LONDON, May 20 (Reuters) - Emerging stocks hit 6-1/2 month highs on Tuesday for a second straight day on expectations of greater monetary stimulus in developed markets and a lessening in geopolitical risks.
Thai debt insurance costs hit their highest in two months, however, after Thailand's army declared martial law, but denied it was staging a military coup.
The possibility of monetary stimulus from the European Central Bank and maybe from China, in addition to existing support from Japan and the United States, is boosting demand for high-yielding emerging market assets.
Tensions between Russia and Ukraine, meanwhile, appear to be subsiding.
"The European Central Bank has been very vocal, the market is waiting to see if it will deliver," said Murat Toprak, emerging markets strategist at HSBC, referring to the ECB's policy meeting later this week and the chance of lower rates.
"Russia-Ukraine has become a bit marginal, it is less of a market theme than it was."
The MSCI emerging equities index hit 6-1/2 month highs before trimming gains to trade 0.22 percent lower on the day, with Chinese stocks near three-week lows.
Emerging stocks are up 3 percent on the year, compared with a 1.5 percent rise in developed stocks.
Indian and South African stocks were close to post-election record highs.
Emerging sovereign debt spreads tightened by 4 basis points to 303 bps over U.S. Treasuries.
Russian stocks hit 3-1/2 month highs earlier in the session and the rouble was steady near 4-month highs on growing expectations of an end to the Ukraine conflict.
Russia's defence minister has told troops to return to their permanent bases after military exercises near the border with Ukraine, fulfilling an order from President Vladimir Putin, Interfax news agency reported on Tuesday.
Russia's 2030 dollar bond rose 0.2 point to a three-month high of 115 and has risen five points in the past month. Ukraine's 2017 dollar bond rose a quarter point to 94.5, bringing its rise in the past week to six points.
But Russian stocks lost earlier gains, dragged down by gas giant Gazprom, after a spokesman for Putin, who is visiting China this week, said Russia and China had not yet agreed a gas supply deal.
Thai five-year credit default swaps rose five basis points to two-month highs of 130 bps, according to Markit, following the imposition of martial law after six months of protests. The Thai baht recouped earlier losses, however, with the central bank suspected of intervening to support the currency.
In emerging Europe, Serbia's dinar fell and the Croatian kuna hit four-week lows on fears that the cost of cleaning up after devastating floods in the Balkans will weigh on the countries' already strained public finances.
The rand and the lira fell on uncertainty ahead of central bank meetings later this week.
The Egyptian pound was trading around record lows ahead of presidential elections next week.
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Editing by Susan Thomas)