China's annual inflation rose to a higher-than-expected 6.5 percent in July, putting the central bank in a bind as it tries to keep prices in check without dragging down an economy facing increasing threats from abroad.

The unexpected rise kept inflation at its highest mark since June 2008, when global oil prices were soaring toward a record high. Economists polled by Reuters had expected it to dip to 6.3 percent, after June's reading of 6.4 percent.

China has acknowledged that inflation will exceed its annual target of 4 percent this year. But with debt crises raging in the United States and Europe, the People's Bank of China is widely expected to hold interest rates steady.

Asia's stock markets took a beating on Tuesday, following deep losses on Wall Street, as investors weigh the risk of another U.S. recession and a worsening sovereign debt crisis in Europe.

The U.S. Federal Reserve holds its policy-setting meeting later on Tuesday. With interest rates already near zero, its easing options are limited. Economists see little chance that the Fed will announce another round of bond purchases this time.

Figures due later on Tuesday will shed more light on how China's economy held up as troubles grew in two of its biggest export markets, the United States and Europe. Economists polled by Reuters expect the data to show retail sales, industrial output and domestic investment remained strong.

But given China's high inflation, it may not be in a position to reprise its 2008 role of lifting the global economy. Back then, when the Lehman Brothers bankruptcy triggered a worldwide slump, China quickly ramped up a big stimulus package, helping to buffer its own economy and buoy the world.

(Reporting by Koh Gui Qing and Zhou Xin; Writing by Emily Kaiser; Editing by Ken Wills)

China Inflation