* Dollar hits 2-1/2 week high against major currencies
* Chinese rate fears add to Fed worries
* World shares extend last week's losses
* German Ifo points to gradual recovery
By Richard Hubbard
LONDON, June 24 (Reuters) - Plans by the U.S. central bank to scale back its money printing combined with fears that China's policy may be tightening to lift the dollar on Monday, while bonds, shares and commodities extended last week's losses.
The Federal Reserve's signal that the era of cheap central bank money - which saw many assets hit record highs - was coming to an end has raised fears of prolonged market shakeout.
"The prospect for a disorderly transition is there," said Josh Raymond, market strategist for City Index.
"The more liquidity you've got in the system, the more disorderly the potential could be, so that's the real fear about this," he said.
The shift out of assets which have benefited most from cheap money has been sharpest in the U.S. debt market, where yields on 10-year Treasury notes have spiked to two year highs, hitting 2.57 percent on Monday
This rise in rates and the brighter outlook for the U.S. economy, which was behind the Fed's decision, has favoured the dollar against most major currencies. The dollar index was up 0.4 percent at 82.66 on Monday, building on last week's 2.2 percent rally, its biggest weekly gain in 19 months.
Against the yen, the dollar was up 0.6 percent to 98.40 yen while euro fell 0.2 percent to $1.3095 after dropping as low as $1.3078, a level not seen since June 6.
As investors retreated into the dollar, share markets everywhere have tumbled.
MSCI's main world equity index, which tracks stocks in 45 countries, was down 0.8 percent after recording its worst weekly loss since May 2012 of 3.2 percent on Friday.
Asian markets earlier felt the full burnt of both the worries about the Fed's move and growing fears over China's outlook, given high money market rates, with MSCI's broadest index of Asia-Pacific shares outside Japan dripping 1.8 percent to its lowest since early September.
A warning from the People's Bank of China (PBOC) that local banks needed to do a better job of managing their cash and lending saw Chinese shares suffer their biggest daily loss in nearly four years.
The PBOC has been allowing short term rates to rise steeply in a bid to pressure the bank's to end the funding of speculative investments, but its efforts have raised fears about the impact on China's already slowing growth rate.
The concerns about falling demand from China spread to mining stocks in Europe, adding to the worries about the impact of Fed tapering, and pushing the FTSEurofirst 300 index of top companies down 0.8 percent to 1,124.10 points.
Amid the selloff, the Euro STOXX 50 Volatility index , known as the VSTOXX, hit a four-month high signalling a sharp rise in risk aversion among investors.
European equity markets remained weak despite data showing German business morale picking up for a second straight month in June, pointing to a slow recovery for Europe's largest economy.
The data from the Munich-based Ifo think tank, based on a monthly survey of some 7,000 firms, was in line with the consensus forecast in a Reuters poll of 40 economists, and marked the second straight monthly improvement.
Commodity markets were also weaker. Copper dropped to its weakest level in 21 months, while oil slipped below $100 a barrel.
"Global money supply will be wound back and the level of investment in commodities like oil will be pulled back," said Michael McCarthy, chief market strategist at CMC Markets.
Gold fell over 1 percent, extending last week's 7 percent decline as investors shunned gold's usual appeal as a safe-haven asset.