* Dollar, Treasury yields jump on risk of earlier Fed hike
* Falling yen bolsters Japanese stocks, other markets mixed
* Eyes on China manufacturing index amid economic uncertainty
By Wayne Cole
SYDNEY, Aug 21 The U.S. dollar was flying high on Thursday as investors detected a hawkish turn in policy discussions at the Federal Reserve, while Asian share markets took comfort from a resilient performance on Wall Street.
Yields on short-term U.S. debt leaped by the most since March, while the dollar reached heights not visited in 11 months as minutes of the Fed's last meeting led markets to price in a greater risk of an earlier hike in interest rates.
The story was much the same in Britain where bond yields jumped on news that two Bank of England policymakers unexpectedly broke rank with colleagues and voted for higher interest rates earlier this month.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, was up at 82.244 after breaking decisively higher overnight.
The dollar also notched up a four-month peak against the yen at 103.85, while the euro crumbled to an 11-1/2-month trough of $1.3256.
The drop in the yen was taken as positive for Japanese exports and corporate earnings, giving a boost to stocks. The Topix added 0.4 percent, while the Nikkei gained 0.5 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan was all but flat.
In Asia, all eyes will be on a preliminary survey of China's manufacturing sector due at 0145 GMT. Last month, the sector posted its strongest growth in at least 1-1/2 years as new orders surged to multi-month highs.
WHEN HAWKS CRY
On Wall Street, the Dow had ended Wednesday up 0.35 percent, while the S&P 500 gained 0.25 percent and the Nasdaq dipped 0.02 percent.
Equity investors seemed reassured that the vast majority of the Fed's voting committee wanted to keep a pledge that rates would stay near zero for a considerable time after it stops buying assets, which is expected in October.
But the minutes also revealed a more active debate about whether an earlier hike in rates might be needed.
"Our takeaway is that the median FOMC participant has been surprised by how quickly the unemployment rate has come down and is also less convinced there is as much slack in the labor market as previously believed," said Michelle Girard, chief economist at RBS.
"So the hawks are getting restless and the centrists seem to be less dug in on some of their previously held views."
With cries of the hawks ringing in their ears, bond investors chose to punish Treasuries. Shorter-dated debt was hit hardest as it is typically more sensitive to expectations on changes in the official Fed funds rate.
Yields on two-year paper shot up 5 basis points to 0.4757 percent, the biggest daily increase since March.
Fed funds futures fell as the market brought forward the timing of a first hike. Futures for June next year <0#FF:> now imply a rate of 27 basis points, compared to 23 basis points early in the week.
The current target for Fed funds is a range of zero to 25 basis points and it effectively trades at just 8 basis points.
Across the Atlantic, the risk of an early move by the BoE lifted yields on British two-year debt 4 basis points to 0.74 percent.
That saw sterling hold up fairly well against the broadly firmer greenback and actually rise on the euro, which plumbed a one-week low at 79.68 pence.
In commodity markets, the rise in the dollar knocked gold down to $1,289.40 an ounce, and further away from last week's peak of $1,319.10.
Oil prices found a respite from recent selling and steadied somewhat. Brent crude for delivery in October was a cent easier at $102.27 a barrel, while U.S. crude rose 7 cents to $93.51. (Editing by Shri Navaratnam)