* EM stocks down 0.8%, FX off 0.3%

* Pentagon weighs diverting Ukraine military aid to

Middle East, report says

By Pranav Kashyap

March 27 (Reuters) - Most emerging market equities

extended their decline for a second session on Friday and were

headed for a fourth weekly loss, as central banks in the

developing world sounded inflation warnings that prompted

markets to price in a more hawkish policy outlook.

U.S. President Donald Trump said he would again extend the

deadline for Iran to reopen the Strait of Hormuz or face the

destruction of its energy plants, after Tehran had earlier

rejected a 15-point U.S. proposal to end the fighting as unfair.

The four-week war has sent shockwaves through the global

economy, driving energy prices sharply higher and reigniting

fears of a fresh wave of worldwide inflation.

A broad index tracking emerging market equities

fell 0.8% on the day and was on track for a near 2% weekly loss,

marking its longest weekly losing streak since October 2024. A

similar index tracking currencies fell 0.3%.

RATES DECISIONS

This week's rate decisions from the central banks of the

Philippines, South Africa, Mexico and Sri Lanka all carried a

common thread - growing concern over how much the surge in

energy prices, fuelled by the U.S.-Israel war with Iran, could

feed into inflation.

Markets were also tested by conflicting signals from

Washington and Tehran, with both sides offering sharply

different accounts of diplomatic progress, casting doubt on

hopes for a swift de-escalation.

Israeli stocks slid to a two-week low, while the

shekel weakened to its lowest level in more than two

months against the dollar.

"Investors who choose to remain invested in markets should

consider adding hedges for adverse geopolitical developments,"

analysts at Societe Generale said.

"If current supply shortages drag on for a few more weeks,

crude oil could reach $150 per barrel and potentially trigger

severe unintended consequences."

The South African rand, a currency especially

sensitive to swings in risk sentiment, was set for a fourth week

of losses - its longest losing run since April 2025. South

African stocks, however, looked set to snap a

three-week slide, supported by elevated gold prices.

Stocks across central and eastern Europe

also came under pressure, with Polish equities leading

the regional losses.

UKRAINE WAR IN FOCUS

Elsewhere, Ukraine's international dollar bonds fell nearly

1% after the Washington Post reported the Pentagon was

considering redirecting weapons originally intended for Ukraine

to the Middle East.

Russia, meanwhile, has asked oligarchs to contribute to the

state budget, according to reports by The Bell online media

outlet and the Financial Times, as Moscow seeks to shore up its

finances while the war in Ukraine continues.

The Russian rouble, meanwhile, broke a five-week

losing streak and was on course to gain about 2.5% for the week.

Across the emerging world, governments continued trying to

shield consumers from the energy price spike while

simultaneously revising growth forecasts and reassessing

interest-rate trajectories.

Some cut taxes, others raised local fuel prices, and some

turned to Russian oil to bypass the still-closed Strait of

Hormuz.