(Updates prices as of 0750 GMT)

By Tom Wilson and Ankur Banerjee

LONDON/SINGAPORE, July 31 (Reuters) -

European shares followed Asian indexes higher on Wednesday

after the Bank of Japan raised interest rates in a mostly

unexpected hawkish pivot, sparking gains for the Japanese yen.

The BOJ also unveiled a detailed plan to slow its massive

bond buying, taking another step towards phasing out a decade of

huge stimulus. Its decision takes its short-term policy rate to

0.25%, levels unseen since 2008.

The Euro STOXX 600 gained almost 1%, also

helped by a slew of corporate updates. MSCI's broadest index of

Asia-Pacific shares outside Japan added over 1%,

with Japan's benchmark Nikkei closing up 1.5% at its

highest for a week.

il prices rose from seven-week lows on escalating tension in

the Middle East after Palestinian militant group Hamas said its

leader Ismail Haniyeh was killed in the Iranian capital Tehran.

"The BOJ will hope that the rate rise will be a

confidence booster to the economy in that it will signal that

the central bank believes the economy is on a path to something

approaching 'normal'," said Gary Dugan, CEO of the Global CIO

Office.

The reaction from markets to the BOJ news was choppy. The

yen recovered slight losses and was last up 1% at

151.09 a dollar, reaching its highest since early April and set

for its first month of gains this year.

On an action-packed Wednesday, central banks dominated

investor attention. A Federal Reserve rates decision is due

later in the day, with markets expecting the U.S. central bank

to stand pat on rates but indicate cuts are on the way.

The yields on Japanese government bonds were lower.

European bond yields, meanwhile, were at multi-month lows, ahead

of euro zone inflation data due later in the day.

Investors were also assessing contrasting results from

Microsoft ( MSFT )

and chipmaker

AMD

that suggested a

divide

in the AI landscape.

Wall Street stocks were set for gains, with futures

gauges showing advances of between 0.2% and 1.5%.

FED AWAITED

Markets are fully pricing in a Fed rate cut of 25 basis

points (bps) in September, with roughly 68 bps of easing priced

in for the year.

The dollar index, which measures the U.S. currency

against six rivals, was at 104.39 and is down over 1% in July.

However, some analysts expect the Fed to stay cautious as

the labour market is still tight.

Investors are jittery about the AI frenzy and tech

valuations as results from sector bellwethers reinforced the

idea that the payoff in hefty AI investments may take longer

than first thought.

Disappointing earnings from Microsoft ( MSFT ) sent its

shares lower, along with those of other tech firms, while strong

earnings from Advanced Micro Devices ( AMD ) spurred a rally in

chip stocks. Nasdaq futures rebounded, and were last up

1%.

The Australian dollar sank to a three-month low,

while stocks soared more than 1% as a soft inflation

report squashed lingering speculation that interest rates would

have to rise again.

In commodities, U.S. crude was 2% higher at $76.24

per barrel and Brent was at $80 per barrel, up 1.74% on

the day.