GLOBAL MARKETS-Stocks stumble, Treasuries yields at nearly two-year high
* Wall Street falls with volatility expected
* 10-year Treasuries yields rise above 2.50 percent
* Dollar continues gains against euro, yen
* Crude drops, gold bounces back
By Leah Schnurr
NEW YORK, June 21 (Reuters) - Equities weakened on Friday, while Treasuries yields hit their highest levels in almost two years in the wake of the Federal Reserve's plans to withdraw the stimulus that has fueled equities this year.
Markets are adjusting to the Fed's plan laid out earlier in the week for the central bank to scale back its asset purchases later this year if the U.S. economy keeps improving as expected.
This has roiled markets around the world since Chairman Ben Bernanke outlined the timeline on Wednesday, with interest rates rising and equities markets selling off.
Easing fears about an immediate banking crisis in China helped make for a calmer tone, but short-term funding rates there remain elevated, especially for smaller lenders.
U.S. stocks fell in late morning trading and 10-year Treasuries yields rose above 2.50 percent, their highest level since August 2011. The dollar rose and was headed for its biggest weekly gain in almost a year.
MSCI's broad world stock index, which tracks shares in 45 countries, was off 0.7 percent, and Europe's broad FTSE Eurofirst 300 index provisionally ended down 0.7 percent.
"There is a supply of money waiting to step back in, but a big move down forces people to at least pause," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
Tokyo was an exception to the weaker trend, with the Japanese stock market up 1.7 percent, but emerging markets remained under stress.
The quarterly expiration and settlement of June U.S. equity options and futures contracts later on Friday is seen likely to contribute to volatility for the session.
About $14 billion is expected to change hands in index rebalancing-related trading toward the session's close, according to Credit Suisse, which could further add to volatility.
The Dow Jones industrial average was down 46.31 points, or 0.31 percent, at 14,712.01. The Standard & Poor's 500 Index was down 8.43 points, or 0.53 percent, at 1,579.76. The Nasdaq Composite Index was down 34.49 points, or 1.03 percent, at 3,330.14.
The Fed is currently buying $85 billion a month in bonds, part of its huge stimulus effort that has driven many investors to embrace riskier assets and has sent U.S. stocks up about 15 percent for the year. Traders now face the task of unwinding those trades, which is expected to continue to roil global markets across asset classes.
"We think the stock markets still have a little bit further to go. We're a little bit less optimistic than the Fed as we think fiscal tightening is still going to drag on the economy in the next few months," said Larry Kantor, head of research at Barclays.
Benchmark 10-year Treasury notes were down 16/32 in price to yield 2.4807 percent, while 30-year bonds dropped 15/32 in price to yield 3.544 percent.
The dollar continued to climb as Bernanke's view that the U.S. economy is improving prompted traders to start pricing in a rise in interest rates in late 2014.
"We're very bullish right now on the U.S. dollar," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
He said the dollar is likely to gain regardless of Fed actions on tapering. If the economy improves and the Fed cuts back on its stimulus, the dollar will benefit from expectations of higher interest rates. But if the Fed maintains stimulus because the economy is weak, the dollar will rise on safe-haven demand.
The dollar rose 0.6 percent against a basket of currencies , putting it on track for a weekly gain of 2 percent, the biggest since early July, 2012.
The euro fell 0.7 percent to $1.3122 and the dollar gained 0.3 percent against the yen to 97.56 yen.
There was little respite across the emerging markets, with MSCI's benchmark index down 1.1 percent.
As the Fed's policy tapering gradually pushes U.S. Treasury yields higher, the attractiveness of returns in developing countries like Turkey and South Africa has waned.
The emerging markets index has fallen close to 6 percent this week, making for a year-to-date loss of nearly 15 percent, and many in the market see further falls ahead.
Gold drew some demand from investors attracted by the week's big equity and bond price falls, although worries about China's sluggish growth outlook weighed on sentiment.
Spot gold recovered from a three-year trough and was up 0.9 percent at $1,289.36 an ounce, while gold futures added 0.2 percent to $1,288.50 an ounce.
But oil gave up some ground gained earlier, with Brent crude losing $2 to $100.15, while U.S. oil dropped $1.93 to $93.22.
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