* MSCI Asia-Pacific index down 0.5 pct, Nikkei adds 0.5 pct
* Prospect of supply increase weighs on crude oil
* Currencies await Fed Powell's first congressional testimony
By Shinichi Saoshiro
TOKYO, July 17 (Reuters) - Asian stocks sagged on Tuesday, weighed by a sharp decline in crude oil prices as Libyan ports reopened, while the dollar steadied ahead of Federal Reserve Chairman Jerome Powell's first congressional testimony.
Overnight on Wall Street, the Dow edged up 0.2 percent but the S&P 500 lost 0.1 percent as energy shares were hit by the drop in oil that offset a jump in financials.
MSCI's broadest index of Asia-Pacific shares outside Japan was 0.5 pct lower following two sessions of gains.
Chinese shares extended losses after dropping the previous day on soft economic data. The Shanghai Composite Index fell 0.7 percent and Hong Kong's Hang Seng dropped 0.9 percent.
Australian stocks fell 0.4 percent and South Korea's KOSPI lost 0.2 percent. Japan's Nikkei bucked the trend and rose 0.5 percent.
"Crude has been rising steadily so some kind of adjustment was due. From this context the impact on the broader economy, inflation and therefore the stock markets should be limited," said Soichiro Monji, senior economist at Daiwa SB Investments in Tokyo.
Crude prices slumped more than 4 percent on Monday, with Brent futures reaching a three-month low of $71.52 a barrel, as Libyan ports reopened and traders eyed potential supply increases by Russia and other producers.
Concerns over China's second-quarter economic growth also weighed on oil prices. The country's economy expanded at a slower pace as Beijing's efforts to contain debt hurt activity, while June factory output growth weakened to a two-year low.
But Brent has gained about 7.5 percent in 2018, during which it poked above $80.00 a barrel in May to a 3-1/2-year high.
"The stock markets have been quite steady recently, and this shows that investors are starting to look beyond the U.S. midterm elections, which by then President (Donald) Trump's posturing is expected to have peaked out," Monji at Daiwa SB Investments said.
In currencies, the dollar index inched up 0.1 percent against a basket of six major currencies to 94.587.
The index shed 0.25 percent on Monday, nudging away from a two-week high of 95.241 scaled on Friday ahead of Fed Chairman Powell's first congressional testimony.
Powell will testify on the economy and monetary policy before the U.S. Senate Banking Committee on Tuesday, followed by testimony on Wednesday to the House of Representatives Financial Services Committee.
Powell is likely to reiterate the Fed's stance towards gradual monetary policy tightening, and market focus will be on his views on recent trade tensions.
"In short, we expect the chairman to signal optimism on growth and inflation, consistent with continued 'gradual' tightening," wrote Jim O'Sullivan, chief economist at High Frequency Economics.
"He will undoubtedly acknowledge some downside risks associated with the administration's trade warmongering, but he will likely try to avoid sounding critical of the administration."
The euro dipped 0.05 percent to $1.1703 after adding 0.25 percent overnight.
The dollar pared the previous day's losses and gained 0.2 percent to 112.48 yen, crawling back towards a six-month peak of 112.80 touched last week.
The Australian dollar dipped 0.2 percent to $0.7405 .
Treasury yields remained buoyant after rising overnight when strong U.S. domestic retail sales supported the view of solid economic growth in the second quarter.
The two-year Treasury yield was at 2.598 percent and in reach of a decade-high of 2.611 percent scaled on Monday.
Brent crude futures were 0.65 percent higher at $72.32 a barrel after the previous day's steep fall. U.S. crude bounced 0.05 percent to $68.10 a barrel after shedding 4.1 percent on Monday. (Editing by Sam Holmes and Jacqueline Wong)