Asian stocks fall on credit and inflation fears

By Kevin Plumberg

HONG KONG (Reuters) - Asian stocks fell on Thursday as worries that persistent global inflation will require higher interest rates, even as banks grapple with a credit crisis, overshadowed a 3-day decline in oil prices.

The U.S. dollar rose to the highest against the euro since May 12 on hopes the U.S. Federal Reserve may be more inclined to raise interest rates to fight inflation than to cut rates to spur growth.

Fed Chairman Ben Bernanke for the second time this week has startled markets with his candor about price pressures in the world's largest economy, saying on Wednesday that rising long-term inflation expectations were a "significant concern."

That set the stage for the European Central Bank, which meets to set policy later on Thursday. The ECB is widely expected to keep its benchmark interest rate unchanged in the face of sluggish growth, though inflation in the euro zone is running near record highs.

By 3 a.m. British time, Japan's Nikkei share average .N225 was down 1.2 percent, pulled lower by industrial robot maker Fanuc (6954.T). However, the index is only about 180 points shy of a 5-month high hit on Monday.

The MSCI index of Asia-Pacific stocks outside Japan fell 0.8 percent .MIAPJ0000PUS.

Stocks in Malaysia were the biggest decliners in Asia, with the Kuala Lumpur composite index tumbling 2.7 percent .KLSE, the largest one-day drop in 12 weeks, after the government revamped its energy price system because of its deteriorating fiscal position, raising diesel prices by 63 percent.

"The fear is setting in that inflation either destroys consumer spending now, or induces panic tightening by central banks, destroying growth later. Either way, equities are supposed to lose from inflation," said asset allocation strategists with JPMorgan, referring to emerging markets.