EMERGING MARKETS-Emerging market assets drop as Middle East conflict deepens

By Twesha Dikshit

March 2 (Reuters) - Emerging market stocks, bonds and currencies declined on Monday after U.S. and Israeli strikes on Iran and Tehran's retaliation threatened to spill into a wider Middle East conflict, driving oil prices sharply higher and sparking a dash into havens such as gold and the U.S. dollar.

The MSCI index of emerging market equities .MSCIEF dropped 1.6%, its steepest decline in a month. A corresponding gauge for currencies .MIEM00000CUS fell 0.7%, set for its biggest one-day decline in over three years.

International bonds from a number of Middle Eastern countries, as well as riskier emerging-market economies, also came under pressure.

"If the conflict expands or persists, the inflationary consequences could ripple through the global economy," said Daniela Hathorn, senior market analyst at Capital.com.

"The key variable is duration... if escalation threatens energy infrastructure or maritime routes, the shock could become more structural."

President Donald Trump said the attacks would continue until U.S. objectives were met. An Iranian official told Reuters that the country would defend itself against aggressors.

Bourses in Kuwait and the United Arab Emirates temporarily closed, citing "exceptional circumstances".

International bonds issued by Egypt tumbled more than 2 cents on the dollar, while debt from Saudi Arabia and Jordan was down almost 2 cents, Tradeweb data showed.

Elsewhere in fixed income markets, Saudi five-year credit default swaps - instruments that gauge an issuer's risk of default - jumped to a near one-year high of 88 basis points from Friday's 82 bps. Qatar's CDS rose to 33 bps from 32 bps, according to S&P Global Market Intelligence.

"For equities and credit the impact is negative, but only a severe and sustained oil disruption would imply substantial consequences for global growth," Goldman Sachs said in a note.

Oil supply concerns remained front and center. Saudi Arabia shut its biggest domestic oil refinery after a drone strike, a source said, while Iraqi Kurdistan and several major Israeli gas fields carried out precautionary production suspensions.

The European Commission said it did not expect any immediate impact on the EU's security of oil supply, according to an email seen by Reuters.

ESCALATING CONFLICT, DOMESTIC DATA ON WATCH

Stocks and bonds in Turkey, which neighbours Iran, also came under pressure. Turkey's blue-chip equity index .XU100 slumped 2.7%, while its international bonds slipped more than one cent, with longer-dated debt suffering the biggest declines.

Separately, data showed that Turkey's economy grew 3.4% year-on-year in the fourth quarter, slightly below expectations.

Hungary's benchmark index .BUX lost 1.4%, while Poland's .WIG20 fell marginally. PMI data showed Poland's manufacturing sector faced a steep drop in new orders while Hungary's PMI remained below the long-term average.

Bourses in Czech Republic .PX, Greece .ATG and Romania .BETI were down 0.9%, 2.2% and 1.3%, respectively.

A bright spot, Israel's equities .TA125 climbed 3.8% while its shekel ILS= appreciated 1.8% versus the dollar to 3.074, nearing a 30-year high reached last month.

Most emerging Europe currencies were lower against the euro, with the Hungarian forint EURHUF= down the most, by 1.1%.

In Asia, most equity indexes ended lower, with the conflict disrupting oil flows to several Asian countries. Philippine's stocks .PSI lost 2.8%, while Thailand's SET Index .SETI fell 4%. Chinese equities bucked the broader trend with Shanghai's stocks .SSEC closing at a 10-year high.

With worldwide travel stocks affected by disruptions, focus remained on a potential closure of the Strait of Hormuz. The vital waterway is a conduit for about a fifth of the world's seaborne oil trade flows as well as large quantities of liquefied natural gas.

Gauging the impact on emerging economies, JPMorgan said it expected Bahrain and the UAE to suffer the biggest hit. The Wall Street bank trimmed its forecast for non-oil growth across Gulf Cooperation Council countries by 0.3 percentage points and flagged risks for larger revisions.

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