By Ankur Banerjee

SINGAPORE Asian shares slid on Friday while the dollar was firm after U.S. consumer prices increased more than expected, bolstering the case for the Federal Reserve to keep rates higher for longer.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.94% on Friday, on course for its biggest one-day percentage drop in a week, having scaled a three-week high on Thursday.

Declines for Chinese stocks were particularly large after data earlier in the day showed China's consumer prices were flat in September, while factory-gate prices shrank at slower pace, indicating deflationary pressures persist.

China's blue-chip stock index CSI300 fell 0.80%, while the Hang Seng Index sank 1.5% in early morning trade.

In contrast, Japan's Nikkei was 0.13% lower, while Australia's S&P/ASX 200 index lost 0.25%.

The increase in U.S. consumer prices for September contained a surprise surge in rental costs and traders now see a stronger chance the Fed will end up delivering another hike this year.

Futures contracts that settle to the Fed policy rate reflect about a 40% probability of a rate hike in December, compared with about a 28% chance seen before the inflation report.

Ryan Brandham, head of global capital markets, North America at Validus Risk Management, said the CPI data highlights the challenges the Fed will face bringing inflation down to its 2% target.

Separate data also showed the number of Americans receiving benefits after an initial week of aid, a proxy for hiring, increased 30,000 to a still-low 1.702 million during the week ended Sept. 30.

"The labour market softening is key to the Fed achieving its goal of returning inflation to target, and the hawks calling for at least another hike will be supported based on these numbers," Brandham said.

The inflation report along with poor demand for an auction of U.S. 30-year bonds sent Treasury yields higher on Thursday.

In Asian hours on Friday, the yield on 10-year Treasury notes eased 3.7 basis points to 4.674% but remained far off the two week low of 4.5300% it touched a day earlier.

Recent gains in stocks and a slide in Treasury yields had followed comments from Federal Reserve officials suggesting that U.S. interest rates - which tend to drive global borrowing costs - may have finally peaked.

"Much of the ‘good’ work done in the past week in the form of bull flattening of the US yield curve has been undone by the latest US CPI report," said Ray Attrill, head of FX strategy at National Australia Bank.

The week's sharp escalation of Middle East tensions has also ensured the mood remains cautious across markets.

Investors will next focus on remarks by Federal Reserve Chair Jerome Powell who is due to speak on Oct. 19, just before the U.S. central bank's blackout period begins ahead of its next interest-rate decision. The Fed next meets Oct. 31-Nov. 1.

The risk-off mood also prevailed in the currency market, with the dollar holding on to overnight gains. Against a basket of currencies, the dollar was at 106.47, having gained 0.8% overnight.

The euro was up 0.13% to $1.054, while sterling was at $1.2193, up 0.16% on the day. The dollar's ascent has again put the Japanese yen under pressure, with the yen at 149.82 per dollar.

Gold prices edged up on Friday but remained below two-week highs hit in the previous session. Spot gold added 0.2% to $1,872.17 an ounce.

Oil prices rose on Friday after the U.S. tightened its sanctions programme against Russian crude exports, raising supply concerns in an already tight market. U.S. crude rose 0.63% to $83.43 per barrel and Brent was at $86.33, up 0.38% on the day.

(Reporting by Ankur Banerjee; Editing by Edwina Gibbs)