* Commodities fall on stronger dollar
* World stocks fall for third day
* U.S. 2-year Treasury yield at highest since Sept. 2008
* Euro zone bond yields dip on lower PMIs (Updates throughout)
By Ritvik Carvalho
LONDON, Feb 21 (Reuters) - The dollar rose to its highest level in a week on Wednesday and world stocks fell for the third day as investors braced for minutes from the Fed's last policy meeting to see if they would herald more rises in interest rates and global bond yields.
Wall Street looked set for a weaker session, with equity futures down around 0.2 percent and the VIX volatility gauge up for the third day in a row.
The dollar index, which measures the greenback against a basket of peers, rose 0.2 percent. The index has bounced almost 1 percent so far this week, after slumping 1.5 percent the previous week to its lowest level in three years .
MSCI's world index of stocks was down 0.1 percent, set for its third straight decline this week, as a down day in Europe offset earlier gains in Asia.
Investor attention is on the minutes of the Fed's last policy meeting in late January, due at 1900 GMT. The last readings of U.S. wages and inflation came in higher than expected, with some blaming the numbers for a violent sell-off in stocks earlier this month.
"Markets are particularly sensitive to inflation, and we think the odds that the minutes reinforce the narrative of firming inflation are high," said Elsa Lignos, RBC's global head of FX strategy.
"We think there is a high probability that the Fed moves the dots to four hikes in 2018 (from three) near-term, and that the minutes could be another step in that direction."
The U.S. currency has been weighed down this year by concerns that Washington might pursue a weak-dollar strategy, and by the perceived erosion of its yield advantage as other countries start to scale back their easy-money strategies.
Confidence in the dollar has also been shaken by mounting worries over the U.S. budget deficit.
But the greenback appeared finally to be benefiting from rising U.S. bond yields, especially as the Treasury Department is issuing more debt in anticipation of a higher deficit from last year's tax overhaul and plans to increase federal spending.
As markets braced for the next wave of this week's $258 billion deluge of new debt, two-year and 10-year yields eased a touch, with the former retreating from nine-year highs of 2.282 percent, hit on Tuesday.
German bond yields, the benchmark for Europe, fell to two-week lows after weaker-than-expected business activity data in the two biggest euro zone economies .
The data dampened expectations of a speedy end to the European Central Bank's ultra-easy monetary policies.
"It might well be the case that people in the market were getting carried away about strength of recovery and what that means for the ECB," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
In Britain, an unexpected jump in the jobless rate weighed on the pound..
While emerging Asian shares had shrugged off Wall Street's Tuesday weakness to rise 0.7 percent, and Japan's Nikkei firmed 0.2 percent, the momentum failed to carry into Europe.
The pan-European STOXX 600 index fell 0.6 percent and Germany's DAX lost 0.8 percent, still spooked by the recent rises in bond yields.
There were some bright spots, however, such as bank Lloyds , telecommunications firm Orange and commodities trader Glencore. Analysts noted that more than half of MSCI Europe firms have either met or beaten analysts' earnings expectations, according to Thomson Reuters data.
"The underlying earnings season has been quietly delivering the goods," UBS equity strategists told clients, adding that they remained bullish on European equities for 2018.
On commodity markets, dollar strength fuelled a half percent fall in Brent crude futures to $64.61 per barrel. U.S. crude oil futures slipped 1 percent to $61.16.
Reporting by Ritvik Carvalho and Sujata Rao; additional reporting by Tommy Wilkes in London and the Asia markets team; Editing by Kevin Liffey