* Euro falls to 9-mth low vs dollar as Fed ups discount rate
* Oil down 1.4 pct, gold drops; US stock futures fall 1.1 pct
* Fed's Bullard: expectations of policy rate hike "overblown"
* Policy risks intensifying after U.S., China actions (Repeats to more subscribers)
By Kevin Plumberg
HONG KONG, Feb 19 (Reuters) - The U.S. dollar rose, commodity prices dropped and stocks fell on Friday after the Federal Reserve unexpectedly lifted an emergency lending rate for the first time since the financial crisis.
U.S. stock futures fell 1.1 percent after the Fed raised its discount borrowing rate by a quarter percentage point, weighing on Asia. Major European stock markets were expected to follow, opening down as much as 0.4 percent, according to financial bookmakers.
Though the Fed cited improving market conditions, traders said the action had come sooner than expected and moved the central bank one step closer to pushing up benchmark lending rates, which would raise borrowing costs for consumers and companies.
"The emergency easing cycle began with discount rate cuts -- it was all about easing liquidity to banks. So the move to raise the discount rate means the long journey towards (policy) normalisation has begun," Robert Rennie, chief currency strategist at Westpac in Sydney, said in a Reuters chat room.
The U.S. dollar index, a gauge of its performance against six major currencies, rose more than 1 percent to its highest in eight months at 81.30 after the Fed move, which was announced after Wall Street stock markets had closed.
The euro fell to its lowest in 9 months, though it briefly trimmed losses after St. Louis Federal Reserve President James Bullard said market expectations for a policy rate hike this year were "overblown."
Still, coming so soon after China delivered two surprising increases in banks' reserve requirements this year, the Fed's move worried investors who have become quite comfortable with extraordinary amounts of money injected into banking systems during the financial crisis.
Ample amounts of cheap cash fuelled a strong rally in stocks and commodities last year. But as governments and central banks around the world start withdrawing that stimulus and tightening policy, markets are bound to turn more volatile, likely curbing returns.
BANKS STUNG AFTER FED
The MSCI index of Asia Pacific stocks outside Japan fell for a second day, losing 1.8 percent, with the financial, materials, consumer and energy sectors all hit hard.
Hong Kong stocks led declines in the region as the Hang Seng index sank 2.5 percent Shares of global bank HSBC were the biggest drag on the index, down 1.9 percent.
Japan's Nikkei share average finished down 2 percent Mizuho Financial Group, Japan's second-largest bank, lost 2.8 percent, while top bank Mitsubishi UFJ Financial Group fell 1.3 percent.
In the currency market, investors added to growing bets on the U.S. dollar and slashed bets on others, especially currencies of countries with poorer growth prospects.
The euro was down 0.5 percent to $1.3458 and has dropped around 16 cents in the last two months. The single currency has been dogged by Greece's debt problems and tepid economic growth in the 16-nation region, even as U.S. economic prospects appear to improve.
Sterling also fell to a 9-month low against the dollar, dropping 0.9 percent to $1.5380 In all likelihood, the Fed will keep winding down monetary stimulus, while the Bank of England may have to extend its own growth friendly policies to shore up the UK's patchy recovery.
"We think that the Fed discount rate hike will lead to more USD strength as the market expects the Fed to start thinking about hiking the Fed Funds rate this summer," UBS strategists said in a note, recommending to investors that they sell sterling and buy dollars.
Shorter-term U.S. bond yields were also supportive of the dollar.
The yield on the 2-year U.S. Treasury note which is sensitive to policy rates, rose in choppy trade to a 1-month high of 0.9724 percent before settling back to 0.9439 percent.
Investors were shifting from the shorter-end to longer- maturity Treasuries, causing the difference between yields to narrow.
The spread of the benchmark 10-year yield over 2-year yields narrowed 5 basis points to 282 basis points, though remains not too far from historic steepness at 288 basis points.
U.S. crude oil futures fell 1.4 percent to $77.97 a barrel hurt by dollar strength that rocked commodities across the board.
Gold in the spot market was down 0.8 percent at $1,102.10 an ounce and has declined more than 6 percent since December.
Copper on the London Metal Exchange fel1 1 percent. (Editing by Kim Coghill)