* Australia stocks bounce off lows but upside limited
* Wary over financial sector's exposure to slowing mining industry
* NZ shares extend rally, low interest rates help
By Colin Packham and Charlotte Greenfield
SYDNEY/WELLINGTON, March 30 (Reuters) - Australian shares edged away from near one-month lows on stronger commodity prices, but Wednesday's session was characterised by caution over the financial sector's exposure to a slowdown in the mining industry.
That circumspection checked enthusiasm seen in global riskier assets after Federal Reserve chief Janet Yellen signaled a slower pace of rate increases this year.
The S&P/ASX 200 index .AXJO rose 0.4 percent, or 20.84 points, to 5025.4 by 0212 GMT. The benchmark fell 1.6 percent on Tuesday when the index hit 4,998.5, the lowest since March 2.
The market rose as much as 1 percent when trading began, but underlying concerns about the exposure of country's largest financial stocks to a slowing mining sector eroded much of the gains.
"Even though the weaker U.S. dollar has helped material stocks in particular, it hasn't helped the banks with concerns continuing about their exposure to the materials sector," said Angus Nicholson, market analyst, IG Markets.
The U.S. dollar fell after Yellen set a cautious outlook for policy tightening, leaving markets wondering if there will be even one hike in U.S. interest rates this year. which pared much of the morning gains, still managed the feat of being the strongest performing sector with a gain of 0.18 percent, probably reflecting the sharp selloff in recent sessions.
Shares in Commonwealth Bank of Australia CBA.AX . Westpac Banking Corp WBC.AX and National Australia Bank NAB.AX each rose more than 0.5 percent.
In contrast, Australia and New Zealand Banking Group Ltd ANZ.AX , which last week warned about increasing bad debt charges due to a downturn in the resources sector, fell 0.5 percent.
Australia's materials sector also edged higher. Shares in Fortescue Metals Group Ltd FMG.AX saw some of the strongest gains, rallying more than 2 percent after UBS said the iron ore miner has the capacity to reduce gearing to below 40 percent by mid-2019.
Shares in BHP Billiton (LON:BLT) Ltd BHP.AX rose 0.3 percent, while Rio Tinto (LON:RIO) Ltd RIO.AX rose nearly 0.5 percent.
New Zealand's benchmark S&P/NZX 50 index .NZ50 edged up 0.16 percent or 10.90 points to 6,687.23, continuing its steady rise as record low interest rates have lured investors away from bank deposits and toward higher yielding stocks.
The biggest gainers were consumer retailer the Warehouse Group WHS.NZ , which rose 1.1 percent and accounting software company Xero XRO.NZ , which was up 1 percent.
Z Energy ZEL.NZ gained 0.3 percent as the fuel retailer extended its gains made on Tuesday on news it had settled its fuel dispute with New Zealand Customs. biggest losers were Vector VCT.NZ , down 2.1 percent and Meridian Energy MEL.NZ , off 1.9 percent.