Soaring gold prices helped buttress the local market, supporting shares in gold miners, while phone company Telstra was buoyed by stronger-than-expected earnings.
Even weaker-than-expected jobs numbers at home failed to prevent bargain-hunters stepping into the market.
"Investors are taking the view that these problems that we get hit with first thing in the morning are northern hemisphere focused problems and may not necessarily flow through down here," said Richard Morrow, director at EL&C Baillieu Stockbroking.
Defensive stocks such as gaming groups and health care firms also helped cap losses. The Australian market rallied from a low of 4,058.4, down 2 percent, to briefly turn positive by midday.
At 0200 GMT, the benchmark S&P/ASX 200 index was off only 2 points at 4,139.3 points, though it remains down by more than 16 percent from its April highs.
With gold hitting new records above $1,800 an ounce, gold miners posted the strongest gains. Newcrest Mining rose 4 percent and smaller miners like St Barbara Mines jumped 5-6 percent.
Brokers said sophisticated investors were dipping their toe in to pick up bargains as they see Australia is not heavily exposed to the problems on either side of the Atlantic, while its biggest trading partner, China, is still booming.
"There's a lot to look forward to. We really are very, very fortunate that we're in the position we are in and have our relationship with Asia," said David Spry, research manager at broker FW Holst.
While European and US banks slumped as much as 10-15 percent overnight, Australia's big banks held up relatively well, all down less than 1.5 percent, following results this week from the top two lenders, National Australia Bank and Commonwealth Bank of Australia.
"Commonwealth Bank results yesterday gave investors the confidence that the Australian banking system is in good shape, much better than their global peers," said Simon Bonouvrie, portfolio manager at Platypus Asset Management.
Investment bank Macquarie Group was down 4.7 percent at A$22.32 but held above a 29-month low hit on Tuesday.
The big miners dropped between 2.4 and 2.8 percent after copper prices fell to 8-month lows.
New Zealand's benchmark NZX 50 index picked up 7 points to 3,190.8 after hitting a low of 3125, led by gains in Telecom Corp of New Zealand.
STOCKS ON THE MOVE
Alumina Ltd plunged 8.2 percent to A$1.745 but held above a one-year low hit on Tuesday, after its first-half underlying earnings came in below the low end of broker forecasts.
Up-market department store chain David Jones slumped 5.4 percent after reporting a 10 percent fall in fourth-quarter sales and a weak start to the new year.
Telstra Corp jumped 3.5 percent to A$2.93 after reporting a narrower-than-expected fall in full-year net profit and flagging a rise in earnings in the year ahead.
Copyright Reuters, 2011