*

Israeli military pledges response to Iran attack

*

Dollar rises to 5-month high, pressuring risky EM assets

*

Sri Lanka fails to reach deal on restructure terms with

bondholders

*

Indonesian rupiah hits 4-year low, prompts c.bank

intervention

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Stocks down 1.7%, FX off 0.3%

By Bansari Mayur Kamdar

April 16 (Reuters) - Emerging market stocks and

currencies fell on Tuesday as tensions between Iran and Israel

and diminishing hopes of a rate cut by the U.S. Federal Reserve

kept the riskier markets on edge.

The MSCI index for emerging market stocks shed 1.7%, while

currencies slipped 0.3% by 0830 GMT.

Israel's shekel weakened slightly against the dollar

after closing the previous session 0.6% higher in the aftermath

of Iran's retaliatory strike on Israel.

Investors remained cautious about Israel's response as

international pressure for restraint grew amid fears of an

escalation of the conflict in the Middle East. Israel's GDP data

was also due later in the day.

Also on tap are two separate legislations this week in the

U.S. House of Representatives on aid to Israel and Ukraine, more

than two months after the Senate passed a bill combining the

two.

Meanwhile, the U.S. dollar soared to a five-month

high as traders also pushed back expectations for the timing and

size of any rate cuts from the Fed.

The strength of the dollar pushed the Indonesian rupiah

to its weakest in four years as the market reopened after

the Eid al-Fitr holidays, prompting the central bank to

intervene.

Other Asian currencies like the Indian rupee and

Vietnam's dong touched a record low, while China's yuan

briefly hit a five-month low against the dollar before recouping

some of the losses.

Data showed China's economy grew faster-than-expected in the

first quarter. However, China stocks fell, with small-cap

companies leading losses, as March economic indicators showed a

recovery is losing momentum.

"China certainly isn't out of the woods just yet - it has

been battling against a cocktail of headwinds including its

ongoing property crisis, weak consumer confidence and tumbling

exports in March," said Victoria Scholar, head of investment at

Interactive Investor.

Foreign investors significantly reduced their holdings in

Asian bonds last month, as traders reassessed their expectations

of a Fed rate cut and amid caution over national elections in

South Korea and India.

Elsewhere, the Russian rouble weakened

against the greenback to its lowest level since late October,

while South Africa's rand eased 0.6%.

Sri Lanka's dollar-denominated bonds slid after the

government said it had failed to strike an agreement on debt

restructuring terms with its bondholders.

Pakistan Finance Minister Muhammad Aurangzeb said on Monday

he would hold talks with the International Monetary Fund (IMF)

during his visit to Washington and hoped to get a new loan

agreement in place as soon as possible.

HIGHLIGHTS:

** Israeli military pledges response to Iran attack amid

calls for restraint

** Mexico presidential frontrunner pledges $13.6 billion for

energy investments

** India rate cuts 'off the table' in 2024/25: Morgan

Stanley