* Euro undermined as ECB talk drags down bond yields
* US yields fall as auctions draw strong demand, inflation seen benign
* Asian shares get little inspiration from a flat Wall St
* Emerging markets extend their recent rally, hit two-month high
By Wayne Cole
SYDNEY, March 28 (Reuters) - The euro was wallowing near three-week lows in Asia on Friday as speculation intensified that the European Central Bank might ease policy further, while bond yields and gold were down on the outlook for low inflation in the U.S. and Europe.
Activity in Asian shares was lacking after a flat finish on Wall Street and as the end of the quarter approached. Both the Australian market and MSCI's index of Asia-Pacific shares outside Japan were barely changed.
There was more life in currencies as talk of ECB action pulled down bond yields across the EU and undermined the euro.
Peripheral European bond yields hit a multi-year trough on Thursday while the premium that U.S. two-year debt pays over German paper widened to its fattest since late 2012.
That saw the euro peel off to $1.3742 and a long way from the March peak of $1.3967. Its largest loss of 1.2 percent came against the New Zealand dollar which has been on a tear since the country's central bank raised interest rates a couple of weeks ago.
The Reserve Bank of New Zealand has all but promised to hike rates several more times this year, setting it far apart from other developed nations and sending its currency to a two-and-a-half year peak on the U.S. dollar.
Asian stocks got little inspiration from Wall Street, where the Dow and the S&P 500 both ended a fraction lower. The Nasdaq extended its recent pullback with a loss of 0.54 percent.
Investors seemed to derive scant comfort from the final revision to fourth-quarter growth to 2.6 percent and a decline in weekly jobless claims to a four-month low.
Yet the sluggishness of U.S. stocks contrasts with a sudden revival in emerging markets, leading some to suspect that stretched valuations on Wall Street are leading fund managers to go bargain hunting elsewhere.
The MSCI index of emerging shares has climbed for five straight sessions to the highest in two months. The index for Latin America boasted its biggest daily gain on Thursday since July 2012 as Brazilian markets rallied.
TREASURIES IN DEMAND
In debt markets, a sale of U.S. seven-year Treasury paper drew red hot demand, just as a five-year auction had on Wednesday. Direct bidders, which include central banks, took a record share of the sale, leaving dealers scrambling to cover short positions.
The demand for U.S. debt also showed up in the amount of Treasuries that the Federal Reserve holds on behalf of foreign central banks, which surged by a record $56 billion in the week to Thursday, on top of a $32 billion jump the previous week.
The inflow almost entirely reversed a mysterious $104 billion drop three weeks ago that many had thought was due to Russia pulling its money out of the U.S. to avoid possible sanctions over Ukraine.
Whatever the source of the demand it has helped drag down longer-term U.S. yields and contributed to a marked flattening of the yield curve. The spread between five-year notes and thirty-year bonds has shrunk to its smallest in five years.
The shift also reflects speculation that U.S. interest rates will rise sooner than first thought and thus keep inflation well contained below 2 percent.
The downward revision in the market's inflation expectations might also be one reason gold has taken a turn for the worse in recent sessions. On Friday, the metal was stuck at $1,291.56 an ounce having lost 7 percent in nine sessions.
In the oil market, Brent rose to $107.83 a barrel, while U.S. crude futures were steady at $101.24. (Editing by Shri Navaratnam)