* Nikkei on fire, Asia stocks elsewhere down slightly
* Some see Asian emerging markets' comeback
* Eyes on BoE inflation report
By Ian Chua and Ayai Tomisawa
SYDNEY/TOKYO, Feb 16 (REUTERS) - Sterling rose in Asia on Wednesday as accelerating inflation in Britain cemented expectations of an early interest rate rise, while a weaker yen helped to send Japanese stocks to their highest level since May.
Shares elsewhere in Asia fell slightly and U.S. oil prices recovered to nearly $85 a barrel partly due to a surprise drop in weekly crude stocks.
Stocks in emerging markets in Asia have underperformed those in developed countries this year. Underscoring that trend, MSCI's Japan share index has risen around 7.5 percent this year, compared with a drop of more than 2 percent in MSCI's Asia Pacific share index excluding Japan.
But some analysts remain sceptical that such a trend will continue for long.
Rodrigo Zorrilla, head of markets Asia-Pacific, Citigroup, said some $10 billion of funds had moved from emerging market dedicated funds to the United States during the first two weeks of February.
"The question everybody is asking is whether that is the reversal of a trend of the bullish emerging market story or is that just a rebalancing of portfolio," Zorrilla said, adding that he supported the second view.
"We think the fundamentals are still very strong in Asia. And while there are some scares in the market relating to the political issues in the Middle East and inflation concerns around the world, as soon as the dust settles we will see that trend (of outflows) to slow down and stop."
INFLATION REPORT EYED
Sterling rallied to a 5-1/2 month peak against a currency basket after data on Tuesday showed inflation in Britain jumped to 4 percent, twice the Bank of England's target, prompting Governor Mervyn King to acknowledge that rates might rise more rapidly than economists had expected.
Analysts now expect a rate rise in May and the next market focus is the BoE's inflation report due at 1030 GMT.
Yuuki Sakasai, a strategist at Barclays Capital, said the inflation report would support King's comments overnight that suggested an early rate increase.
"But we do think that King is likely to use his news conference later on to warn against aggressively pricing in rate hikes. So the pound could gain on the report and fall on King's comments. On the whole we think risk is skewed to the downside," he said, adding that the pound could fall to around $1.60.
Sterling last traded at around $1.6150 , compared with a high of $1.6170 overnight. The pound has gained some 3 percent against the U.S. dollar so far this year .
The euro edged up against the dollar, standing at around $1.3520 as of 0544 GMT.
Against the yen, the dollar last traded at around 83.75 , not far from an eight-week high of around 83.90 yen hit the previous day, helped by the recent rise in U.S. Treasury yields.
Japan's benchmark Nikkei average extended gains and rose to a nine-month high as a softer yen lifted exporters. It closed up 0.57 percent at 10,808.29. A weaker yen makes Japanese exports cheaper and boosts company profits.
"It's a weaker yen that's lifting sentiment, but foreign investors are also picking up domestic-demand stocks," said Shinichiro Matsushita, a market analyst at Daiwa Securities, adding that financials were attracting foreign interest due to the Nikkei's strong performance.
The index has gained some 18 percent since November when foreigners began snapping up lagging Tokyo stocks, helped by a shift in market focus to developed economies from emerging ones.
High trade volumes also lifted the mood. The Tokyo stock exchange's first section has seen more than 2.0 billion shares change hands for seven consecutive sessions.
MSCI's Asia Pacific share index excluding Japan was down 0.13 percent, while Hong Kong stocks rose 0.6 percent, recovering from the previous session's 1 percent dip as investors sought bargains among heavy-weighted financials.
The Korea Composite Stock Price Index (KOSPI) fell 0.9 percent. The Shanghai Composite , which rallied earlier this week on hopes for milder inflation in China, was up 0.5 percent as of 0548 GMT.
In Australia, BHP Billiton , the world's biggest miner, said it planned to pour $80 billion into expansions over the next five years and return cash to investors rather than chase ambitious takeovers, after nearly doubling its first-half profit to a record.
After having rallied 9 percent to a 33-month high in recent weeks, shares of the market leader BHP fell 1.6 percent after posting results. But Australia's benchmark S&P/ASX 200 index was little changed as banking shares weighed on the broader market.
U.S. crude for March delivery gained 0.25 percent to $84.56 a barrel by 0550 GMT, while brent crude for April delivery rebounded to near $102 a barrel, underpinned by continued protests in the Middle East. (Additonal reporting by Hideyuki Sano in Tokyo and Masayuki Kitano and Saeed Hasan in Singapore; Writing by Yoko Nishikawa; Editing by Nick Macfie)