dollar bought 101.56 yen in Tokyo, down from 101.99 yen in New York and well off the 103.61 yen in Asia earlier Tuesday.

After surging last week on speculation of a rate rise this month, the data out of Washington has doused those hopes, analysts said, while a rise this year could now be in question.

"The trifecta of terrible ISM manufacturing and non-manufacturing PMIs and weaker-than-expected non-farm payrolls have left the quixotic calls for a September rate hike dead in the water," Angus Nicholson, a market analyst in Melbourne at IG Ltd., said in an e-mail to clients.

"This is no longer a September story -- for even a December rate hike to occur both ... PMIs are going to have to stage quite a rapid recovery in the next month or so."

The greenback was down 1.4 percent against the won, while Australia's dollar added 0.5 percent and Indonesia's rupiah also climbed 0.5 percent. There were sharp gains in the Malaysian ringgit and the Singapore and New Zealand dollars.

Oil prices enjoyed some support from the weaker dollar, which makes the commodity cheaper for buyers using other currencies. 

West Texas Intermediate was up 0.5 percent at $45.06 and Brent also added 0.5 percent to $47.50, although gains were limited as traders grow sceptical that a meeting between Russia and OPEC this month will result in any deal to limit output.

In early European trade London dipped 0.1 percent while Frankfurt and Paris each rose 0.2 percent.

- Key figures around 0800 GMT -

Tokyo - Nikkei 225: DOWN 0.4 percent at 17,012.44 (close)

Shanghai - Composite: UP 1.22 points at 3,091.93 (close)

Hong Kong - Hang Seng: DOWN 0.2 percent at 23,741.81 (close)

London - FTSE 100: DOWN 0.1 percent at 6,821.24

Pound/dollar: DOWN at $1.3404 from $1.3442 late Tuesday

Euro/dollar: DOWN at $1.1245 from $1.1257

Dollar/yen: DOWN at 101.56 yen from 101.99 yen

New York - DOW: UP 0.3 percent at 18,538.12 (close)

-- Bloomberg News contributed to this report --

Source: AFP