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The Labor Department said on Thursday its Consumer Price Index rose 0.5 percent, the largest gain since June 2009, after increasing 0.4 percent in January. Core CPI -- excluding food and energy -- rose 0.2 percent after advancing by the same margin in January.

Though the increase in core CPI was a touch above economists' expectations for a 0.1 percent gain, it suggested that surging costs for energy and other commodities, which have been hitting producers and consumers alike, had yet to generate the type of broad inflation that would spur the Federal Reserve to respond.

The Fed said on Tuesday it expected the upward price pressure from commodities to be temporary but it would closely monitor inflation and inflation expectations.

"I don't think it means anything for the Fed. They're going to probably wind up saying some of this is transitory. It won't be sustained," said Tom Porcelli, U.S. economist at RBC Capital Markets in New York.

JOBLESS CLAIMS FALL

In another report, the Labor Department said initial claims for state unemployment benefits fell 16,000 to a seasonally adjusted 385,000 last week, broadly in line with expectations, hinting at a strengthening in the labor market.

The four-week moving average of unemployment claims -- a better measure of underlying trends - dropped 7,000 to 386,250, the lowest since mid-July 2008 and staying below the 400,000 level for a third straight week.

U.S. stock index futures pared gains on the inflation data, while prices for government debt held onto earlier losses. The dollar pared losses versus the euro.

Rising food and energy prices are exerting upward pressure in some major economies and putting monetary authorities on the edge. But high unemployment in the United States, which is restraining wage growth, is seen dampening inflation pressures from the strong commodity prices.

In the 12 months to February, overall consumer prices rose 2.1 percent, the largest increase since April, after rising 1.6 percent in January. Core CPI rose 1.1 percent year-on-year, the largest increase in one year, after increasing 1 percent in January.

Data on Wednesday showed U.S. wholesale prices rose at their fastest pace in just over 1-1/2 years in February, but they were well contained outside of food and energy.

The increase in overall consumer inflation last month was broad-based, with energy the largest contributor. Energy prices rose 3.4 percent after increasing 2.1 percent in January. Food prices increased 0.6 percent, the largest gain since September 2008.

Core consumer prices were lifted by increases in airline fare, new vehicles, shelter and medical care -- confirmation the disinflationary trend in core inflation has bottomed.

Shelter costs, which account for about 40 percent of core CPI, rose 0.1 percent for a fifth straight month. Apparel fell 0.9 percent, the largest decline since July 2006.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Rising alarm over the unfolding disaster in Japan following an earthquake and tsunami has sent shivers through world markets, hitting shares and other riskier assets, such as commodities, while prompting investors to scurry for the safety of government debt.

The yen soared in disorderly trading to a record high against the dollar on speculation Japan will repatriate billions of dollars in overseas funds to pay for massive reconstruction that is expected to be much costlier than the bill following the Kobe earthquake in 1995.

"I think the world economy is going to go right down and it has happened at a time when financial markets are still fragile," said a central banker of a Group of Seven country.

The comments, made on condition of anonymity, are a testimony to the degree of concern among top policymakers about the potential impact of Japan's triple disaster and in particular its race against time to prevent a nuclear meltdown.

The G7 financial ministers and central bankers will hold a telephone conference call around 2200 GMT on Thursday (7 am Tokyo time Friday), Japan's finance minister, Yoshihiko Noda, said as financial markets braced for potential currency intervention following the yen's surge.

"I don't think stock and currency markets are in a state of turmoil," Japan's economy minister, Kaoru Yosano, said in an interview with Reuters.

"We would like to get psychological support from the G7," he said.

The triple disaster, unprecedented in a major developed economy, is already disrupting global manufacturing.

SUPPLY CHAIN

Makers of equipment for mobile telephones to carmakers and chipmakers have warned of a squeeze on their businesses given Japan's crucial role in many supply chains that keep global commerce ticking over.

The technology sector felt an immediate impact after Friday's quake and tsunami since Japan makes around a fifth of the world's semiconductors.

NAND flash memory chips, used in various electronic gadgets, soared 20 percent on Monday.

On Thursday, electronic conglomerate Toshiba Corp said an assembly line that makes LCD displays for smartphones and other devices will be shut for a month to repair machinery damaged by the quake.

The company's shares are already reeling on speculation its nuclear power business will suffer after governments globally have raised doubts about the industry's future.

