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* European shares in the red, Germany's DAX down 1 percent
* Fed hike bets for Sept, Dec rise after Yellen speech
* Dollar rallies, Middle East output fears weigh on crude futures
By Anirban Nag
LONDON, Aug 29 (Reuters) - The dollar rose to a three-week high against the yen on Monday, while bond yields surged to their highest since June and stocks sold off after senior Federal Reserve officials indicated a U.S. interest rate increase was on the cards in the near term.
In the past few months, the Fed has been swaying back and forth on whether to raise rates this year, keeping investors across the globe on tenterhooks. But on Friday, at the Fed's annual gathering for global central bankers in Jackson Hole, Wyoming, Fed Chair Janet Yellen gave one of the clearest indications that a rate hike was probably round the corner.
She said the case for an interest rate hike has strengthened in recent months as the labour market and economy improved. That echoed what other senior Fed officials had been saying in the run-up to the Jackson Hole symposium.
And while she gave no hints on the timing of a hike, Fed Vice Chair Stanley Fischer said Yellen's speech was consistent with expectations for possible rate increases this year. Fischer said Friday's nonfarm payrolls report for August was likely to be key to the decision over a hike in the near term. confirmed the broad view on the Fed Open Market Committee that the economy has strengthened of late and that interest rates should be raised gradually; possibly again next month if this week's employment report supports a rate rise," said Stewart Richardson, chief investment officer at RMG Wealth Management.
The odds of a hike in September rose to 33 percent following the comments, from 21 percent on Thursday, according to CME Group's (NASDAQ:CME) FedWatch tool.
The prospects of higher U.S. interest rates saw European shares lose ground. Germany's DAX .GDAXI was 1.2 percent lower, while the blue-chip Euro Stoxx 50 .STOXXE was down 0.6 percent. British markets are closed for a holiday.
YIELDS JUMP
Earlier, Japan's Nikkei .N225 bucked the trend in Asia, closing 2.3 percent higher, the biggest one-day gain in three weeks, as the yen weakened against the resurgent dollar.
The dollar rose 0.5 percent to a three-week high of 102.39 yen JPY= . That followed gains of 1.3 percent on Friday, its biggest one-day advance in almost seven weeks. The dollar index was up at 95.724 .DXY its highest in two weeks.
Treasury yields rose US2YT=RR , US10YT=RR to their highest since June, dragging German Bund yields higher. The yield on Germany's benchmark 10-year bond briefly rose more than 6 basis points to minus 0.025 percent DE10YT=TWEB -- the highest level since June 24 when the result of Britain's EU referendum sent shockwaves through markets.
"We're still cautious about the scope for a September rate hike, but it is increasingly becoming a close call," said Martin van Vliet, senior rates strategist at ING.
Investors will turn their focus to a slew of U.S. data this week before the all-important jobs report on Friday. Among the releases to be scrutinized will be U.S. consumer confidence for August, due on Tuesday, while productivity, manufacturing and construction figures are due on Thursday. factory activity surveys will also be released on Thursday.
In commodities, crude prices fell on the back of a rally in the dollar and concerns about growing output after exports from Iraq in August exceeded July levels.
Iran also said late last week that it would only cooperate in upcoming producer talks in September if other exporters recognised Tehran's right to regain market share lost during international sanctions that were only lifted in January. crude futures CLc1 dropped 1.7 percent to $46.84 while Brent crude LCOc1 also fell by a similar margin to $49.08.
The stronger dollar weighed on gold. Spot gold XAU= slipped 0.1 percent to $1,319, after earlier touching a five-week low.