* Dollar index at highest level since mid-Sept, short-term U.S. yields surge
* Stocks supported by strong U.S. GDP data
* Fed says in no rush to raise rates but upgrades view on economy, inflation
* Argentine on brink of default again but no major fallout expected this time
By Hideyuki Sano
TOKYO, July 31 The dollar stayed strong and U.S. bond yields held firm on Thursday after data showed solid U.S. economic growth, even as the Federal Reserve repeated its message that it is in no hurry to raise interest rates.
While the prospect of a solid U.S. recovery underpinned equities, many Asian shares slipped on profit-taking after making hefty gains since the middle of this month.
MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.3 percent but held still not far from 6 1/2-year high hit on Wednesday.
The Nikkei average rose 0.3 percent while Australian shares inched up to hit six-year highs.
European shares are expected to open slightly firmer, with France's CAC40 seen rising up to 0.3 percent and Britain's FTSE 0.1 percent.
U.S. April-June gross domestic product expanded at a 4.0 percent annualised rate as activity picked up broadly, while the reading for the first quarter was revised up to a contraction of 2.1 percent from an earlier estimate of a 2.9 percent drop.
"The data led markets to think that there's no need to be pessimistic about the U.S. economy," said Makoto Noji, senior strategist at SMBC Nikko Securities.
The GDP data increased expectations that the Fed is moving closer to an interest rate hike that many expect will occur next year if the economy continues to gain momentum.
The 10-year U.S. debt yield jumped to as high as 2.569 percent, posting its biggest daily rise since November. It last stood at 2.55 percent.
Two- and three-year note yields rose to their highest in three years.
The U.S. dollar index rose above two of its recent peaks - one hit in January and the other in November - to its highest level in almost 11 months. The index rose to as high as 81.545 on Wednesday and last stood at 81.387, having risen 2.0 percent this month.
The U.S. currency broke above its long-held range against the yen to hit a four-month high of 103.15 yen on Wednesday. It last stood at 102.76 yen.
The euro also fell to eight-month low of $1.3366 and last fetched $1.3398.
RISK OF DEFLATION
As widely expected, the U.S. Federal Reserve cut its monthly asset purchases to $25 billion from $35 billion, leaving it on course to end the programme this autumn. ]
While the Fed also reiterated its concerns over slack in the labour market, it upgraded its assessment of the U.S. economy and expressed some comfort that inflation was moving toward its target.
That stood in contrast with the euro zone, where data showed on Wednesday Spanish consumer prices fell 0.3 percent in July, faster than an expected 0.1 percent fall, keeping pressure on the European Central Bank to adopt full-scale quantitative easing.
As signs of disinflation mounted, euro zone bond yields kept falling, with Italian and Spanish 10-year debt yields both hitting record lows of 2.625 percent and 2.451 percent respectively.
In addition, there are concerns that the euro zone economy may be hit by a loss of trade with Russia after the European Union and the United States imposed further economic sanctions on Moscow.
Oil prices eased, with U.S. crude futures hovering at $99.60 per barrel, near a 2 1/2-month low of $99.01 hit in mid-July, pressured by excess supplies in Europe and Asia despite continued hostilities in Gaza and Ukraine.
Elsewhere, Argentine looked set to default on its debt within hours after it failed to strike a deal with holdout creditors.
But the broader global impact of any default is likely to be limited because Argentina has been effectively shut out of financial markets since its devastating debt default in 2002. (Editing by Eric Meijer & Kim Coghill)