Inflation fears and delays in debt payments by an affiliate of private equity giant KKR spooked financial markets on Wednesday, battering stocks and driving the cost of corporate debt insurance to all-time peaks.

Wall Street looked set to open sharply lower as oil traded near $100 a barrel and the U.S. government reported that rising food costs had pushed consumer prices up in January.

The dollar rose on expectations that it would be harder for the U.S. Federal Reserve to cut interest rates.

Oil prices were off their record high of more than $100 reached on Tuesday, but were mainly correcting after a massive move. New York crude was trading at around $99 a barrel.

Heady prices for oil, along with other commodities such as platinum, wheat and gold, are worrying investors because rising inflation will make it harder for policy makers to cut interest rates to help spur ailing economies.

It means the central bank's hands are somewhat tied, and that's not good, said Dustin Reid, senior currency strategist at ABN AMRO in Chicago.

The U.S. report showed core prices rising by 0.3 percent, slightly higher than expected and the fastest monthly rate since June 2006.

CIBC World Markets warned that rising prices generally and stuttering economies could rekindle fears of stagflation.

In the meantime, investors have been shaken by a series of reminders that the trouble in the credit markets that began last summer has not gone away.

The latest came from KKR Financial Holdings, the listed affiliate of private equity group Kohlberg Kravis Roberts & Co KKR.

In a filing with the U.S. Securities and Exchange Commission on Tuesday, it said it had delayed repayment of debt backed by mortgage securities for the second time and begun a new round of talks with creditors.

NEW CREDIT JITTERS

The news hit stocks and knocked jittery credit markets hard, with the widely watched iTraxx Crossover index breaking above 600 basis points for the first time, a reflection of soaring debt-insurance costs.

Juergen Ruettgers, the premier of Germany's most populous state, North-Rhine Westphalia, meanwhile, added to the concern.

He told the state's parliament that the country's landesbanks were in a crisis and called on the central federal government to help shake up the industry.

Both events followed Tuesday's news from Credit Suisse that it had marked down the value of asset-backed investments by $2.85 billion.

The pan-European FTSEurofirst 300 index was down around 1.6 percent, hit also by British lender Alliance & Leicester taking a writedown and earnings from French bank BNP Paribas failing to excite.

Earlier, Japan's benchmark Nikkei share average closed down 3.3 percent at 13,310.37. The broader TOPIX was down 3.2 percent at 1,302.72.

The dollar rose. It was up 0.15 percent against the yen at 107.92 yen. The euro lost 0.6 percent to $1.4637.

Yields on 10-year euro zone bonds drifted around 4 percent after coming under pressure on Tuesday on safe-haven buying triggered by Credit Suisse.

(Additional reporting by Antonina Vorobyova; editing by Tony Austin)

Germany Inflation