* Strikes on energy infrastructure sap sentiment

* Investors fret about prolonged conflict, stagflation

risk

* BOJ holds rates as expected; flags war impact on

inflation

* Fed's hawkish tone boosts dollar, traders cut rate-cut

wagers

(Updates after BOJ policy decision)

By Ankur Banerjee

SINGAPORE, March 19 (Reuters) - Stocks slid and oil

prices rose sharply on Thursday after major escalation in the

U.S. and Israel's war with Iran rattled investors, while the yen

wobbled near the crucial 160 per dollar level as Japan's central

bank left interest rates unchanged.

As widely expected, the Bank of Japan left unchanged its

short-term policy rate at 0.75% but joined the U.S. Federal

Reserve and Bank of Canada in striking a cautious tone about the

impact of rising oil costs from the conflict on inflation.

The yen was last at 159.61 a dollar as traders look

for any hint of intervention, with Japanese finance minister

Satsuki Katayama earlier saying authorities were prepared to

"take necessary action at any time against market volatility".

"The comments this morning before the BOJ were made to warm

up the market for intervention if markets sell the yen in

reaction to the central bank's decision," said Kyle Rodda,

senior financial analyst at Capital.com.

"160 looks like a critical threshold here. Barring any huge

development in the war and energy markets, especially after last

night's Fed decision, the USDJPY looks poised to test it."

The yen has dropped more than 2% against the dollar since

the war broke out at the end of February as investors worry

about the impact of a prolonged conflict on inflation and growth

and head towards the U.S. dollar as the haven of choice.

WAR IN MIDDLE EAST WORSENS

The broader market though remains focused on the war in the

Middle East and is coming to the realisation that the conflict

is shaping up to be a prolonged one, stoking stagflation risk.

Iran accused Israel of striking its facilities in the huge

South Pars gas field on Wednesday and retaliated by vowing

attacks on oil and gas targets throughout the Gulf, firing

missiles at Qatar and Saudi Arabia.

The hits to energy infrastructure sent U.S. crude futures

about 1% higher to $97.07 per barrel. Natural gas

rose more than 6%, while Brent futures rose to $112.19 a

barrel, up 4.5% on the day.

In stocks, Japan's Nikkei was down 2.5%, while South

Korean equities fell 1.5%. MSCI's broadest index of

Asia-Pacific shares outside Japan fell more than

1.5%. European futures were down more than 1%.

"This latest escalation feels like a turning point for

markets because the conflict is no longer just about military

headlines or Strait of Hormuz closure," said Charu Chanana,

chief investment strategist at Saxo in Singapore.

"It is now hitting the plumbing of the global energy system.

What is unsettling markets now is the growing stagflation

risk... It means this is no longer just a geopolitical story but

a macro one."

The dollar strengthened across the board, also buoyed by the

Fed predicting just one more cut this year as the central bank

left rates unchanged on Wednesday. Traders though are no longer

fully pricing in any easing in 2026.

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

against six other units, is up 2.5% this month. The index was

last at 100.06, slightly lower after a 0.7% rise on Wednesday.

MORE CENTRAL BANKS AWAITED

In a week filled with policy meetings across the globe,

investors have been parsing through comments to gauge the impact

of the war, with the European Central Bank and Bank of England

due later in the day.

The ECB and BoE, like the BOJ, are widely expected to keep

interest rates steady, but attention will be on comments from

officials on the impact of the war on inflation and growth.

Laura Cooper, global investment strategist at Nuveen, said

the key question for policymakers is whether higher energy costs

risk de-anchoring inflation expectations or whether the shock

ultimately proves transitory.

"Rate hikes cannot increase oil supply, they can only

suppress the demand response to higher prices, compounding the

growth drag. Much of the adjustment to the energy shock

therefore occurs organically."