Group of Seven sources told Reuters earlier the call was about steps to calm financial markets roiled by the nuclear crisis.

Economics Minister Kaoru Yosano, however, insisted the yen and Japanese stock markets were not in a state of turmoil and that the government would like the G7 to merely provide a psychological prop to markets, rather than intervene.

The yen spiked to a record high against the dollar, while shares in Japan and elsewhere in Asia fell on Thursday after U.S. officials said the risk of a catastrophic radiation leak from an earthquake-crippled Japanese nuclear plant was rising.

The Japanese currency bolted higher amid speculation Japanese insurers would have to repatriate funds to pay for massive claims following Friday's 9.0 magnitude quake and the devastating tsunami that ravaged Japan's northeast.

The disaster and subsequent nuclear crisis have wiped hundreds of billions of dollars off global stock markets.

But Japan's Finance Minister Yoshihiko Noda, Yosano and other officials dismissed such talk about repatriation and said speculation, not fund flows, was responsible for the currency's surge, which threatens to add further pressure on the quake-hit economy.

"I don't think stock and currency markets are in a state of turmoil," Yosano said, when asked whether the G7 advanced nations should jointly intervene in the currency market to stem yen rises.

"We would like to get psychological support from the G7," he told Reuters in an interview on Thursday.

Noda confirmed the G7 was holding a teleconference at 6 p.m. ET on Thursday and said Japan would explain to the group the damages from the quake and the situation in financial markets.

He declined to comment on a possibility of currency market intervention to weaken the yen, but markets interpret reminders about monitoring currency moves as a warning that the authorities could step in if they thought the yen was moving too rapidly.

"Market moves have been nervous amid speculation while trade has been thin," Noda told reporters. "I will be closely watching market moves today.

While government officials were stepping up their verbal intervention, the Bank of Japan continued to pump massive amounts of cash into the money market to make sure it would not seize up, with the latest offer of 5 trillion yen in same-day funds. It had offered a record 22 trillion on Monday, through a combination of same-day and longer tenor funds.

G7 SUPPORT

Other Group of Seven sources told Reuters that G7 finance officials would discuss what to do to calm global financial markets.

The unfolding disaster in Japan has sent fear coursing through markets, hitting shares and other riskier assets such as commodities while boosting safe-haven government debt, as investors struggle to get a fix on the scale of the nuclear crisis and the tsunami's economic and human toll.

Operators of the Fukushima Daiichi nuclear complex, 240 km (150 miles) north of Tokyo, were they were trying again on Thursday to use military helicopters to douse the plant's overheating reactors.

"Fear is the only factor driving the market today and if you look at news about temperatures rising, things exploding, you're not going to trade calmly, right?" said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

The yen spiked around 4 percent against the dollar, initially driven by speculation that Japanese insurers would have to repatriate funds to pay for massive claims following last Friday's 9.0 magnitude quake and the devastating tsunami it triggered.

That run-up set off a wave of stop-loss and options-related selling that sent the currency rocketing as far as 76.25 to the dollar on electronic trading platform EBS in increasingly chaotic trading, before easing to around 78.90.

"It's mayhem out there," said one trader at an Australian bank in Sydney as liquidity evaporated and bids were pulled. "The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in."

INTERVENTION ALERT

Japan's Finance Minister Yoshihiko Noda blamed speculation for the spike in the yen and said he would closely watch market action. Markets usually interpret such comments as a reminder that the authorities could intervene to curb the currency.

"There's a real possibility that authorities would intervene to calm the markets, though I don't think it will be heavy," said Junya Tanase, a foreign exchange strategist at JPMorgan Chase in Tokyo.

Japan's Nikkei .N225 fell about 1.8 percent, with big exporters such as industrial robot maker Fanuc (6954.T) and car maker Toyota (7203.T), whose overseas earnings are eroded by a stronger currency, taking the most points off the index. .T

Fanuc fell 5.2 percent and Toyota 4.2 percent.

Japanese stocks had suffered their biggest two-day rout since the 1987 crash on Monday and Tuesday before rebounding nearly 6 percent on Wednesday.

Asian shares outside Japan .MIAPJ0000PUS were down about 1.2 percent, with Hong Kong's Hang Seng .HSI down 1.8 percent.

Benchmark 10-year Japanese government bond futures rose 0.10 point to 139.82, and U.S. Treasuries firmed, with the 10-year yield slipping toward a three-month low. <JP/>