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SINGAPORE, Aug 16 (Reuters) Major Asian share indexes reached landmark highs on Wednesday and the dollar weakened against the yen as U.S. inflation fears eased.

Crude oil dropped below $73 a barrel, extending its decline for a third session as a truce between Israel and Hizbollah largely held.

Tokyo's benchmark Nikkei average topped 16,000 for the first time since May 29 and was up 1.1 percent at midsession. Hong Kong's Hang Seng rose 0.7 percent to a six-year high.

MSCI's index of non-Japan Asian shares was up 0.9 percent at 0245 GMT, its highest level since June 5.

Tuesday's U.S producer price data for July relieved worries the U.S. might have to start raising interest rates again and the associated fear that any rate rises would dampen U.S. demand for Asian exports.

''With the PPI so below expectations, it seems to have eased concerns ... It doesn't seem to be that necessary to worry about inflation now,'' said Katsuhiko Kodama, senior strategist at Toyo Securities Co. Ltd.

The U.S. producer price index, which measures wholesale prices, rose just 0.1 percent in July. Analysts had expected a 0.4 percent rise.

Among strong exporters, Canon Inc. rose 2.2 percent.

In South Korea, shares in LG Card soared 6.1 percent after a source said Shinhan Financial would pay an 18.5 percent premium to Monday's closing price for an 85 percent stake, making the deal South Korea's biggest takeover at $7.5 billion. Shinhan Financial rose 1.4 percent.

U.S. stocks closed up. The Dow Jones industrial average rose 1.2 percent and the Nasdaq Composite Index jumped 2.2 percent.

The dollar remained weak against the yen after an overnight slide on the U.S. data. Core producer prices slipped 0.3 percent in July, declining for the first time since October, compared with the 0.2 percent rise expected by economists.

''The market wasn't positioned for that sort of figure,'' said Luke Waddington, head of currency trading at Royal Bank of Scotland in Tokyo.

''Figures are having a much bigger impact in the market at the moment because we don't have any defined direction.'' Also pressing on the dollar was a survey from the New York Federal Reserve that showed manufacturing activity in August slowed to its weakest since June 2005.

U.S. interest rate futures implied a 36 percent chance the Fed would raise rates again at its meeting in September, down from a 42 percent chance just before the data releases.

The dollar dipped below 116 yen but recovered to 116.10, unchanged from late U.S. trade on Tuesday when it fell 0.5 percent.

The euro was little changed at $1.2788 after climbing 0.5 percent in the previous session. It was little changed from overnight levels at 148.50 yen, in sight of the record high of 148.62 yen touched on Tuesday.

The yen has repeatedly plumbed new lows against the euro amid signs the Bank of Japan is in no hurry to raise rates again after the first rise in six years last month, while the European Central Bank is expected to keep tightening credit.

Japanese government bond prices rose on the U.S. PPI data, tracking U.S. bonds.

But analysts said any rise in JGBs may be limited, especially in comparison to U.S. debt, given that the Bank of Japan is still widely expected to raise rates, possibly later this year, and as Japanese share prices rose.

''Both bonds and stocks are rising today in Japan, mirroring moves in the U.S. markets. But if share prices keep rising, the Japanese bond market will grow more nervous of a possible rate hike by the Bank of Japan,'' said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.

The benchmark September bond futures contract rose 0.27 point to 132.69.

Another important U.S. inflation number, the consumer price index for July, is due at 1230 GMT. The core CPI, which strips out volatile food and energy prices, is seen up 0.3 percent.

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