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 Falling bank stocks drove Asian markets lower on Friday, while bonds rallied and expectations for U.S. interest rate rises were reduced after a surprise capital raising at a Silicon Valley startup lender unleashed fears of broader banking-system stress.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.3% to a two-month low, with banks and Hong Kong tech stocks leading losses, while London and European futures each slid more than 1%.

Japan's Nikkei lost 1.3% and S&P 500 futures were down 0.4% in early trade following the cash index dropping 1.8% and falling below its 200-day moving average.

The U.S. dollar rose and short-end Treasuries extended sharp overnight gains - driving two-year yields down another nine basis points to 4.8068%. [US/]

Fed funds futures also rallied strongly, pulling the market-implied peak in U.S. rates from above 5.6% to just below 5.5%, and pricing about a 50% chance of a 50 basis point Fed hike this month, down from more than 70% a day earlier.

The moves followed SVB Financial Group, parent of startup-lender Silicon Valley Bank, noting higher-than-expected "cash burn" from clients, falling deposits and rising costs of capital. It announced an equity sale hours after crypto-focused lender Silvergate said it was closing down.

SVB stock was still sliding after the bell and has lost about 70% of its value in 24 hours. Titans' shares were dragged down with it, with J.P. Morgan Chase & Co losing 5.4%, Citigroup down 4.1% and big lenders in Asia and Australia on the slide - albeit to a lesser extent - on Friday morning.

"I think there's speculation that there are wider problems within the U.S. banking system, or there's that potential, and that's caused a re-think of Fed policy," said ING economist Rob Carnell in Singapore.

"The thinking is that if what the Fed's doing is causing this distress, then perhaps they won't be doing that much more," he said.

"But it's a big move on the back of what seems to be some fairly woolly speculation...which just shows how antsy the markets are right now, and this has spilled into all the other markets."

Adding to the nerves, traders were wound up ahead of a Bank of Japan (BOJ) meeting on Friday - Governor Haruhiko Kuroda's last one in charge - and U.S. jobs data due later in the day that is likely to set the tone for the U.S. rates outlook.

JOBS, BOJ

The BOJ is likely to maintain ultra-low interest rates and hold off on major changes to its yield control policy, leaving options open ahead of a leadership transition in April.

But since long-dormant Japanese inflation has gathered pace, and following a surprise relaxation of a cap on 10-year yields in December, speculation of changes is rife and has dollar/yen volatility gauges spiking. The yen nudged a little higher to 135.86 prior to the BOJ policy announcement.

Ten-year Japanese government bond futures tracked global bonds higher in morning trade and ten-year cash bonds yielded 0.495%, just below the 0.5% cap. [JP/]

Elsewhere surprisingly high U.S. jobless claims have offered a weak entree for the broader U.S. employment data due later on Friday, putting some pressure on recent dollar gains. [FRX/]

The figures loom as a crucial barometer of the health of the U.S. labour market and the direction of interest rates after Fed Chair Jerome Powell warned rates could rise further and faster if data shows that is needed to get a grip on inflation.

The euro held modest overnight gains at $1.0594.

Bitcoin was nursing losses just above the psychological $20,000 level as the fallout from the demise of Silvergate weighs on the broader mood in digital assets.

Brent crude futures were pinned at $81.55 a barrel and gold at $1,831 an ounce.