GLOBAL MARKETS-Oil jumps, stocks skid, dollar rallies as conflict grips Middle East

By Alun John and Wayne Cole

LONDON/SYDNEY, March 2 (Reuters) - Oil and gas prices surged, the dollar gained and shares slid on Monday as the U.S.-Israeli air war against Iran widened and looked set to last for weeks, threatening to upend a global economic recovery and perhaps reignite inflation.

Brent crude LCOc1 was last up 9% at $78.9 a barrel, set for its biggest daily jump since 2020's COVID-19-related turbulence and just surpassing its surge after Russia launched its full-scale invasion of Ukraine in 2022.

Brent briefly topped $82.00 at one stage, while U.S. crude CLc1 climbed 8.4% to $72.66 per barrel. Safe-haven gold rose 2.1% to $5,389 an ounce XAU=. O/RGOL/

Israel launched new air strikes on Monday targeting Iran and expanded its military campaign to include attacks on Iran-backed Hezbollah militants in Lebanon, while Tehran fired missiles and drones at Israel, Gulf states and a British air base in far-away Cyprus.

The air war is already having an impact on energy production. Qatar halted production of liquefied natural gas, Saudi Arabia shut its biggest domestic oil refinery as a precautionary measure, and shipping has ground to a near halt in the Strait of Hormuz, through which a fifth of global oil supply flows.

For investors the crucial question is how long the war, and specifically the disruption to energy markets, will continue.

U.S. President Donald Trump signalled the U.S.-Israeli military assault on Iranian targets could last four weeks.

"Historically markets have mostly shrugged off isolated conflicts in the Middle East. Only when the conflicts have had the potential to draw in the entire region have markets really moved," said Michael Field, chief European equity strategist at Morningstar.

"For now, the market will be trying to ascertain how long the conflict will be likely to last and whether it will draw in other nations."

A prolonged spike in oil prices would risk reigniting inflationary pressures globally, while also acting as a tax on business and consumers that could dampen demand.

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BANKS LEAD STOCK MARKET FALLS

Stock markets around the world fell. Europe's broad STOXX 600 slid 1.6%, .STOXX following similar sized moves in Asia earlier in the day. .N225, ..MIAPJ0000PUS U.S. S&P 500 futures were down 1.1%. EScv1 .EU .N

Banks were to the fore, given worries about the impact on economic growth, with the banking sector index in Europe .SX7P down 3.3% and travel shares tumbling. Tech stocks also fell in Europe and Asia as investors dumped the riskier parts of their portfolios. .EU

Energy stocks were big gainers, however, up 4% in Europe at one point to a new record high .SXEP. European defence stocks .SXPARO also gained 1.3%. In the Middle East, the UAE and Kuwait temporarily closed their stock markets citing "exceptional circumstances".

And Chinese blue-chips .CSI300 were a rare gainer, up 0.4% though the country does get much of its seaborne oil imports from the Middle East. .SS

THE DOLLAR IS BACK

In currency markets, the dollar was by far the biggest gainer, rallying even against safe-haven currencies such as the Swiss franc and Japanese yen.

The euro shed 0.9% to $1.170 while the pound lost 0.66% to $1.3397. EUR=, GBP= FRX/

The dollar, meanwhile, climbed 0.85% on the Japanese yen and 1% on the Swiss franc to 157.37 yen and 0.7774 francs, respectively. JPY=, CHF=

The euro also hit its lowest since 2015 on the Swiss franc, down more than 0.5% at one point to 0.9032 francs EURCHF=, prompting the Swiss National Bank to warn it was increasingly willing to intervene to curb the franc's strength.

The euro was last up 0.2% at 0.9105 francs.

But the foreign exchange moves were really about the U.S. currency. "The dollar maintains its safe-haven role because of its liquidity, and that's what investors want when there is an extreme crisis," said Jane Foley, Rabobank's head of FX strategy.

"Its primary position in payments means that millions of people around the world will be saying 'I need dollars to make transactions'."

"If inflation worsens and the market starts to panic about energy supply I can see the potential for it going a lot higher," she added.

The energy moves were also relevant for currency markets given the U.S. is a net energy exporter while both Europe and Japan rely heavily on imports.

BOND INVESTORS' DILEMMA

Government bond markets gave back early safe-haven gains, hit by investor worries about the inflationary impact of higher oil prices, and hence more hawkish central bank policy.

Benchmark 10-year U.S. Treasury yields hit an 11-month low of 3.926% in early trade but were last 3 basis points higher on the day at 3.99%. US10YT=RR US/

Rate-sensitive two-year Treasury yields were more clearly driven by investors' inflation concerns, up 6 bps at 3.44%. US2YT=RR US/

Investors also have to weather a squall of U.S. economic data this week, including the ISM survey of manufacturing, retail sales and the always vital payrolls report on Friday.

Any weakness could shake confidence in the economy after a disappointing fourth quarter, but would also likely narrow the odds on rate cuts from the Federal Reserve.

Markets currently imply a 50% chance of a 25-basis-point easing by June and are fully pricing two such cuts this year. 0#USDIRPR