By Ankur Banerjee

SINGAPORE, March 23 (Reuters) -Asian shares spiked on Thursday and the dollar slid after the U.S. Federal Reserve hinted it could pause interest rate rises following turmoil in the banking sector, though it also reiterated its commitment to fighting sticky inflation.

In a widely expected move, the Fed raised interest rates by 25 basis points, but it recast its outlook to a more cautious stance as a result of the banking stress.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 1% to touch a two-week high of 515.62. The index was on track for its best week in more than two months.

Focus now shifts to the Bank of England, with investors expecting a quarter-percentage-point increase in its policy rate after a surprise jump in inflation squashed hopes of the central bank pausing its tightening campaign.

Asia's rally looked unlikely to spread to Europe, where futures were pointing to a lower open. Eurostoxx 50 futures STXEc1 were down 0.53%, German DAX futures FDXc1 0.32% and FTSE futures FFIc1 0.29%.

Wall Street ended sharply lower overnight as investors digested the Fed's policy statement and comments from Fed Chair Jerome Powell's press conference. E-mini futures for the S&P 500 EScv1 rose 0.54%. .N

The Fed's statement suggested it was on the verge of pausing interest rate rises, but Powell in his press conference said the central bank would do "enough" to tame inflation, and he raised the possibility of further increasing rates if necessary.

Management of Silicon Valley Bank had "failed badly", but the bank's collapse this month did not indicate wider weaknesses in the banking system, Powell said.

But sentiment was damaged by a comment from U.S. Treasury Secretary Janet Yellen, who told lawmakers that she had not considered or discussed creating "blanket insurance" for U.S. banking deposits without approval by Congress.

"Despite seeming to rule out rate cuts this year ... much of the damage seems to have come from Yellen's parallel remarks to Congress right when Jerome Powell was insisting that the banking sector was sound," ING economist Rob Carnell wrote in a note to clients.

"This won't be the final word on either rates or deposit insurance in all likelihood, and a little further homework and collaboration between Fed and Treasury Dept seems probable."

Markets are now pricing in an approximately 65% chance of the Fed pausing in its next meeting, in May, and a 35% chance of a 25 bps rise then, the CME FedWatch tool showed.

In Asia, Japan's Nikkei .N225 fell 0.22%, while Australia's S&P/ASX 200 index .AXJO lost 0.61%.

China's blue-chip CSI 300 Index .CSI300 rose 0.6%, and the Shanghai Composite Index .SSEC gained 0.8%. Hong Kong's Hang Seng Index .HSI jumped 1.5%.

Global markets have been volatile, with bank shares battered in the past two weeks following the sudden failures of two U.S. lenders an emergency sale of embattled Swiss banking behemoth Credit Suisse CSGN.S.

Regulators and policymakers have scrambled globally to quell contagion risks and ease worries of a banking crisis, but investors remain wary that other small lenders may be vulnerable as credit markets tighten.

In the currency market, the dollar index =USD, which measures the dollar against other major currencies, fell nearly 0.5% to fresh seven week low of 101.92. The euro EUR=EBS was up 0.45% at $1.0904.

The yen JPY=EBS strengthened 0.60% to 130.64 per dollar, while sterling GBP= was last trading at $1.2325, up 0.50%.

The yield on 10-year Treasury notes US10YT=RR was down 6 basis points at 3.440%, while the 30-year Treasury bond US30YT=RR was down 3 basis points at 3.667%.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 10 basis points at 3.881%.

U.S. crude CLc1 fell 1% to $70.19 per barrel and Brent LCOc1 was at $76.04, down 0.85%. O/R

Reporting by Ankur Banerjee; Editing by Bradley Perrett

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