HONG KONG, May 14 (Reuters) - Greece's sovereign debt crisis has plagued Europe and shaken market confidence, but it has also strengthened the case for Asia as a long-term investment destination.

That might be difficult to see now following a heavy sell-off in Asian stocks and bonds in the last two weeks and as investors load up on safe-haven assets like gold on concern that Europe's currency union could be at risk of crumbling.

However, Asia's stable growth prospects, relatively sound government finances and healthy corporate balance sheets mean the region will likely see a shallow correction and emerge in the medium term as a more attractive place in which to invest compared with western developed economies.

''Until a few years ago, Asia was considered a risky place, where you look for yield and when things are good, you look outside into emerging markets. That view has been changing over the last crisis,'' Rajeev De Mello, head of Asian investment for Western Asset, which has some $482 billion under management.

''Asia is a much sounder place than other parts of the world,'' he said in a Reuters Insider interview.

De Mello believes the $1 trillion emergency plan to stabilize the euro zone and the European Central Bank's government bond purchases, similar to the effective quantitative easing by US and British authorities, will result in more money finding its way to Asia for higher returns.

He is looking to add to his overweight position in Indonesian local sovereign bonds after yields shot up to one-month highs last week and has a positive view on South Korean government debt on expectations the Bank of Korea will not raise interest rates very soon.

Underlying a bullish case for Asia are improving economic fundamentals that will mean less government borrowing and more stability in the face of crisis.

Between 2008 and 2009, Asian countries significantly improved in a ranking of economic strength by Thomson Reuters Datastream based on real gross domestic product growth, unemployment, terms of trade, current account balances and foreign direct investment.

In 2008 when the financial crisis truly went global, three of the top 10 countries were Asian. A year later, not only were five of the top 10 Asian, but China, India and Malaysia took the top three spots.

The United States, Germany, France, Italy and Britain were all in the bottom third of the 32 countries in the study.

Brazil, China, and India are forecast slip down the rankings in five years while Southeast Asian economies move up, based on five-year projections from the Economist Intelligence Unit.

Russia, Malaysia, Indonesia and Thailand and Egypt will be the top five in 2014.

To be sure, some investors are wisely taking defensive positions based on the near-term risk of external shocks hitting the region and hurting cyclical sectors.

Louisa Lo, head of Asia ex-Japan equities at Schroders in Hong Kong, said she has been taking profits on airline stocks and other big gainers. She has moved to overweight telecommunication, banking and resources stocks based on valuations.

''We are looking for balance sheet strength,'' Lo said.

Seton Lor, chief investment officer of BOCI-Prudential Asset Management in Hong Kong, is actually still bullish on cyclical stocks and does not expect Europe to be pulled down into another recession after the massive EU/IMF aid package.

However, he is concerned about what steps China might take to stop inflation from accelerating further after consumer prices rose at the fastest pace in 18 months in April.

''Within Asia, the Chinese policy risk is an equal, if not a bigger risk than any crisis in Europe. One needs to watch every move that China makes,'' said Seton Lor, chief investment officer of BOCI-Prudential Asset Management in Hong Kong.

There is no indication though that stability for foreign investors means they are necessarily looking to take money out of the region.

Indeed, the four-week moving average of mutual fund net flows into Asia ex-Japan equities was $1.4 billion, EPFR Global data showed. That was the best showing among the emerging market regions, with Latin America posting a net outflow of $1 billion and  Europe, Middle East & Africa seeing inflows of $1.2 billion.

Among advanced economies, Japan had inflows of $860 million, the United States was barely positive and developed Europe had outflows of $5.7 billion.

Some Asian countries though have shown remarkable stability following the last three major global financial crises.

China, Malaysia, Thailand and Japan have exhibited the least variation of their economic strength rankings in Datastream, following the Asian financial crisis, dotcom bust and subprime credit crisis.

Russia, Saudi Arabia, Brazil and Peru reflected the biggest variation following the crises.

Stability has been certainly one factor in Japan's corner, given the high concentration of industry leaders in the country's stock market. However, fund managers there are also finding reasons to be more optimistic about domestic earnings prospects.

Koichi Ogawa, who manages a portfolio of Japanese equities for Daiwa SB Investments in Tokyo, counts Greece's debt crisis, China's monetary tightening and bank regulation as his biggest uncertainties. But he thinks it's too early to slash risk from his portfolio.

''This is not the right timing to rebalance portfolios by shifting into defensive shares. It's too early to become overly pessimistic as we are seeing healthy corporate earnings, which is expected to continue through next year,'' Ogawa said.