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GLOBAL MARKETS-Wall Street rebounds, sterling steadies after tumble

(Updates to late morning U.S. trading, adds comment from BlackRock strategists, Bank of England chief economist)

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U.S. equity indexes regain ground, up 1-2%

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Dollar extends 20-year highs reached Monday

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Oil rallies 3% from Monday's nine-month lows

By Lawrence Delevingne and Carolyn Cohn

Sept 27 (Reuters) - U.S. stocks gained and sterling bounced from this week's record lows against the dollar on Tuesday as investors took stock after recent sharp market moves.

The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite all added between 1% and 2% after Wall Street fell deeper into a bear market in the previous session. Benchmark 10-year Treasury yields ticked up from Monday's 12-year high and the dollar added to 20-year highs on a basket of other currencies.

Markets are still wary about the pace of U.S. interest rate rises to calm inflation, a concern which has hurt risky assets and boosted the U.S. currency.

"We don’t see a quick retrenchment or a return to 2% inflation, keeping the Fed in hiking mode. This implies more volatility and a need for caution and balance in equity allocations," BlackRock stock strategists wrote in a note released on Tuesday.

Indeed, markets are seeing a 74% probability of a further 75 basis points move at the next U.S. Federal Reserve meeting in November.

The Fed will need to raise interest rates by at least another percentage point this year, Chicago Fed President Charles Evans said on Tuesday, a more aggressive stance than he has previously embraced that underscores the central bank's hardening resolve to quash too-high inflation.

Other central bank speakers due on Tuesday include Fed Chair Jerome Powell and European Central Bank President Christine Lagarde.

"Central bankers have been walking a tightrope trying to curb inflation while attempting to limit recessionary risks," Bank of America strategists wrote in a note released Tuesday. "However, their recent tone and 'jumbo' rate hikes have reinforced that the foremost priority is controlling inflation, even at the potential cost of a recession."

POUND CRASH

Sterling collapsed to a record low $1.0327 on Monday on concern over the funding of recently announced UK tax cuts, which come on top of huge energy subsidies.

But the pound recovered from that low to $1.0782 on Tuesday, up 0.84%, after the Bank of England said late on Monday it would not hesitate to change interest rates and was monitoring markets "very closely".

Bank of England Chief Economist Huw Pill said on Tuesday that BofE is likely to deliver a "significant policy response" to last week's announcement of tax cuts by finance minister Kwasi Kwarteng but it should wait until its next meeting in November before making its move.

The pound has suffered "a build-up in negative sentiment which we believe has room to unwind," said Chris Teschmacher, multi-asset fund manager at Legal & General Investment Management, adding that the asset manager was taking a "moderate positive view" on sterling versus the euro.

LGIM would likely add to its position on any further falls in the pound, as this "would only make support from the government or Bank of England more likely", Teschmacher added.

The yield on five-year gilts rose as much as 100 basis points in two trading days, but was down 0.74% in midday trading Tuesday.

Spillover from Britain kept other assets on edge.

Bond selling in Japan pushed yields up to the Bank of Japan's ceiling and prompted more unscheduled buying from the central bank in response.

The German 10-year bond yield briefly hit a new nearly 11-year high of 2.142% before easing.

Ten-year U.S. bond yields gained 4.7 basis points to 3.925% from the U.S. close after reaching a high on Monday of 3.933%.

The MSCI world equity index gained nearly 1% after hitting its lowest since Nov 2020 on Monday. European stocks gained 0.3%.

MSCI's broadest index of Asia shares outside Japan hit a fresh two-year low before gaining 0.2%. Japan's Nikkei was up 0.5%.

The dollar index was flat on Tuesday, after touching $114.58 on Monday, its strongest since May 2002. The euro was up about 0.1% after hitting a 20-year low a day ago.

Oil rallied after plunging to nine-month lows in the previous session, helped by supply curbs in the U.S. Gulf of Mexico ahead of Hurricane Ian and by a slight softening in the U.S. dollar.

U.S. crude rose 3.15% to $79.13 per barrel and Brent was at $86.82, up 3.28% on the day.

Dutch and British gas prices rose on news that the Nord Stream gas pipeline from Russia to Europe had suffered damage, raising concerns over the security of the bloc’s energy infrastructure and making a swift resumption in flows through the pipeline even less likely.

Gold, which hit a 2-1/2 year low on Monday, rose around 1% to $1,637 an ounce.

Bitcoin broke above $20,000 for the first time in about a week, as cryptocurrencies bounced, along with other risk-sensitive assets.

(Reporting by Lawrence Delevingne in Boston and Carolyn Cohn in London; Additional reporting by Xie Yu in Hong Kong; editing by Jonathan Oatis)