Regional investors had been in a broadly upbeat mood owing to optimism about a China-US trade deal, a dovish outlook on monetary policy from Federal Reserve boss Jerome Powell and easing Brexit worries.

But trading floors were shaken in the afternoon by a statement from the Pakistan Air Force that it had downed the two planes and arrested one of the pilots.

That came as Indian sources said Pakistani fighter jets had violated airspace over Indian Kashmir, but were forced back over the de facto border of the disputed territory.

The developments came a day after warplanes struck a site in Pakistan that New Delhi said was a militant training camp, in retaliation for a February 14 suicide bombing in the disputed region that that killed 40 Indian troops.

Islamabad vowed to retaliate -- fuelling fears of a dangerous confrontation.

"This is unprecedented territory, we haven't had tit-for-tat air strikes between India and Pakistan since the 1971 war," Anit Mukherjee, a former Indian Army major and assistant professor at the S. Rajaratnam School of International Studies in Singapore, told Bloomberg News.

"We don't know what will come from this. But it seems like Pakistan has given a response. And there have been casualties -- captures, deaths."

Markets fell sharply on the reports but managed to claw back some of the losses.

Mumbai was down 0.2 percent while the rupee was down 0.3 percent. The Karachi Stock Exchange sank more than three percent.

Shanghai ended up 0.4 percent, having plunged deep into negative territory, though Hong Kong finished slightly lower.

Tokyo, which closed before news of the jet downings filtered through, was up 0.5 percent, Seoul added 0. 4 percent, Singapore was 0.2 percent lower and Manila shed more than one percent.

Sydney added 0.4 percent, Taipei was flat and Wellington was off 0.5 percent.

In early trade London, Paris and Frankfurt all fell 0.4 percent.

- 'Perilous game' -

Hopes that Britain will not leave the European Union without a divorce pact in place had provided some support to markets and the pound in particular.

Sterling extended gains in Asia a day after surging more than one percent on Prime Minister Theresa May's decision to let MPs vote on a three-month delay to the March 29 Brexit deadline if she is unable to ram through her own deal.

But Jeffrey Halley, senior market analyst at OANDA, pointed out that risks remained.

Investors are "clearly second-guessing both the UK Parliament and the European Union, moving to a Brexit delay followed by a Brexit deal scenario", he said.

"This seems like a perilous game to play, but the momentum of this hope-versus-reality trade could push the pound to much higher levels yet. Be warned, though, that a disappointment in this glossy scenario could see just as ugly a move back down."

Traders will be keeping an eye on the second day of congressional testimony by Fed chief Powell after saying Tuesday that he saw inflation falling short of the bank's two percent target despite rising employment and economic growth.

The comments follow recent Fed announcements that it will be "patient" before lifting or cutting interest rates and did not provide much news to investors.

- Key figures around 0820 GMT -

Tokyo - Nikkei 225: UP 0.5 percent at 21,556.51 (close)

Hong Kong - Hang Seng: DOWN 0.1 percent at 28,757.44 (close)

Shanghai - Composite: UP 0.4 percent at 2,953.82 (close)

London - FTSE 100: DOWN 0.4 percent at 7,124.11

Pound/dollar: UP at $1.3265 from $1.3254 at 2200 GMT

Euro/pound: DOWN at 85.92 pence from 85.93 pence

Euro/dollar: DOWN at $1.1380 from $1.1389

Dollar/yen: DOWN at 110.38 yen from 110.58 yen

Oil - West Texas Intermediate: UP 40 cents at $55.90 per barrel

Oil - Brent Crude: UP 33 cents at $65.54 per barrel

New York - Dow: DOWN 0.1 percent at 26,057.98 (close)

dan/tom

RAKUTEN