By Tom Miles

HONG KONG (Reuters) - Asian shares rallied on Wednesday as investors joined Wall Street's optimism that the worst news from U.S. banks might be over and took heart from a strengthening dollar and falling oil prices.

Asian investors also saw the bright side of Merrill Lynch's MER.N $5.7 billion (2.88 billion pound) write-down and share sale. The news had dented Asian stocks on Tuesday, but U.S. shares rose as some investors took the view that the Merrill news may signal a possible turning point in the credit crisis.

The optimism was reinforced by a surprise gain in U.S. consumer confidence and a rise in the dollar to a one-month high against a basket of currencies on Tuesday.

"Financial shares are moving higher after U.S. banks led a rebound in the U.S. market. On the whole, the market likes the yen trading in the 108s (versus the dollar) and the jump in U.S. stocks," said Junichi Misawa, executive officer at STB Asset Management.

Japan's Nikkei average .N225 was up about 1.2 percent at 4 a.m. British time, boosted by Matsushita Electric Industrial (6752.T: Quote, Profile, Research), which jumped 6.7 percent on a 86 percent quarterly net profit rise, helped by strong sales of flat-screen TVs.

But rival Sony (6758.T: Quote, Profile, Research) slumped 3.3 percent after it unveiled a weak quarterly profit on Tuesday and cut its outlook. It has been hurt by its struggling mobile phone joint venture with Sweden's Ericsson (ERICb.ST: Quote, Profile, Research).

"Japanese corporate earnings will drive the market from now on. Earnings drew a clear contrast between Sony, whose results were a bit of a negative surprise, and Matsushita, whose results were a positive surprise," said Misawa.

Data showed Japanese industrial output fell 2.0 percent in June after a 2.8 percent rise in May as overseas demand for cars and computer chips slowed.