* Investors brace for tighter monetary policy
* Oil hits fresh 7-year high after Turkey pipeline outage
* Rate-sensitive tech stocks lead stock market decline
By Lawrence White and Daniel Leussink
LONDON/TOKYO, Jan 19 (Reuters) - Strong earnings updates in the United States and Europe helped shares recover on Wednesday from earlier falls driven by rising fears over inflation that have sent bond yields on both sides of the Atlantic to multi-year highs.
An index of Europe's 600 biggest stocks rose 0.49% as robust earnings from luxury majors Burberry and Richemont countered pressure from rising bond yields. Buoyant reports from companies including UnitedHealth Group Inc and Bank of America Corp likewise supported U.S. futures.
U.S. Treasury yields hit fresh two-year highs and Germany's 10-year yield rose above 0% for the first time since May 2019, as investors hike bets that policymakers will curb years of stimulus in order to fight rising asset prices.
The benchmark German bond's shift to positive yields marks a turning point for euro area debt, reflecting record-high inflation that is being exacerbated by supply chain disruption.
"This inflationary episode is unusually challenging in that it is driven by both strong demand and shortages of supply," said Guy Foster, chief strategist at wealth manager Brewin Dolphin.
Oil prices hit their highest since 2014 amid an outage on a pipeline from Iraq to Turkey and global political tensions, stoking fears of inflation becoming more persistent and propping up the dollar, which hovered near one-week highs.
"There is a limited amount that domestic interest rates can do to ease global markets for gas, oil and semiconductors but generally tighter monetary policy around the world would slow the economy and relieve some of this pressure," Foster said.
U.S. stock futures rose as strong corporate earnings reports helped investors temporarily shrug off inflation concerns, with S&P 500 futures up 0.33% by 1300 GMT.
Investors now await next week's Federal Reserve policy meeting for more cues on the central bank's plan to control inflation.
The positive tone in Western share markets contrasted with a downbeat session earlier in Asia, where MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4 % as tech stocks in particular suffered.
Australia shed 1.0%, while Japan's Nikkei hit a three-month low as worries over new curbs on businesses to halt a record surge in coronavirus cases curbed risk appetite.
Shares in Sony Group slumped to their lowest level since late October, losing more than 10% after gaming rival Microsoft said it will buy developer Activision Blizzard.
Two-year Treasury yields, which track short-term interest rate expectations, were last at 1.0429%, after hitting a peak of 1.075%, the highest since February 2020, as traders positioned for a more hawkish Federal Reserve.
The prospect of higher U.S. rates also played out elsewhere in fixed income markets, with longer-dated U.S. Treasury yields hitting fresh two-year highs.
Ten-year yields were last flat around 1.8646%, while five-year yields were at 1.6497%, near new two-year highs recorded early in the session.
The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was down 0.17% at 95.654.
Meanwhile sterling rose against the dollar to $1.3642 as expectations of rate hikes to combat inflation at a 30-year high overshadowed the growing prospects of a leadership challenge against Prime Minister Boris Johnson.
Oil prices rose for a fourth day as the outage on a pipeline from Iraq to Turkey added to worries about an already tight supply outlook amid geopolitical troubles involving Russia and the United Arab Emirates.
U.S. crude jumped 0.65% to $86.08 a barrel. Brent crude rose 0.63% to $88.06 per barrel.
Gold edged up slightly, with spot gold at $1818.26 per ounce.
(Reporting by Lawrence White and Daniel Leussink; Editing by Kim Coghill, Simon Cameron-Moore and Emelia Sithole-Matarise)