By Karin Strohecker

LONDON, July 4 (Reuters) - Emerging stocks took a tumble on Tuesday as Pyongyang's latest missile test heightened tensions on the Korean peninsula and added to a correction in China, while currencies were torn between lower commodity prices and a weaker dollar.

MSCI's emerging equity benchmark fell 0.7 percent - its sharpest one-day drop in nearly three weeks - after losses among Asian heavyweights Taiwan and South Korea as the North Korean missile landed in Japanese waters.

Stocks in Hong Kong fell 1.5 percent, their steepest daily fall in more than half a year, while Chinese mainland equities turned tail after a rally following their inclusion in a key MSCI index continued to unwind.

Bourses in South Africa, Poland and Romania all chalked up losses.

Currencies were mixed as oil and copper trended lower, counteracting the effect of a tepid dollar .

Major central banks turning more hawkish and higher core bond yields are also weighing, said Kiran Kowshik, EM FX strategy, UniCredit.

"The bigger-picture driver for these movements you are seeing in emerging market currencies at least over the past two weeks, are signs of a more hawkish turn from central banks – including the ECB, Fed and the Bank of England," Kowshik said.

"At the same time, when oil prices fall you tend to see inflation expectations fall as well – those two things together - nominal bond yields moving up and inflation expectations moving down - take real rates higher," he said.

The South Korean won dropped to a more than 16-week low, while currencies in oil producers Russia and Kazakhstan eased.

However, South Africa's rand and Turkey's lira strengthened around 0.2 percent.

Investors were watching for further developments in the Gulf, where Qatar faces a Tuesday night deadline to comply with a list of demands by four Arab powers which accuse Doha of supporting terrorism.

Saudi Arabia, Egypt, the United Arab Emirates and Bahrain have listed 13 demands including ejecting Turkish troops based in Qatar and shutting al Jazeera TV – requests so severe, says Qatar, that they seem designed to be rejected.

Qatar assets have suffered in recent weeks, but the stock market continued rebounding from recent lows, gaining 0.5 percent. Meanwhile, profit-taking in a few Saudi blue chips dragged down the region's largest stock market by 1.3 percent.

For GRAPHIC on emerging market FX performance 2017, see http://tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see http://tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see