EMERGING MARKETS-EM stocks on correction course as Mideast war drags on

By Pranav Kashyap

March 23 (Reuters) - Emerging market stocks tumbled on Monday as the Middle East war intensified, with Israel planning for "weeks" of continued fighting, sending global risk sentiment into a tailspin.

Asian equities, which carry significant weight on the emerging market equity index .MSCIEF, bore the brunt of the selloff. The index sank 3.3% to its lowest level of the year so far, leaving it more than 12% below its record closing high in February, as of 0949 GMT.

A close 10% below that peak would place the index firmly in what markets commonly define as correction territory.

Seoul equities .KS11 plunged 6.5%, while stocks in Taiwan .TWII, Bangkok .SETI, Mumbai .BSESN, Istanbul .XU100, Warsaw .WIG20, and Johannesburg .JTOPI each dropped more than 2%. Markets in Hong Kong .HSI, Shanghai .SSEC, and Vietnam .VNI slid over 3% each.

Iran warned on Sunday that it would target the energy and water infrastructure of its Gulf neighbours if U.S. President Donald Trump carried out his threat to strike Iran's electricity grid on Monday if it did not open the Strait of Hormuz. With the conflict now in its fourth week, hopes for a swift resolution have all but evaporated.

"Tonight's deadline imposed by the U.S. on Iran to reopen the Strait of Hormuz translates into a nervous and defensive start to the trading week as inflation concerns continue to rattle investor sentiment," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

Europe, in particular, remains highly vulnerable to energy shocks. Central banks globally are no longer debating whether inflation could reaccelerate, but rather how many economies may feel the impact.

This week, rate decisions are due from Hungary, Chile, Mexico, and South Africa. The inflationary jolt from rising energy prices has prompted markets to scale back hopes for further monetary easing and, in many developed economies, shift toward pricing in fresh rate hikes.

"In Hungary, we no longer expect a rate cut, with the outlook clouded by the dual uncertainties of the escalating conflict and the upcoming parliamentary elections," Societe Generale's CEEMEA analysts said in a note.

In Central and Eastern Europe, currencies were broadly weaker, though their losses were far milder than the sharp declines seen in equities.

On the data front, Polish retail sales for February rose less than expected. Meanwhile, Romania's debt managers cut their March domestic debt issuance target for the second time on Friday, after scrapping seven consecutive debt sales amid the volatility unleashed by the Iran war.

International dollar bonds issued by Ukraine, Pakistan, and Sri Lanka also came under pressure, falling by as much as three cents each.

The Turkish lira TRY= remained volatile. Turkey's foreign minister, according to a diplomatic source, held talks with counterparts from Iran and Egypt, as well as with U.S. officials and the European Union, to discuss possible steps toward ending the war involving Iran, the United States, and Israel.

(Reporting by Pranav Kashyap in Bengaluru; Editing by Harikrishnan Nair)

((pranav.kashyap@tr.com; +919886482111;))