GLOBAL MARKETS-Stocks, bonds shed losses on tame US inflation

* Wall Street shrugs off CPI report, focuses on Fed move

* Dollar up broadly in the aftermath of Fed discount move

* Bonds up as soft CPI follows soothing Fed comments

* CPI report supports Fed's low interest rate pledge (Updates with U.S. markets, adds byline; dateline)

By Herbert Lash and Ian Chua

NEW YORK/LONDON, Feb 19 (Reuters) - Stocks and bonds cut losses on Friday after a benign U.S. inflation report took the sting out of a surprise rise in a Federal Reserve emergency lending rate for banks.

The U.S. dollar rose broadly, touching an eight-month high against a currency basket, boosted by the Fed's decision to raise the discount rate late on Thursday. For details, see [ID:nN19139371].

The dollar trimmed some of its gains and U.S. Treasuries rose modestly after the Labor Department said U.S. consumer prices rose less than expected in January. [ID:nN19119822]. But U.S. government bond prices turned negative in response to a recovery by stocks.

U.S. consumer prices, excluding food and energy, fell for the first time since 1982. Low inflation has been a factor in the Fed's policy that it would keep its benchmark fed funds interest rate low for an "extended period." [ID:nN19117929]

The Fed's move had caught investors off guard after U.S. stock markets had closed on Thursday with its 25 basis point increase in the discount rate to 0.75 percent -- its first move on interest rates since December 2008. [ID:nN18231994]

Initially the U.S. dollar rose and global stocks and commodity prices fell, but analysts said the tame inflation report supports keeping U.S. benchmark interest rates low.

"That type of data reinforces the outlook for low U.S. interest rates," said Joe Manimbo, a currency trader at Travelex Global Business Payments in Washington. "Consequently the dollar has pared some of its impressive overnight gains."

Still, Wall Street dipped in early trade before recovering slightly and European shares turned positive late in the session as fears abated about the impact of the Fed's discount rate increase. [ID:nN19117419].

The MSCI world equity index <.MIWD00000PUS> dropped almost 1 percent before trimming losses to 0.4 percent.

The Dow Jones industrial average <.DJI> was up 26 points, or 0.25 percent, at 10,419. The Standard & Poor's 500 Index <.SPX> was up 3 points, or 0.3 percent, at 1,110. The Nasdaq Composite Index <.IXIC> was up 1 point, or 0.07 percent, at 2,243.

The dollar was up against a basket of major currencies, with the U.S. Dollar Index <.DXY> up 0.95 percent at 81.161.

The euro was down 0.90 percent at $1.3492. Against the yen, the dollar was up 0.61 percent at 91.78.

The euro earlier fell to its lowest in nine months at around $1.3444, though it trimmed losses after St. Louis Federal Reserve President James Bullard said market expectations for a rate hike this year were "overblown." [ID:nN18246045]

Sterling fell to a 9-month low against the dollar at $1.5350 .

Shorter-term U.S. bond yields rose. 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 0.9157 percent.

The benchmark 10-year U.S. Treasury note was down 2/32 in price to yield 3.82 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 27 cents to $78.79 a barrel , hurt by dollar strength that rocked commodities across the board.

Spot gold was down 0.3 percent at $1,112.50 an ounce and has declined more than 6 percent since December, while copper fell 0.4 percent to $7,260 a tonne. (Reporting by Angela Moon, Vivianne Rodrigues and Burton Frierson in New York and William James and Jan Harvey in London; Writing by Herbert Lash; Editing by Kenneth Barry)