HONG KONG/SINGAPORE, Aug 29 (Reuters) - Asian stock markets were slammed on Wednesday by the widening damage caused by the U.S. subprime mortgage sector meltdown, with investors fearing more negative surprises will emerge in the region.

The creeping release of information from Asian financial institutions, including the Bank of China, about their exposure to subprime-related investments fuelled the uncertainty and spurred the selling of riskier assets.

Asian shares lost some 2.5 percent of their value, while the currencies of South Korea, Indonesia and Malaysia weakened against the dollar.

However, the yen and safe-haven Japanese and U.S. government bonds rose.

"Essentially this is the second round. In the first round we found out the root of the problem. Now we're beginning to see which institutions are exposed to the subprime problem," said Irvin Seah, an economist at DBS Bank in Singapore.

"The key problem for investors is confidence and the lack of it."

The latest bout of market turmoil triggered little response from the region's policymakers and central bankers.

China's deputy central bank governor told a news conference the bank was paying close attention to changes in prices and would act to keep them in check, suggesting China was still more concerned about inflation than any global market turmoil.

Australia's central bank added only a minor amount to the banking system in its regular money market operation on Wednesday, indicating there was no desperate demand for funds.

That was a change from earlier in the month when the central bank pumped over A$4 billion into the market to ease upward pressure on bank bill rates.

CONFIDENCE PLUNGES

The latest flight to safety followed a report showing U.S. consumer sentiment took its steepest plunge in nearly two years and Merrill Lynch's move to downgrade its ratings on some major U.S. banks due in part to the ailing credit markets.

A separate report revealing the biggest drop on record for a U.S. house price index further rattled investors.

Reflecting concern that the fallout from the subprime debacle was spreading, shares in State Street Corp., the world's biggest institutional money manager, fell 4.3 percent on worries about the company's $20-billion-plus in commitments to asset-backed commercial paper programmes.

Meanwhile, British bank Barclays Plc denied a report on Tuesday that it had several hundred million dollars of exposure to failed debt vehicles structured by its investment banking arm.

Concern about the exposure of Asian banks to subprime-linked investments rose this week after Singapore's DBS Group Holdings said it was injecting cash into a special-purpose vehicle that invests in collateralised debt obligations (CDOs).

Analysts have noted banks in Singapore and Taiwan, operating in an environment of low sectoral growth and depressed yields, had sought exposure to a riskier segment of the credit market, making them potentially vulnerable.

"Banks may be entering a period of lower earnings visibility," Ng Wee Siang, a banking analyst at BNP Paribas, said of Singaporean banks.

"While the earnings outlook is not impaired, recent widening of credit spreads and rising risk aversion should have some short-term negative implications on banks' earnings."

(With additional reporting by Saeed Azhar in Singapore)