GLOBAL MARKETS-Bond market blues hammer stocks, drive euro higher

(Updates prices)

* German Bunds lead global bond sell-off

* Higher yields push euro higher, weigh on stocks

* Wall St expected to open lower

* Oil prices rise, weak dollar lifts gold

By Nigel Stephenson

LONDON, May 12 (Reuters) - Government bonds sold off again on Tuesday, driving down stocks and helping push the euro sharply higher against the dollar.

Traders struggled to explain fully the latest lurch higher in yields, which drove those on benchmark 10-year U.S. Treasuries to their highest since mid-November.

German 10-year yields rose even more strongly, adding 14 basis points to 0.73 percent.

Volatility in the bond markets weighed on stocks, adding to existing investor anxiety over the perilous state of Greece's finances. Shares (Frankfurt: DI6.F - news) in Europe and Asia fell and Wall Street was expected to follow, with index futures down 0.7 percent.

"When any particular asset class goes through periods of extreme volatility in a short space of time, people feel the pressure to take their risk exposure lower," Ian Richards, global head of equities strategy at Exane BNP Paribas, said.

Less than a month ago, German 10-year yields hit a record low of 0.05 percent, driven down by a 1-trillion-euro European Central Bank bond-purchase scheme intended to kick-start inflation.

Traders have blamed the surge on a rise in inflation expectations, higher oil prices, and restricted liquidity, caused by ECB purchases, as investors sought to exit a crowded trade.

"It's clear that the market hasn't stabilised. Before the sell-off started the common perception was one of low volatility. Now (NYSE: DNOW - news) investors are more cautious, asking for a premium for the volatility we've seen recently," said Jan von Gerich, chief fixed income analyst at Nordea.

Higher German yields lifted the euro 1 percent to $1.1265, having fallen close to Monday's low of $1.1131 in Asian trade. It was last up 0.7 percent at $1.1230.

The dollar index, which measures the U.S. currency against a basket of major peers, fell 0.6 percent. The yen was 0.1 percent higher at 120 per dollar.

U.S. 10-year yields, which have been driven higher in recent weeks by German Bunds, last stood at 2.35 percent, up 8 basis points on the day.

Elevated U.S. yields mean higher corporate borrowing costs, which could hit shares across the world.

The pan-European FTSEurofirst 300 index fell 1.7 percent. Germany's exporter-heavy DAX index fell 2.2 percent.

GREEK CONCERNS

Investors have also been concerned that debt-burdened Greece could run out of cash. Euro zone finance ministers, who met on Monday, acknowledged progress in talks between Greece and its creditors but said more work was needed to close a cash-for-reforms deal. Athens stocks, however, rose 0.2 percent.

Worries that higher yields could drive the dollar higher weighed on Japanese stocks. Tokyo's Nikkei ended flat.

MSCI (NYSE: MSCI - news) 's main gauge of Asia-Pacific shares outside Japan fell 0.4 percent, though Chinese shares maintained momentum after the central bank's weekend cut in interest rates. The CSI300 index rose 1.2 percent.

Oil prices, up more than 50 percent from their January lows, rose further as dollar weakness trumped concerns about oversupply. Brent crude was up $1.25 at $66.16 a barrel.

Gold rose just under 1 percent to $1,193.40 an ounce. (Additional reporting by Marius Zaharia, Atul Prakash and Patrick Graham; Editing by Mark Trevelyan)