* Australian shares add 0.8 pct, Japan's Nikkei up 0.4 pct
* Investors cheer U.S. March manufacturing activity improvement
* U.S. retail sales post unexpected drop in Feb.
* Sterling takes knock on Brexit uncertainty
* Asian stock markets: tmsnrt.rs/2zpUAr4
By Daniel Leussink
TOKYO, April 2 (Reuters) - Asia shares extended their rally on Tuesday as factory activity surveys from China and the United States boosted investor confidence, triggering the largest one-day sell-off in the U.S. Treasury market in nearly three months.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent to a seven-month high after rallying more than one percent in the previous session.
Australian shares gained 0.8 percent while Japan's Nikkei advanced 0.4 percent, extending its gains for a third session.
Wall Street shares jumped on Monday, with the S&P 500 and Dow Jones Industrial Average both rising more than one percent, with the Dow lifted by sharp gains in Caterpillar Inc and Boeing Co.
Investors cheered U.S. data overnight showing improvements in manufacturing activity last month and construction spending for February, which overshadowed an unexpected drop in retail sales.
The upbeat readings added to earlier data showing China's manufacturing sector surprisingly returned to growth for the first time in four months in March in a sign government stimulus steps were starting to be felt.
The rare bright news for the global economy comes in the wake of persistent worries over cooling demand across the world, with the Sino-U.S. tariff dispute, slowing trade and corporate profits prompting investors to dump risk assets over the past several months.
"The market is reacting to the improvement of the sentiment in China. Many investors are buying in anticipation of a rise in shares," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
"But thinking about how things really are, at the end of the week (U.S.) jobless claims will be released and it's true that individual consumption, which accounts for 70 percent of gross domestic product, hasn't been good. I think that has to be taken into account," Fujito said.
The encouraging data on manufacturing activity in the world's two biggest economies led to a wobbly start to the U.S. bond market, with the U.S. benchmark 10-year Treasury note yields booking their largest single-day jump since Jan. 4.
The U.S. 10-year Treasury yield overnight jumped to a more than one-week high of 2.502 percent, moving off a 15-month low of 2.340 percent touched on March 25.
The rise pushed the yield curve between three-month U.S. Treasury bills and 10-year notes further into positive territory, after being inverted for a week until last Friday.
In the currency market, sterling took a knock after British lawmakers came no nearer to resolving the chaos surrounding the country's departure from the European Union.
The British parliament failed on Monday to find a majority of its own for any alternative to Prime Minister Theresa May's divorce deal.
"The only sensible thing for Theresa May to do is to step aside and let someone else take control of Brexit," said Naeem Aslam, chief market analyst at Think Markets in London.
"Failure to chose any of the options on Brexit took the floor under sterling and the currency stumbled like a rock," Aslam said in a note to clients.
Sterling was last down 0.25 percent at $1.3073, not far from last month's nadir of $1.2945.
The euro struggled near a three-week low of $1.1198 brushed early on Tuesday, and was last trading down a tenth of a percent at $1.1204.
Against the Japanese yen, the dollar was down a tad at 111.33 yen, but 1.5 percent above its 1-1/2-month low of 109.70 touched on March 25.
Oil prices hovered near their four-month peaks, after two key benchmarks booked their largest first-quarter gains in nearly a decade on positive signs for the global economy and tighter supplies.
U.S. crude futures traded at $61.92 per barrel, up half a percent on the day. Brent futures were up 0.4 percent at $69.28 a barrel.
Gold was 0.15 percent higher at $1,289.10.
Editing by Shri Navaratnam