* Stocks on major markets recover for third day
* Bond yields slip as investors brace for CPI data
* Oil hits two-month low, outlook for global balance dims
* U.S. dollar extends fall as yen hits five-month high
By Herbert Lash
NEW YORK, Feb 13 (Reuters) - Stocks on major world markets rose for a third day in a row on Tuesday while bond yields slipped ahead of a widely anticipated U.S. inflation report that has investors on edge as it may increase the pace of future U.S. interest rate rises.
After tumbling about 12 percent in the past two weeks from record highs, benchmark U.S. stock indexes were helped on Tuesday by gains in Amazon.com and Apple, while advances by Asian heavyweights Tencent, Alibaba and Taiwan Semiconductor supported world markets.
Economic growth in the U.S., Europe and Asia has stoked inflation fears in recent weeks, pushing up bond yields and undermining stock prices, so Wednesday's U.S. inflation data may help determine whether the correction in equities markets is over.
Economists expect the U.S. consumer price index for January to have risen month over month by 0.3 percent with underlying inflation of 0.2 percent when the Labor Department reports on Wednesday, according to a Reuters poll. But the year-on-year increase in the CPI is seen slowing to 1.9 percent from 2.1 percent in December.
"After years of pronouncing inflation 'dead,' the market is now suddenly focused on and dreading inflation, which of course was at the cornerstone of this most recent period of market volatility," said Mike Terwilliger, portfolio manager of Resource Liquid Alternatives for the Resource Credit Income Fund.
The prospect of higher inflation forcing the Federal Reserve to increase the pace of interest rates rises, and the threat of a widening U.S. federal budget deficit in the wake of December's tax cuts leading to more borrowing by the U.S. Treasury, could lead to a significant repricing of all fixed-income assets, analysts said.
"It doesn't mean it's going to conflate right now but it certainly is why the sentiment in the market has begun to shift in this direction and why tomorrow's report has the attention it's garnering," said Larry Hatheway, chief economist at GAM Investment Management in Zurich.
Too high a reading for U.S. inflation would be negative for both bonds and stocks but an especially unexpected low reading of zero to 0.1 percent would ignite a rally in both assets, he said.
MSCI's gauge of stock markets in 47 countries closed up 0.32 percent and its emerging markets index rose 0.96 percent on Tuesday.
In Europe, the pan-regional FTSEurofirst 300 index closed down 0.63 percent.
The Dow Jones Industrial Average rose 39.18 points, or 0.16 percent, to 24,640.45. The S&P 500 gained 6.94 points, or 0.26 percent, to 2,662.94 and the Nasdaq Composite added 31.55 points, or 0.45 percent, to 7,013.51.
The S&P 500 index has recovered 3.2 percent over the past three session but remains down 7.3 percent from a record peak in January.
Cleveland Fed President Loretta Mester, a voting member in the U.S. central bank's rate-setting committee this year, said inflation should pick up this year but not at a rate that requires a faster Fed reaction.
The market sell-off this month will not damage the U.S. economy's overall strong prospects, Mester told the chamber of commerce in Dayton, Ohio.
U.S. long-dated Treasury yields edged lower in generally quiet trading ahead of Wednesday's U.S. economic data reports which also include U.S. retail sales for January.
Benchmark 10-year notes last rose 6/32 in price to yield 2.8349 percent.
German government bonds were in demand as recent multi-year highs on yields on either side of the Atlantic proved attractive for some investors.
Germany's 10-year bund, the benchmark for the euro bloc, was down 1.5 basis points at 0.74 percent, off 2-1/2 year highs of 0.81 percent hit last week.
The Japanese yen rose to a five-month high on the back of broad-based U.S. dollar selling and speculation the Bank of Japan could be about to dial back record levels of monetary stimulus.
The U.S. dollar index fell 0.55 percent, with the euro up 0.5 percent to $1.2353. The Japanese yen strengthened 0.78 percent versus the greenback at 107.80 per dollar.
Oil prices ended largely unchanged as a weaker dollar spurred a rebound from an early slide after the International Energy Agency forecast supply could outstrip demand.
Brent futures hit a two-month low early, but the benchmark settled up 13 cents at $62.72 a barrel. U.S. West Texas Intermediate crude futures fell 10 cents to settle at $59.19 a barrel.
Gold prices rose on Tuesday as the dollar slipped.
U.S. gold futures futures for April delivery settled up $4, or 0.3 percent, at $1,330.40.
Reporting by Herbert Lash; Editing by Clive McKeef