* European markets open lower
* Gilts, sterling in firing line
* Yellen suggests allowing inflation to overshoot target
* U.S. stocks futures down 0.3 pct
By Marc Jones
LONDON, Oct 17 (Reuters) - World stocks started the week in the red Monday as the dollar touched a 7-month high and U.S. and European government bond yields - the main driver of global borrowing costs - climbed to their highest since June.
Riskier assets have had a difficult few weeks, undermined by concerns about a potential rise in U.S. interest rates, the outcome of U.S. elections, Britain's departure from the EU and the health of German and Italian banks.
China and Hong Kong had pulled Asian stocks lower overnight and Europe fell early on as weak-looking updates from media group Pearson and Norwegian seafood company Marine Harvest added to nervy signals from bond markets.
U.S. Treasuries pushed past 1.8 percent, German Bund yields hit their highest in 4-months ahead of a European Central Bank meeting on Thursday, while Brexit worries ensured another jittery start for UK gilts.
Despite the specifics, all the moves came amid signs that inflation is finally starting to wake from its slumber and that top central banks may let inflation "run hot" as U.S. Federal Reserve chief Janet Yellen suggested on Friday.
"We have the two month window where there will be a lot of uncertainty about what the European Central Bank will do, and we had a poor gilt opening this morning and that has spooked the market," said Mizuho interest rate strategist Antoine Bouvet.
"We expected another 20 basis point rise in Bund yields by mid-November."
Elsewhere in markets, the dollar took a breather after hitting a seven-month high against a basket of six major currencies and following its largest weekly rise in more than seven months last week.
That gave some respite to the euro and yen, which had both touched 2-1/2-month lows of $1.0964 and 104.22 yen per dollar respectively, although not for the Brexit-battered pound which slumped back to $1.2160.
Media reports of disagreements between the finance minister and his cabinet colleagues over the terms of Britain's exit from the European Union were the latest cause of strife.
The Daily Telegraph said Phillip Hammond could quit his post after he was excluded from government meetings because he criticised the "hard" Brexit stance of Prime Minister Theresa May.
Although the Treasury denied that Hammond will quit, it did little to instill confidence in the pound, traders said.
Investors are awaiting a raft of global economic data this week, including U.S. industrial production on Monday; U.S. and UK consumer prices, and UK producer prices on Tuesday; and Chinese third-quarter gross domestic product on Wednesday.
The European Central Bank will publish bank lending figures on Tuesday, hold its policy meeting on Thursday and euro zone consumer confidence data for October is due on Friday.
Emerging Asian currencies lost ground on Monday after the comments by Yellen, which spurred investors to cut bond holdings in the region.
The Chinese yuan also weighed as it dropped to its weakest since September 2010 as the central bank in Beijing set its official guidance rate lower again.
China's economy likely grew 6.7 percent in the third quarter from a year earlier, the same pace as the previous quarter, as increased government spending and a property boom offset stubbornly weak exports, according to a Reuters poll of 58 economists.
But analysts are increasingly worried that China's growth is becoming too reliant on government spending, ballooning debt levels and a housing market that is showing signs of overheating.
U.S. stock futures fell 0.3 percent. MSCI's broadest index of Asia-Pacific shares outside Japan had ended down 0.5 percent, with Hong Kong's Hang Seng hitting 1-1/2-month lows, though the weaker yen helped Japan's Nikkei close up 0.3 percent.
"Markets are reacting to the possibility that the Fed might join the Bank of Japan in conducting policy to steepen the yield curve," Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote in a note.
"In the Fed's case, this might amount to running the gauntlet of higher inflation with a very slow pace of monetary tightening."
Oil prices, which have risen for four straight weeks, have helped drive the pickup in inflation globally.
Brent crude futures stood flat at $51.94 in European trade with U.S. crude futures a shade lower at $50.15 per barrel.
They were capped by a rising rig count in the United States, a strong dollar and record OPEC-output.
Some market players are wary of a possible hit to investors' risk appetite after Iraq's Prime Minister Haider al-Abadi announced the start of an offensive to retake the Iraqi city of Mosul from Islamic State. (Reporting by Marc Jones; Editing by Alison Williams)