* World equity markets post worst week since late June
* Dollar supported by rise in U.S. Treasuries yields
* Wall Street slips; Dow has year's biggest weekly drop
* Gold hits two-month high; oil up on supply worries
By Wanfeng Zhou
NEW YORK, Aug 16 U.S. bond yields rose to two-year highs on Friday as investors worried the Federal Reserve will start scaling back stimulus next month, while world share indexes registered their biggest weekly fall in almost two months.
The rise in yields on U.S. Treasuries drove the dollar up against major currencies, though it did briefly weaken after data showed U.S. consumer sentiment declined in August while housing starts and permits rose less than expected in July.
U.S. stocks ended lower, with the Dow posting its biggest weekly decline of the year as rising interest rates hurt high-dividend names and as earnings from retailers disappointed. European shares ended higher after hitting two-year highs earlier this week.
Treasuries have been roiled, along with German, British and other government bonds, as the United States and euro zone economies appear to have finally found a more solid footing, increasing expectations that yields will continue their recent rise.
"It's a further belief that the economy is on a more sustainable path," said Jennifer Vail, head of fixed income at U.S. Bank's wealth management group in Minneapolis. "The market believes that we are closer to the end of not only bond purchases, but also the end of near-zero interest rate policy."
The 10-year Treasury note was last down 18/32 in price, its yield at 2.8288 percent. On moderate trading volume, the 10-year yield reached as high as 2.866 percent, a level not seen since July 29, 2011, according to Reuters data.
The bond market has undergone a sharp sell-off since the Fed started talking about paring back its bond purchases. The benchmark 10-year yield has risen from about 1.6 percent at the start of May.
A Reuters poll released on Wednesday showed a majority of economists expect the Fed to reduce bond purchases at its Sept. 17-18 policy meeting, with a consensus expecting that the U.S. central bank would reduce purchases by $15 billion initially from the current $85 billion monthly pace.
On Wall Street, stocks have come under pressure as corporate revenue growth has disappointed even as companies' earnings have hit estimates. From Wal-Mart and Gap to Macy's and McDonald's, chains that cater to middle- and lower-income Americans are feeling the pinch of an uneven economic recovery.
Nordstrom became the latest department store chain to miss revenue estimates, prompting it to cut its full-year sales and profit forecasts. Its shares fell 4.9 percent.
"We haven't seen the revenue growth the market was anticipating," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
"We are unlikely to see a large-scale correction in the market right now, but it certainly is losing the momentum that took it to strong highs earlier this year," he said.
MSCI's world equity index, which tracks shares in 45 countries, was little changed on Friday but fell 1 percent this week, its biggest weekly drop since late June.
The Dow Jones industrial average dropped 30.72 points, or 0.20 percent, to close at 15,081.47. The Standard & Poor's 500 Index lost 5.49 points, or 0.33 percent, to end at 1,655.83. The Nasdaq Composite Index eased 3.34 points, or 0.09 percent, to 3,602.78.
For the week, the Dow lost 2.2 percent, the S&P 500 fell 2.1 percent, and the Nasdaq was off 1.6 percent.
Europe' broad FTSE Eurofirst 300 index of top companies rose 0.3 percent.
Emerging currencies struggled, with India's rupee hitting a record low beyond 62 per dollar, bringing its year-to-date losses to 11 percent. The rupee fell on concerns the central bank's latest measures to defend the currency could be a step toward outright capital controls. The Indonesian rupiah also tumbled to a four-year trough.
MSCI's broad emerging equities index shed 0.5 percent.
The dollar rose 0.2 percent to 97.56 yen, while the euro slipped 0.1 percent to $1.3335.
Expectations of a global economic recovery fueled demand for industrial metals, with copper reaching a 10-week peak of $7,420 a tonne, while zinc has rallied to a five-month high of $1,990 a tonne.
Precious metals like gold and platinum have gained as well, though they could be threatened if the Fed does wind down its stimulus. Gold hit a two-month high of $1,379.60, with platinum and palladium also at two-month highs.
Oil futures ended higher, with Brent oil posting the biggest weekly percentage gain in six weeks as turmoil in Egypt and Libya stoked worries about oil supply security.
Brent crude futures for October were up 80 cents to settle at $110.40 a barrel. U.S. oil for September rose 13 cents to settle at $107.46.