(Updates prices, adds new comment)
* Graphic: Global asset performance http://tmsnrt.rs/2yaDPgn
* Graphic: World FX rates http://tmsnrt.rs/2egbfVh
By Herbert Lash
NEW YORK, May 20 (Reuters) - An earlier rally in global stocks fizzled and the dollar strengthened on Friday as investor unease about Federal Reserve policy tightening to clamp down on inflation kindled fears of a slowdown and put risk-off sentiment back in the ascendancy.
Shares had rebounded earlier in Europe and Asia after China cut a key lending benchmark to bolster its weakening economy, helping drive early gains on Wall Street.
China cut its prime rate for five-year loans, which influences mortgage prices, by 15 basis points in a reduction that was sharper than expected as authorities seek to cushion the impact of an economic slowdown.
U.S. Treasury yields fell for a third straight session on concerns about growth prospects. The yield on benchmark 10-year notes fell 5.6 basis points to 2.799%.
Equity valuations need to come down and the expected return on investments, the discount rate, needs to go up, said Stephen Auth, chief investment officer of equities at Federated Hermes.
"The market is starting to digest the idea that this might be a new world where the discount rate on risk assets is not zero anymore," Auth said.
"You're seeing all these different areas of the market get pounded at the same time and it's just been very unsettling for investors," he added.
The pan-European STOXX 600 index closed up a preliminary 0.73%. MSCI's gauge of stocks in 47 countries shed 0.45%, on track on track for its seventh consecutive weekly decline, its longest losing streak since the index was launched in 1990.
On Wall Street, the Dow Jones Industrial Average fell 1.09%, the S&P 500 lost 1.28% and the Nasdaq Composite dropped 1.83%.
Fed funds futures were firmer, suggesting that the U.S. rate market has pulled back a bit from some of its more extreme rate hike estimates. The rates market has priced in a fed funds rate of 2.783% at the end of next year, compared with a current level of 0.83%. The rate was as high as 2.9% two weeks ago.
The dollar recouped some of its recent losses against the euro but remained on pace for its worst weekly loss against the common currency since early February as investors questioned whether the greenback's month-long rally was done.
The dollar has been supported in recent months by a flight to safety amid a rout across markets due to fears of soaring inflation, a hawkish Fed and the war in Ukraine.
The dollar index rose 0.136%, with the euro down 0.29% to $1.0555. The Japanese yen strengthened 0.01% to 127.78 per dollar.
Euro zone bond yields were higher after two days of hefty falls as risk sentiment improved following China's rate cut.
Germany's 10-year government bond yield fell 1.2 basis points to 0.932%, well below last week's eight-year high of 1.189%.
Markets are pricing in 38 basis points of tightening from the European Central Bank by its July meeting. This suggests a 25 basis point hike is fully priced in and markets see around a 50/50 chance of an additional 25 basis point move.
Oil prices steadied, on course for little change for the week as a planned European Union ban on Russian oil balanced concerns that slowing economic growth will hurt demand.
U.S. crude rose 0.08% to $112.30 per barrel and Brent was at $111.64, down 0.36% on the day.
Gold eased 0.1% to $1,840.71 an ounce as the dollar, in which bullion is priced, rebounded from two-week lows. But the safe-haven metal was still likely to post its first weekly gain in five.
Bitcoin fell 4.28% to $28,994.71.
(Reporting by Herbert Lash, reporting by Samuel Indyk in London and Andrew Galbraith in Shanghai; editing by Hugh Lawson, Kirsten Donovan)