EMERGING MARKETS-EM assets set for weekly fall as Iran jitters eclipse Trump-Xi summit

* MSCI EM FX, stocks eye sharpest weekly falls since early March

* Rising US Treasury yields pressure stocks, KOSPI falls 6%

* Romania interest rate decision awaited

By Purvi Agarwal

May 15 (Reuters) - Emerging market equities fell on Friday, led by declines in heavyweight Asian stocks, while currencies weakened against the dollar, setting them on track for losses in a week marked by the U.S.-China summit.

MSCI's index tracking global EM stocks was down 2.5%, set for its biggest one-day drop since March 23. The currencies equivalent was off 0.3%.

Many stocks and currencies, as well as the two indexes, were set for weekly declines. Some were on track to log their steepest losses since beginning of the Iran war.

U.S. President Donald Trump said he and Chinese President Xi Jinping had agreed in talks that Iran cannot be allowed to have a nuclear weapon and must re-open the Strait of Hormuz.

The inflation fears pushed up the dollar index and Treasury yields, with the one on the benchmark 10-year note up at 4.54% - a level last seen in May 2025.

"The market is discounting a positive summit between the U.S. and China, and is instead focusing on the lack of progress towards reopening the Strait of Hormuz," said Kathleen Brooks, research director at XTB.

"Without the support of rate cuts and rising global bond yields, it is hard to see how U.S. and some Asian markets can maintain their record highs.... It could be a rough day for risky assets as investors take risk off the table."

Most Asian currencies depreciated against the U.S. dollar, with the Indian rupee hitting yet another record low. Turkey's lira fell 0.2% and South Africa's rand lost 1%.

Emerging Europe currencies were subdued against the euro, while Hungary's forint fell 0.7%.

Rising U.S. yields pressured stocks, especially chipmakers that have been rallying for the last month. South Korea's KOSPI fell over 6% in a flip-around after crossing 8,000 points for the first time.

The selloff spilled over to emerging European economies, with equities in Poland and Hungary down 1.9% and 1.2%, respectively.

Romanian stocks rose 1.2% to a record high, powered by gains in energy company Hidroelectrica after its first-quarter results.

Turkish stocks shed 1.9% and South African equities fell 1.7%, tracking gold prices that dipped to one-week lows.

Romania's leu was flat ahead of a monetary policy decision in which the central bank is expected to hold interest rates steady.

The currency has been languishing at record lows on political uncertainty after the government was toppled in a no-confidence vote last week, potentially delaying EU funds and putting Romania's credit ratings at risk.

S&P is scheduled to review its ratings on Nigeria and Bulgaria later in the day, while Moody's is set to review Ukraine's.

Ukraine's bonds pulled back from record highs, after rallying this week on prospects of an end to the Russia-Ukraine war.

HIGHLIGHTS:

** Morocco to add $2 billion to its budget to soften economic impact of Middle East conflict

** Malaysia's economic growth beats estimates as domestic demand offsets Iran war shocks

** World Bank forecasts Vietnam 2026 economic growth to slow to 6.8%

** Czech central bank ready to act if Middle East conflict drags on, minutes show

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(Reporting by Purvi Agarwal in Bengaluru; Editing by Janane Venkatraman)