GLOBAL MARKETS-Stocks sag as U.S. rate rise expectations revive

* Fed talk on rate rises follows bump in inflation

* European, Asian shares follow Wall St lower

* Japan's Nikkei closes flat as yen weakens after GDP data

* U.S (Other OTC: UBGXF - news) . rate futures price in 50 pct chance of hike by Sept

* Oil prices dip after hitting 7-month highs

By Patrick Graham

LONDON, May 18 (Reuters) - Stock markets in Europe and Asia weakened on Wednesday in the wake of accelerating U.S. inflation and comments from Federal Reserve officials that rekindled prospects of an interest rate rise within months.

The dollar, hammered by a virtual abandoning since February of expectations for near-term hikes, hit three-week highs after comments by Atlanta Fed President Dennis Lockhart played up the chances of a move by September.

But the assumed shift towards more tightening was bad news for stock markets, which have been comforted by the idea there would be no squeeze on the funds and companies that have borrowed and invested trillions of dollars globally over the past decade.

Hong Kong shares fell by 1.5 percent and Europe's major markets by up to half a percent.

"A barrage of comments from regional Fed presidents has forced rate markets to begin pricing more chance of Fed tightening in the coming months," analysts from French bank BNP (Paris: FR0000131104 - news) Paribas said in a morning note.

"The shift supports the dollar and this adjustment could conceivably have quite a bit further to go."

Data on Tuesday showed the biggest rise in U.S. consumer prices in more than three years in April as gasoline prices and rents rose, while other data showed housing starts and industrial production rebounded strongly.

Lockhart, viewed as a centrist on the Federal Reserve's board, said he still assumed there would be two to three rate hikes this year, a view echoed by San Francisco Fed President John Williams.

Interest rate futures moved to price in a 70 percent chance of a hike by December, with a 50 percent chance of a move priced in by September. Chances of one in June were still just 15 percent, up from less than 5 percent on Tuesday.

Deutsche Bank (LSE: 0H7D.L - news) credit strategist Jim Reid suggested the Fed was for the moment just keeping its options open for the months ahead.

"There's still a clearly large gap between where the market is and the recent rhetoric from the Fed," he said. "Importantly we're yet to hear from either the Fed President (Janet) Yellen or Vice-Chair (Stanley) Fischer recently."

GROWTH SURPRISE

Expectations of further inflation have also been stoked by a recent recovery in oil prices, which hit seven-month highs on Tuesday, on expectations of a drawdown in U.S. crude stockpiles and a new wildfire threat on Canadian oil supplies.

U.S. crude futures retreated around 0.5 percent to $48.06, after climbing as high as $48.76 per barrel.

Japanese shares and the yen were volatile, with markets digesting surprisingly strong annualised 1.7 percent growth in the January-March quarter that may be masking pockets of weakness.

After a volatile day, Japan's Nikkei 225 ended flat, as the yen gave up gains seen immediately following the GDP data to slip 0.1 percent to 109.26 per dollar.

"The yen strengthened a bit because growth was stronger than many had expected," said Ayako Sera, market strategist at Sumitomo Trust and Banking. "But looking at the details, there were still some concerning areas, including capital spending."

Markets are now looking to Prime Minister Shinzo Abe's meeting with his coalition party leader, where he could discuss postponing a planned sales tax hike to support the flagging economy.

If that adds up to less chance of additional monetary easing by the Bank of Japan, it might support the yen but gains for Tokyo stocks generally push the currency in the opposite direction.

MSCI (NYSE: MSCI - news) 's broadest index of Asia-Pacific shares outside Japan , however, lost 1.1 percent. China's CSI 300 slipped 1.1 percent and the Shanghai Composite index lost 1.6 percent. (editing by John Stonestreet)