* MSCI world equity index down almost 1 percent at 288.27
* Dollar hits 8-month highs after Fed ups discount rate
* Policy risk in focus after Fed, China moves
(Adds sterling moves, Russia rate cut)
By Ian Chua
LONDON, Feb 19 (Reuters) - The U.S. dollar rose and global stocks and commodity prices fell on Friday after the Federal Reserve caught investors on the hop with a rise in its emergency lending rate.
Sterling fell to a nine-month low, also hurt by a sharp fall in UK retail sales that highlighted weak consumer demand, while Russia's rouble continued to gain, little moved by the central bank's 11th cut in interest rates in less than a year.
While the Fed's move had been flagged, it came much sooner than expected and was seen by markets as taking the central bank a step closer to lifting benchmark interest rates.
Fed officials sought to play down that view, however, saying borrowing costs in the economy would stay low.
Cheap cash has fired up stocks and commodities over the last year, so as governments and central banks around the world start to withdraw that stimulus, markets are set to turn more volatile. China has already delivered two increases in banks' reserve requirements this year.
"It (the Fed announcement) took the markets by surprise," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
"The market is now struggling between the negative and the positive view... Some are worried that it is a signal for the Fed to become more hawkish ... but others are more positive and see it means the market is now normalising and the economy is recovering enough to be on its own."
The MSCI world equity index dropped almost 1 percent, retreating from a two-week peak hit on Thursday. U.S. stock index futures were all down between 0.6 and 0.8 percent.
European stocks fell 0.7 percent with Germany's DAX down 0.4 percent, having earlier fallen as much as 0.9 percent.
Emerging stocks fell 1.3 percent while Asian equities excluding Japan slid 1.7 percent. Japan's Nikkei stock average closed 2.1 percent lower.
DOLLAR SHINES
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.
Already knocked by worse than expected public finances data on Thursday, Britain's pound fell to $1.5350 on the view that a painfully slow economic recovery and a grim fiscal position would keep sentiment towards the currency negative.
The U.S. dollar index, a gauge of its performance against six major currencies, jumped more than 1 percent to its highest in eight months at 81.342 following the Fed move, which was announced after Wall Street had closed on Thursday.
"Even though this is not an official tightening, it shows that the Fed is at least 'moving'. The Bank of Japan may require more quantitative easing and the ECB cannot change its stance, so the dollar can rally further against the yen and the euro," said Antje Praefcke, currency strategist at Commerzbank.
The euro fell to its lowest in nine months at around $1.3444.
Shorter-term U.S. bond yields were supportive of the dollar. The yield on the 2-year U.S. Treasury note, which is sensitive to policy rates, rose to a 1-month high of 0.9724 percent before settling back to 0.9399 percent.
The euro zone's benchmark two-year Schatz yield hit a one-week high of 1.049 percent, bouncing off a euro lifetime low of 0.958 percent plumbed in the previous session.
U.S. crude oil futures fell 1.3 percent to $78.07 a barrel, hurt by dollar strength that rocked commodities across the board.
Spot gold was down 0.4 percent at $1,106 an ounce and has declined more than 6 percent since December, while copper fell 1.6 percent to $7,176.50 a tonne. (Additional reporting by Joanne Frearson and Neal Armstrong; editing by Patrick Graham)