* Oil prices surge, stoking inflation fears

* Asia stocks down more than 6% this week, biggest fall

since March 2020

* Yields jump as rate expectations turn hawkish

By Rae Wee

SINGAPORE, March 6 (Reuters) - Asia stocks fell on

Friday and were headed for their sharpest weekly drop in six

years while oil prices were poised for their biggest jump in

three in a turbulent week for global markets as the conflict in

the Middle East showed few signs of easing.

Investors sought the safety of cash as they sobered up to

the fact that the U.S.-Israel war on Iran could drag on longer

than initially anticipated.

They also moved to price in more hawkish rate expectations

from major central banks, spooked by the prospect of a

resurgence in inflation if the spike in energy prices persists.

Yields on U.S. Treasuries have shot up some 18 basis points

this week, their most in nearly a year, while the dollar was set

for its largest weekly gain in 16 months.

"The range of plausible outcomes (of the war) has expanded

to include both the possibility of an exceptionally constructive

resolution and a highly destructive one," said Daleep Singh,

chief global economist at PGIM Fixed Income.

"Markets are being asked to price a much fatter set of tails

with very little reliable information about the likelihood of

each, or the path in between."

The war has thus far had the biggest impact on oil prices,

with Brent crude futures now trading around $83 per

barrel, having been as low as $69 just about a week ago. U.S.

crude shot up to a 20-month high earlier this week.

Both are set to clock a rise of more than 15% for the week,

their largest since February 2022.

"The most market-relevant risk lies in severe escalation or

direct infrastructure damage across key Gulf producers, which

would likely produce sustained upward pressure on oil, feed into

higher headline inflation, tighten global liquidity, and

materially raise recession risks," said Klay Group's senior

investment team.

HIGH-FLYING STOCKS TUMBLE

MSCI's broadest index of Asia-Pacific shares outside Japan

last traded 0.4% lower and was set to fall 6.6%

for the week, which would mark its steepest weekly drop since

March 2020.

Japan's Nikkei was down 0.5% and on track for a 6.5%

weekly loss, while South Korea's Kospi was also headed

for its largest weekly fall in six years with a 10.5% slide.

The market rout this week sent even high-flying technology

stocks and indexes such as the Kospi tumbling, as investors

scrambled to book profits to cover losses elsewhere.

"When the dollar rallies and U.S. yields rise, funding

conditions are tightening, which will often exacerbate broader

moves particularly if there's leverage involved," said Ben

Bennett, head of Asia investment strategy at L&G Asset

Management.

U.S. stock futures were steady in Asia on Friday, while

EUROSTOXX 50 futures rose 0.6% and DAX futures

added 0.5%.

DOLLAR IS KING

The dollar has emerged as one of few winners this week in

volatile sessions that have dragged stocks, bonds and, at times,

even safe-haven precious metals lower.

The rally in the dollar hit pause on Friday, but it was

still on track for a 1.4% weekly gain, bolstered by

safe-haven demand and reduced U.S. rate-easing expectations.

The euro, which remains vulnerable to a spike in

energy prices, was set to fall 1.7% for the week, while sterling

was similarly headed for a 0.95% weekly drop.

Investors are now pricing in about 40 basis points worth of

easing from the Federal Reserve this year, down from 56 bps a

week ago, while odds for a rate cut from the Bank of

England this month have fallen to 23% from a near certainty just

last week.

The European Central Bank is seen hiking rates by year-end.

The shifting rate expectations have, in turn, pushed up

global bond yields, and in Asia on Friday, the yield on the

benchmark 10-year U.S. Treasury was steady at

4.1421%, having risen some 18 bps this week.

The two-year yield has jumped 20 bps for the

week.

Elsewhere, spot gold was steady at $5,078.88 an

ounce, though it was headed for a 3.7% weekly fall as rising

yields and a stronger dollar eclipsed the yellow metal's

safe-haven appeal.

(Reporting by Rae Wee; Editing by Muralikumar Anantharaman)