Emerging Markets-Russia, Georgia assets extends losses

* Rouble falls further on Russia conflict with Georgia

* Spreads on Georgian Eurobonds widen sharply

* Emerging equities hover above Friday's 1-year lows

* Chinese stocks drop 5.2 pct to 19-month low

By Carolyn Cohn

LONDON, Aug 11 (Reuters) - The rouble and Russian stocks fell and spreads on Georgian Eurobonds widened sharply on Monday as military conflict between Georgia and Russia unnerved investors.

Russian troops and armour pushed into the Georgian separatist regions of South Ossetia and Abkhazia on Monday and Georgian forces shelled the Russian-held capital of South Ossetia in a worsening of the crisis which erupted last week. [nLB596227]

"Both Georgia and Russia have been much less cautious than the market had expected. This has developed in quite an unexpected way," said Lars Christensen, head of emerging markets research at Danske Bank in Copenhagen.

"There has been a significant impact on Russian assets. It is a reminder that geopolitical risk is there in these markets, which a lot of people had chosen to ignore."

The rouble fell 1.3 percent against the central bank monitored dollar/euro basket after dropping 1 percent on Friday, and the central bank intervened to support the currency.

Russian stocks .IRTS hit their lowest levels in nearly two years before trimming losses, while Russia's five-year credit default swaps, used to insure against restructuring or default of debt, widened slightly from Friday's closing levels.

The spread on Bank of Georgia's bond due 2012 has widened by 200 basis points to 1200 bps over U.S. Treasuries since fighting broke out on Friday in South Ossetia.

The spread on Georgia's debut sovereign bond due 2013, launched in April, widened by nearly 200 bps from launch levels, to 650 bps over U.S. Treasuries.

"We do not see a very-short term positive outcome in this story, which might suggest a little more widening to come as investors capitulate on their long positions," said Luis Costa, emerging debt strategist at CBCM.

Traders said the conflict was also hitting credit default swaps in other CIS countries such as Ukraine and Kazakhstan.

But the safe haven Czech crown rose over 1 percent against the euro EURCZK=, retracing losses made on Friday on a surprise 25 bps cut in interest rates.

EQUITIES TICK UP

Benchmark emerging equities .MSCIEF recovered by 0.5 percent from one-year lows hit on Friday, while sovereign debt spreads widened by 1 bp to 296 bps over U.S. Treasuries 11EMJ.

Chinese stocks .SSEC dropped 5.2 percent to 19-month lows, hit by concern about slowing economic economic growth and rising producer price inflation, which threatens to squeeze corporate profit margins.

While many investors believed China would try to prevent sharp falls in the market during the run-up to the Beijing Olympics, they now fear the market may be left to slide after the games are over.

Elsewhere, the Romanian leu fell 1 percent to its lowest against the euro EURRON= in more than two weeks after data showing annual inflation at a three-year high of 9 percent in July, but below forecasts of 9.3 percent, denting expectations of rate rises.

The broad strength of the dollar, which hit near-six-month highs against the euro on Monday, helped drive the South African rand ZAR= to a one-month low and the Israeli shekel ILS= to a four-month low.

Bank of Israel officials were split over July's interest rate rise, with three out of five voting against the hike, minutes of the discussions showed on Monday.

The vote is not binding and Bank of Israel Governor Stanley Fischer takes the decision alone after the discussions.

South African local bonds surged ahead of an expected no-change decision on rates this week.

(Additional reporting by Peter Apps; Editing by Gerrard Raven)