* Stimulus withdrawal, economic recovery view pushes up core bond yields * Indonesian rupiah lowest since 2009, Indian rupee slides * Markets await minutes of Fed meeting on Wednesday * European shares down, Wall Street seen flat By Marc Jones LONDON, Aug 19 (Reuters) - Rising expectations the Federal Reserve will soon scale back its stimulus drove German and U.S. bond yields to multi-month highs on Monday and dealt a blow to emerging markets, with India's rupee cartwheeling to historic lows. Wednesday's minutes from the last Fed meeting could offer fresh hints on when the U.S. central bank will start winding down its $85 billion-a-month support programme, a tricky process markets have been nervous about for months. German 10-year government bond yields rose 1.3 basis points to 1.89 percent, having hit their highest since March 2012 at 1.924 percent at the open. Their U.S. counterparts hit fresh two-year highs of 2.871 percent, though the move was not tracked by the dollar, which traded little changed against its currency basket. "What you are seeing at the moment in a way is central bankers versus the markets," said ABN Amro economist Nick Kounis. "The markets are pushing up the rate (increase) expectations and central bankers have been trying to pour cold water on the moves, but it is proving more difficult against a background of stronger economic data." The single currency area ended an 18-month recession last quarter, growing 0.3 percent, and August business surveys this week are likely to show the modest recovery is slowly broadening out. As well as a further rise in the euro zone composite purchasing managers' index (PMI), economists expect readings for the area-wide service sector and for French manufacturing to have punched through the no-change mark of 50 to show growth. European shares have outperformed over the last two months amid the brighter picture but at midday they were struggling. Falls of 0.2 percent for London's FTSE and 0.2 and 0.5 percent for the DAX and CAC 40 in Frankfurt and Paris pushed the FTSEurofirst 300 down 0.3 percent and left world shares down 0.15 percent. EMERGING TURBULENCE As rising core debt yields make it harder for developing nations to fund widening current account deficits, emerging markets - whose economies are heavily linked to U.S. fortunes and the dollar - took a spill. The Indian rupee slid as far as 62.73 per dollar, emphatically breaching the previous low of 62.03. The country's share market lost 1.4 percent, on top of a 4 percent drubbing last Friday. The country's central bank has tried to restrict how much Indian residents and companies can send offshore, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors. "The foreign investor community wants tangible and ambitious reforms that look and feel like a worthy 'second generation' to the fundamental measures adopted in the early 1990s," Westpac analysts said in a note. Indonesia's rupiah shed 1 percent to four-year lows at 10,485 per dollar and the strain also showed in MSCI's broadest index of Asia-Pacific shares outside Japan which fell 0.5 percent. Crucial later in the week will be an early reading on Chinese manufacturing from HSBC. Recent data suggested the economy might be stabilising and any improvement in the purchasing manager index will be welcomed by Asian investors. DOLLAR DIVERGENCE Wall Street was expected to open virtually unchanged later, after the Dow Jones Industrial Average suffered its biggest weekly fall of the year last week. <DJI > In the currency market, the dollar gave up early, modest gains to stand at $1.3361 per euro, little moved from Friday. Against the yen it pulled up to 97.91, while the dollar index was a shade softer at 81.213. The dollar has been in gradual decline for the past few weeks, in part on concerns the prospect of Fed tapering would scare foreign investors out of U.S. bonds. At some point yields should reach levels that are attractive to investors, but Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi said for now the view on the currency was being split between advanced and more vulnerable emerging economies. "The rising U.S. yields are making the global financing conditions more difficult, especially for countries which have elevated current account deficits," he said "We think gradually over time the dollar will begin to outperform against the major currencies but at the moment it is being offset by higher (bond) yields in Europe where markets have been very much focused on the improving cyclical momentum." Hopes for a pick-up in growth globally have also supported commodities. Copper slid 0.7 percent to $7,359 a tonne after hitting a 10-week peak of $7,420 on Friday, while gold and platinum both edged down from two-month highs. Brent crude inched up towards $111 a barrel as oil markets remained focused on the violent unrest in Egypt which has stoked fears for exports from other oil producers in the Middle East and North Africa.