By Ankur Banerjee

SINGAPORE (Reuters) - Asian equities rose on Wednesday, tracking a relief rally on Wall Street after U.S. inflation data delivered no nasty surprises, reinforcing hopes the Federal Reserve will likely go for a smaller rate hike when it meets next week.

Investors piled back into stocks in U.S. markets overnight as fears eased about contagion in the banking sector following the collapse of Silicon Valley Bank (SVB) last week.

MSCI's broadest index of Asia-Pacific shares outside Japan was 1% higher, having slid 1.7% on Tuesday after SVB's collapse triggered heavy selling by investors in the last few trading sessions.

The rally is unlikely to continue in Europe with European stock futures indicating a lower open. Eurostoxx 50 futures were down 0.07%, German up 0.01% and futures down 0.04%.

"It's clearly dominated by a relief rally rather than any inflation angst," said Robert Carnell, regional head of research, Asia Pacific at ING.

"I suppose what we've got is the banking sector in the U.S. returning to stability, with depositors being given the fairly clear signal that they're not going to lose out."

Investors were also relieved after February's U.S. inflation report on Tuesday showed consumer prices rose 0.4%, with a year-on-year gain of 6% - in line with analyst expectations. There were worries that stronger-than-expected data might lead the Fed to go for jumbo-sized hikes to battle inflation.

As recently as last week, markets were braced for the return of large Fed hikes but the swift collapse of SVB has changed those expectations, with market pricing in an 80% chance of a 25 basis point hike next week.

"It does feel like the 50 basis point move for this month's meeting that was speculated about especially after Powell's commentary to the Senate Banking Committee - nobody's expecting that anymore," said Carnell.

Also, helping boost sentiment was data on China's economic activity that picked up in the first two months of the year due to a recovery in consumption and infrastructure investment and signs the beleaguered property sector is starting to recover.

Chinese shares gained with 0.46% higher, while Hong Kong's up 1.75%1.4%.

Australia's rose 0.86%, while was flat.

U.S. Treasury yields extended gains into Asian hours after sharp declines at the start of the week. The yield on was up 2.1 basis points to 3.657%. .

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 7.1 basis points at 4.296%, but far off last week's peak of 5.084%.

In the currency market, the greenback held steady, with the , which measures the U.S. currency against six rivals, at 103.69, with the euro mostly flat at $1.0737.

The Japanese yen weakened 0.4% to 134.75 per dollar, while sterling was last trading at $1.2156, down 0.03% on the day.

Oil prices rebounded more than 1% on Wednesday due to a stronger OPEC outlook on China's demand. futures climbed 1.2% to $78.38 a barrel. U.S. West Texas Intermediate crude futures (WTI) gained 1.4% to $72.29 a barrel. On Tuesday, the benchmarks fell more than 4% to three-month lows.