SINGAPORE, March 14 (Reuters) - Asia's share markets slid on Tuesday, with financial stocks in Tokyo leading losses as fear of a U.S. banking crisis had investors fleeing the sector and slashing the interest rate outlook even ahead of U.S. inflation data due later in the day.

Japan's Nikkei dropped 2%. The Tokyo Stock Exchange banks index fell more than 5%, setting it on course for its steepest drop in nearly six months. Banks shares in Singapore and Australia fell. Hong Kong shares in HSBC and Standard Chartered dropped more than 5%.

Markets remained nervous following the collapse of Silicon Valley Bank last week and the failure of New York's Signature Bank over the weekend even after the U.S. government took steps to shore up systemic confidence.

Heavy selling hit U.S. regional bank stocks overnight and traders raced away from bets on U.S. rate hikes, reckoning the instability would turn policymakers cautious. S&P 500 futures stabilised in Asia trade and were last up 0.6%.

Two-year Treasuries steadied after their biggest rally since 1987, and U.S. interest rate futures eased slightly after soaring in New York, when markets priced out any chance of a 50 basis point Fed hike next week.

"Bank runs have started (and) interbank markets have become stressed," said Damien Boey, chief equity strategist at Sydney-based investment bank Barrenjoey.

"Arguably, liquidity measures should have stopped these dynamics, but Main Street has been watching news and queues – not financial plumbing," he said. "Fear has started to feed on itself, and higher uncertainty by itself has triggered its own de-leveraging and de-risking dynamics."

Overnight the VIX volatility index, nicknamed Wall Street's "fear gauge", shot higher and other indicators of market stress showed early signs of strain. The S&P banking index fell 7%, its largest one-day drop since June 2020.

JAPAN BETS UNWIND

In the Asia day stocks were attempting to stabilise around lunchtime and had lifted from mid-morning lows. MSCI's broadest index of Asia-Pacific shares outside Japan was down 1.2%.

Meanwhile bonds in Australia and Korea enjoyed their best gains in a decade on the radically changed outlook.

Japanese yields were diving - and dragging on the banks - as traders quit bets that Japan would soon exit its ultra-easy policy settings.

Refinitiv Data showed 10-year Japanese government bond yields recoiling from a 50 bp cap and down more than 27 bps in three days, the biggest such move in more than two decades.

On stock boards Resona Holdings led losses with a 9% slide, followed by life insurer T&D, down 8%.

"Bank stocks had run up (when) it was thought that monetary policy might normalise a bit," said Jamie Halse, who manages a Japan-focused fund at Platinum Asset Management in Sydney.

"We've seen the yield on the 10-year (government bond) come in quite a lot ... now that move upward (for banks) is reversing."

Elsewhere, the dramatic re-pricing of U.S. rate expectations has knocked the U.S. dollar lower.

It was last hovering around 133.78 yen and $1.0705 per euro.

Nerves have capped oil prices, with Brent crude futures slipping below $80 a barrel.

U.S. inflation data due later in the day is likely to inject more volatility, even if investors see the Fed prioritising financial stability.

"The prospect for the market to 'look through' strong U.S. data in the current environment could reduce upside U.S. dollar risk through (the) CPI, which would mark a significant departure from the fully data-dependent environment in place as recently as a few days ago," said NatWest Markets strategist Jan Nevruzi.

(Reporting by Tom Westbrook; Editing by Bradley Perrett and Sonali Paul)