Asian stocks tumbled and commodities paused on Friday after a recent selloff on worries that rising inflation may invite aggressive policy tightening and hurt growth in the world's growth engines like China and India.

Investors have been reluctant to add positions in emerging markets so far this year, even rotating funds out of high inflation risk economies such as Indonesia and into developed markets such as Japan, on concerns that policy inertia may place authorities behind the curve in fighting price pressures.

The MSCI index of Asia and Pacific shares excluding Japan <.MIAPJ0000PUS> extended its drop to 0.5 percent, after falling more than 1.8 percent on Wednesday, weighed down by selling in sectors such as materials <.MIAPJMT00PUS> which in turn have buckled due to a selloff in commodities this week.

The market's pretty skittish when it comes to the risk of policy tightening, said Pengana Capital portfolio manager Tim Schroeders.

I think there's some sector rotation out of those better performing materials and energy stocks back into financials.

Commodities took a breather after a sharp selloff this week, though sentiment remained fragile, on concerns that tighter policy may cool growth and sap demand from resource-hungry Asia.

The February contract settled at $89.59 per barrel, after plunging 2.2 percent overnight while three-month copper stabilized after shedding 2.3 percent in the previous session.

Chinese consumer prices in December rose 4.6 percent from a year earlier, staying above forecasts of 4.4 percent and raising concerns of more rate hikes in the near term, Thursday's data showed.

Headline inflation in India accelerated to 8.43 percent in December from a year earlier, compared with 7.48 percent in November and analysts expect a quarter point rate increase at a review next week.

But the broad wave of risk aversion and upbeat U.S. data gave a lift to the dollar, which hit one-week highs versus the yen and the Swiss franc.

The euro, too, held its ground due to combination of factors including successful bond sales from highly indebted countries, including Portugal and Spain, and hopes that officials will agree to beef up a euro zone rescue fund.

Bids from Asian central banks have also helped the single currency all this week, traders said.

Gold steadied after a near two percent drop in the previous session. It paused at $1,346.91 an ounce after sliding to a two-month low of $1,342.65 in the previous session. (Additional reporting by Adrian Bathgate and Ian Chua in SYDNEY; Editing by Ron Popeski)

Portugal China India Japan