Associated Press
South Korean currency traders work in front of a screen showing the Korea Composite Stock Price Index (KOSPI), left, and foreign currency rate at the Korea Exchange Bank headquarters in Seoul, South Korea, Monday, Dec. 20, 2010. Asian stock markets fell Monday amid investor unease as South Korea went ahead with a military drill on a frontline island despite threats of North Korean retaliation.

LONDON — European shares rose Monday as investors cheered the extension of U.S. tax cuts but Asia investors were worried by South Korea's military drill on a frontline island despite threats of North Korean retaliation.

After Asian indexes closed mostly lower, Britain's FTSE 100 was up 0.5 percent at 5,903.15 while Germany's DAX was 1.0 percent higher at 7,053.84. France's CAC-40 advanced 1.0 percent to 3,904.72.

Wall Street rose slightly on the open — the Dow industrials average was up 0.1 percent to 11,507 and the S&P was 0.3 percent higher at 1,247.

Sentiment was buoyed after President Barack Obama on Friday evening signed into law an $850 billion package that extends Bush-era tax cuts for another two years and expiring unemployment benefits through next year.

Proponents of the measures hope they will boost consumer spending — which makes up for the bulk of U.S. economic activity and a fifth of the world economy. Critics, however, say this will not be enough to justify the cost to public finances.

In Europe, the U.S. tax deal was enough to bring traders' attention away from the eurozone debt crisis. The euro remains weakened and ratings agencies have warned Ireland, Spain and Greece of possible downgrades. Moody's downgraded Irish banks a day after cutting the Irish government's rating.

Figures on the European Central Bank's bond-buying will be published later Monday and will be scrutinized for any signs the central bank has been stepping up its support for debt markets.

The biggest threat to investor sentiment on Monday, however, were the inter-Korean tensions, a longtime geopolitical risk in Asia.

They spiked to dangerous levels since Pyongyang launched a deadly artillery barrage on the South Korean island of Yeonpyeong last month in response to military exercises by Seoul.

North Korea had warned the South of "catastrophe" if it went ahead with a new round of live-fire drills delayed by bad weather. Seoul finally launched the exercise, which lasted about 90 minutes, on the island Monday afternoon and there were no immediate signs of any North Korean response.

South Korea's benchmark Kospi index closed 0.3 percent lower to 2,020.28, nearly erasing earlier declines of as much as 1.5 percent. South Korea's currency, the won, edged marginally higher to 1,150.20 to the dollar. The country's financial markets often show resilience during times of tension with North Korea.

Still, the uncertainty was seen as a factor in dragging Asian markets lower.

"It's something that can go very bad," Jackson Wong, vice president at Tanrich Securities in Hong Kong, said of the Korean tensions.

South Korean technology stocks were mixed. LG Display Co., which has an LCD factory near the heavily fortified land border with North Korea, fell 2.6 percent.

The military tensions hurt sentiment across the region.

Japan's Nikkei 225 index fell 0.9 percent to 10,216.41 and Hong Kong's Hang Seng index shed 0.3 percent to 22,639.08.

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The Shanghai Composite index slid 1.4 percent to 2,853.92, while Australia's S&P/ASX 200 shed 0.5 percent.

Benchmarks in Thailand, Singapore, Taiwan and New Zealand also retreated, while those in India and the Philippines rose.

In currencies, the dollar fell to 83.69 yen from 83.96 yen late Friday. The euro fell to $1.3165 from $1.3186.

Benchmark crude for January delivery was up 49 cents at $88.51 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 34 cents to settle at $88.02 on Friday.

Kelly Olsen in Seoul and Ji Chen in Shanghai contributed to this report.