* European Parliament launches punitive procedure vs Hungary * Forint, Hungarian stocks fall * Czech central bank chief signals further rate hike in Sept * Czech crown hits strongest level vs euro since May (Recasts with European Parliament vote against Hungary, impacts) By Sandor Peto and Robert Muller BUDAPEST/PRAGUE, Sept 12 (Reuters) - Hungarian asset prices declined across the board on Wednesday after the European Union's parliament voted to start a punitive procedure against Hungary for flouting democratic rules. The forint traded near record lows against the crown which rallied after Czech central bank governor Jiri Rusnok said interest rates could rise further as early as this month. The most severe punishment under the probably lengthy Article 7 procedure is stripping Hungary of its voting rights in the EU. However, that is highly unlikely to happen as Poland, against which similar proceedings are under way, is likely to block the decision which would require unanimity. "Events like tomorrow's Turkish central bank rate decision and ECB meeting overshadow this," said Gergely Palffy, analyst of Raiffeisen in Budapest. "Investors note this, of course ... but I do not think that one week from now we will be talking about this," he added. The forint fell half a percent against the euro after the parliament vote to 326.4. It regained some ground by 1202 GMT, when it was nonetheless 0.4 percent weaker from Tuesday, trading at 325.9. The news also dragged down the zloty by about 0.1 percent, but it also rebounded quickly, to trade almost flat at 4.3095. The decision knocked Budapest's main stock index from slight gains into a half percent decline relative to Tuesday's close, but by 1202 GMT it narrowed its loss to 0.2 percent. Hungarian government bonds yields rose 2-3 basis points, with the 10-year paper trading at 3.56 percent. "I do not think that this (decision) could upset tomorrow's (bond) auction," one Budapest-based fixed income trader said. "Yields may rise (by the auction), but they have been in a rising trend anyway," the trader added. The Czech crown gave up half of its early gains against the euro, retreating from a 4-month high. But trading at 25.595, it was still firmer by a quarter of percent from Tuesday, buoyed by Rusnok's comments in an interview to Reuters. He said strong growth could allow the bank to continue to increase its interest rates at its Sept. 26 meeting, and another rise was also possible before the end of the year. Rusnok also said pressure on the crown "will fade out", adding, though, that when that would happen remained "a big unknown". Prague outperformed all regional equities indices, rising 0.8 percent, mainly driven by 1.6 percent firming of the shares of Komercni Banka, one of the biggest Czech lenders. Romania's leu eased 0.1 percent to 4.638 against the euro. An adviser to the Romanian central bank, Adrian Vasilescu, was quoted by the business paper Ziarul Financiar as saying that a rise in annual inflation to 5.1 percent in August, reported on Tuesday, was not a surprise to the bank. CEE SNAPSHOT AT MARKETS 1402 CET CURRENCI ES Latest Previous Daily Change bid close change in 2018 Czech <EURCZK= 25.5950 25.6600 +0.25% -0.21% crown > Hungary <EURHUF= 325.9000 324.6800 -0.37% -4.60% forint > Polish <EURPLN= 4.3095 4.3078 -0.04% -3.09% zloty > Romanian <EURRON= 4.6380 4.6323 -0.12% +0.90% leu > Croatian <EURHRK= 7.4320 7.4218 -0.14% -0.02% kuna > Serbian <EURRSD= 118.2600 118.4500 +0.16% +0.20% dinar > Note: calculated from 1800 CET daily change Latest Previous Daily Change close change in 2018 Prague 1090.44 1081.440 +0.83% +1.14% 0 Budapest 36313.77 36371.94 -0.16% -7.78% Warsaw 2233.32 2248.35 -0.67% -9.26% Bucharest 8291.07 8282.11 +0.11% +6.93% Ljubljana <.SBITOP 859.11 861.72 -0.30% +6.54% > Zagreb 1809.67 1796.58 +0.73% -1.80% Belgrade <.BELEX1 723.53 722.43 +0.15% -4.77% 5> Sofia 629.51 632.02 -0.40% -7.08% BONDS Yield Yield Spread Daily (bid) change vs Bund change in Czech spread Republic 2-year <CZ2YT=R 1.5040 0.0610 +206bps +8bps R> 5-year <CZ5YT=R 1.8130 0.0090 +201bps +2bps R> 10-year <CZ10YT= 2.1610 -0.0070 +175bps +1bps RR> Poland 2-year <PL2YT=R 1.6440 0.0080 +220bps +2bps R> 5-year <PL5YT=R 2.5740 -0.0250 +278bps -1bps R> 10-year <PL10YT= 3.2740 0.0060 +286bps +3bps RR> FORWARD RATE AGREEMEN T 3x6 6x9 9x12 3M interban k Czech Rep 1.92 2.11 2.22 1.53 <PRIBOR= > Hungary 0.58 0.80 1.03 0.21 Poland 1.77 1.79 1.84 1.71 Note: FRA are for ask prices quotes