LONDON, April 15 (Reuters) - Ukraine's hryvnia jumped from recent record lows on Tuesday after a 300-basis-point (bps) interest rate rise but ratcheting tensions with neighbouring Russia kept up pressure on regional as well as broader emerging markets.
Russia declared Ukraine on the brink of civil war as Kiev said an "anti-terrorist operation" against pro-Moscow separatists was under way, though the crackdown appeared to get off to a slow start.
Fears of all-out war, a worsening domestic economy and reduced central bank intervention have seen the hryvnia lose a third of its value versus the dollar this year. With inflation expected to surge to 12 percent this year, the central bank raised rates for the first time in eight months on Monday to 9.5 percent.
The hryvnia surged more than 4 percent to trade at about 12 to the dollar while one-month and six-month forwards priced in less hryvnia depreciation than they did at the end of last week.
"We are seeing a bit of a short-term bounce in hryvnia on account of the rate rise," Neil Shearing, head of emerging markets research at Capital Economics in London, said.
"Our forecast is for the hryvnia to end the year at 13 to the dollar so it may weaken a bit further which is needed to put the balance of payments on a more sustainable footing."
Ukraine's current account gas remains problematic even though it has narrowed from year-ago levels and Shearing said politics may exacerbate economic recession and hryvnia weakness.
"Unless the political crisis eases, market conditions will remain fragile and the (central bank) could yet be forced into further defensive rate hikes," he said.
Ukrainian five-year debt insurance costs rose 14 basis points to 1,102 bps, according to Markit, a 3-week high.
In Russia, stocks hit new three-week lows, extending the previous session's 1.3 percent fall though the rouble was flat against the dollar and dollar bonds steadied.
Russian stocks had opened flat but soon resumed their descent.
Other emerging markets also weakened, hurt not onlyh by the geo-political tensions but by upbeat U.S. retail data that boosted the dollar and U.S. yields. Emerging equities fell half a percent and have now fallen 1.5 percent from the 3-1/2 month highs hit last week.
Equity markets were also hit by weakness in China where banking stocks tanked more than 2 percent after weak money supply data.
Indian shares meanwhile fell for the second day as investors booked profits off a record-breaking pre-election rally and inflation data hit the rupee and bonds.
Central European markets were broadly negative, with the forint losing almost 0.2 percent against the euro and Hungarian stocks falling 0.6 percent, led by shares in Ukraine-exposed OTP Bank.
The Turkish lira fell half a percent on Ukraine tensions and on last Friday's ratings outlook cut from Moody's.
The currency was also hit by speculation of renewed tensions between the central bank and the government, with the latter irked by interest rate rises that helped boost the lira to 3-1/2 month highs recently.
UBS strategist Manik Narain attributed the weakness to profit-taking after government ministers expressed unease about a stronger lira but said fears of further government interference in policy weighed on the currency at the margins.
"We do know there is pressure on (the central bank) to cut but we have seen the central bank is able to resist this pressure," Narain said. "Overall though, the headwinds for the Turkish economy are pretty severe."
However, Istanbul stocks rose to four-month highs, lifted by conglomerate Dogan whose shares rallied 9 percent on news of a merger with its media holding.
For GRAPHIC on emerging market FX performance 2014, see http://link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see http://link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see http://link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see http://link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see )
(Editing by Louise Ireland)