By Stella Qiu

SYDNEY, Dec 5 (Reuters) - Japan's Nikkei skidded on Friday, wiping out this week's gains amid an otherwise upbeat Asian performance as investors wait for a U.S. inflation reading that could sway a deeply divided Federal Reserve.

European stock markets were headed for a flat open, with both EURO STOXX 50 futures and FTSE futures little changed. Nasdaq futures gained 0.4% and S&P 500 futures rose 0.2%.

In Asia, the Nikkei 225 fell 1.3% after weaker-than-expected household spending data underscored the scourge of inflation as bets of a rate hike later in the month grew. It was on track to end the week mostly flat.

The yield on 10-year Japanese government bonds hit 1.94% early in the day, its highest since mid-2007, before pulling back to settle at 1.93%.

The benchmark yield was on track for a 12.5 basis point rise this week, marking the steepest five-day climb since March, but recent strong auction results suggested the cheap bond prices are drawing buyers into the market.

"In previous cycles, moves of that size would have rattled markets. Instead, demand strengthened," said Nigel Green, chief executive at deVere Group.

"Capital flows are shifting, long-standing expectations are being tested, and portfolios built around permanently cheap yen now face a very different world."

A quarter-point rate hike from the Bank of Japan later this month is now being priced at 75%, after Governor Kazuo Ueda told investors on Monday the central bank would weigh the "pros and cons" of raising interest rates.

Sources have told Reuters that the Japanese government is prepared to tolerate a hike in December.

The dollar lost 0.3% to 154.61 yen, and remained well off its 10-month high of 157.9.

The broader MSCI index of Asia-Pacific shares outside Japan was up 0.4% and was set for a gain of 1% for the week. Most regions were up a little but South Korea managed a decent rise of 1.4%.

US INFLATION TEST

In foreign exchange markets, the dollar was under pressure again, having steadied overnight after falling for nine straight sessions. The dollar index was off 0.1% on Friday to 99 against its major peers, and down 0.5% for the week.

The broad weakness in the U.S. currency has been driven by wagers that the Federal Reserve is almost certain to cut interest rates by a quarter point next Wednesday.

While markets are 90% priced for a Fed rate cut, it could be the most contentious decision in years for the central bank as many as five of the 12 voting members have publicly said they oppose reducing rates further.

Next up, the U.S. personal consumption expenditures (PCE) price index - the Fed's preferred gauge of inflation - is due later in the day, although the data is for September. Forecasts are centred on a 0.2% rise in the core measure, leaving the annual rate unchanged at 2.9%.

The U.S. non-farm payrolls report will not be released on Friday. Data on Thursday showed jobless claims dived last week, assuaging concerns of a sharp deterioration in the labour market, but that might be due to the Thanksgiving holiday.

"Tariffs have stalled the improvement in inflation this year, but we remain convinced the disinflationary framework is intact," said analysts at ANZ.

"That framework includes a softening labour market, moderating wage growth, well-anchored longer-term inflation expectations ... We think the data will support an FOMC rate cut next week."

Treasury yields slipped a little on Friday after rising the previous day. Two-year Treasury yields fell 1 basis point to 3.5206%, having risen 5 basis points overnight, while the 10-year yield also fell 1 bps to 4.098%, after gaining 5 bps overnight.

Oil prices eased, with U.S. crude down 0.3% at $59.46 per barrel but was up 1.5% in the week. Brent crude futures were set to end the week 0.2% lower at $63.12 a barrel. [O/R]

Spot gold prices rose 0.2% to $4,216 per ounce, but were still down 0.3% for the week.

(Reporting by Stella Qiu; Editing by Tom Hogue and Shri Navaratnam)