GLOBAL MARKETS-Asia stocks set for biggest weekly fall in 2 mths

* Indonesia, Thailand among worst performers

* Investor reluctant to add bets on high inflation markets

* Sector rotation out of materials and energy - Schroders

* Inflation in China and India above expectations

By Saikat Chatterjee

HONG KONG, Jan 21 (Reuters) - Asian stocks were set to post their worst weekly performance in nearly two months as rising inflation within the region increased the risks of aggressive policy action and hurt growth in the world's engines such as China and India.

Investors have been reluctant to add positions in emerging market stocks and bonds so far this year after record inflows in 2010 due to concerns that policy inertia may put growth-focused authorities behind the curve in fighting price pressures.

Foreigners have rotated funds out of high inflation risk economies such as Indonesia and into developed markets such as Japan this year and inflows into emerging market local currency bond funds, a favorite last year, have slowed considerably.

The MSCI index of Asia and Pacific shares excluding Japan extended its drop to 0.8 percent, after falling more than 1.8 percent on Wednesday, weighed down by selling in sectors such as materials and energy which in turn have buckled due to a selloff in commodities this week.

For the week, it is down by 1.43 percent, its biggest drop since the end of November in 2010.

"The market's pretty skittish when it comes to the risk of policy tightening," said Pengana Capital portfolio manager Tim Schroeders.

"I think there's some sector rotation out of those better performing materials and energy stocks back into financials," Schroeders said.

Chinese consumer prices in December rose 4.6 percent from a year earlier, staying above forecasts of 4.4 percent and raising prospects of a rate hike as soon as around the Lunar New Year holidays in early February. .

In India, headline inflation accelerated to 8.43 pecent in December from a year earlier. Analysts expect a quarter point rate increase at a review next week. .

Within the region, Indonesia and Thailand were the worst performers, falling by more than 3 and nearly 2 percent respectively.

Indian shares fell by nearly 0.5 percent with market bellwether Wipro Ltd falling by more than 4 percent.

COMMODITIES PAUSE

Commodities steadied after a sharp selloff this week, though sentiment remained fragile on concerns that tighter policy may cool growth and sap demand from resource-hungry Asia.

Oil was on track for a weekly drop of more than 2 oercent on Friday to below the $90/dollar mark, after rising to nearly $100 just a week ago.

London copper prices rose slightly, after shedding 2.3 percent in the previous session.

Analysts said China data showing a sharp jump in the annual growth rate and a smaller-than-expected slowdown in December inflation fed expectations of further policy tightening that could hurt demand for base metals. But tightening had so far been orderly.

"Our reading of the numbers was that they were best you could hope for. GDP is growing, inflation appears contained and interest rates are 150 basis points below pre-crisis levels," said Ben Westmore, commodities economist at National Australia Bank.

But the broad wave of risk aversion towards emerging markets and upbeat U.S. data gave a lift to the dollar which hit one-week highs versus the yen amd the Swiss franc .

The euro , too, held its ground due to combination of factors, including successful bond sales from highly indebted countries, including Portugal and Spain, and hopes that officials will agree to beef up a euro zone rescue fund.

Bids from Asian central banks have also helped the single currency all this week, traders said.

Gold steadied after a near two percent drop in the previous session. It paused at $1,346.91 an ounce after sliding to a two-month low of $1,342.65 in the previous session. (Additional reporting by Adrian Bathgate and Ian Chua in SYDNEY)

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