GLOBAL MARKETS-Stocks drop, crude rises as central banks stand pat

By Chuck Mikolajczak

NEW YORK, March 19 (Reuters) - Global stocks tumbled on Thursday as the latest escalation in the U.S. and Israel's war with Iran caused another surge in oil prices, while major central banks left interest rates unchanged as they try to gauge the climb in price pressure.

Attacks on Iran's South Pars gas field, along with the world's largest gas plant in Qatar as well as on oil refineries in both Saudi Arabia and Kuwait sent Brent prices shooting above $119 a barrel and further fanned inflation fears.

U.S. crude CLc1 rose 1.82% to $98.07 a barrel and Brent LCOc1 rose to $112.21 per barrel, up 4.5%. Brent had earlier in the day jumped above $119, the second time it had crossed that threshold this month.

On Wall Street, U.S. stocks were lower in the early portion of trading, and declines in the small-cap Russell 2000 index .RUT briefly brought the index down more than 10% from its January 22 record closing high.

The 20-day daily correlation for the S&P 500 to both Brent and WTI crude is the most negative it has been since November 2004.

"Unfortunately, just tell me where oil's going today and I'll tell you what the market's going to do today, and that's the environment we've been in for three weeks. It's an inverse relationship with a correlation that's quite high," said Art Hogan, chief market strategist at B. Riley Wealth Management in Boston.

"It cuts both ways, so central banks can't try to guess duration, and they certainly can't estimate the offset that you get."

The Dow Jones Industrial Average .DJI fell 458.69 points, or 0.99%, to 45,766.46, the S&P 500 .SPX slumped 52.70 points, or 0.80%, to 6,572.00 and the Nasdaq Composite .IXIC dropped 212.20 points, or 0.96%, to 21,940.22.

MSCI's gauge of stocks across the globe .MIWD00000PUS fell 14.15 points, or 1.41%, to 991.32 while the pan-European STOXX 600 .STOXX index fell 2.34% and was on track for its biggest daily percentage drop since March 3.

Benchmark government bond yields, which set the global cost of borrowing, also rose as multiple central banks kept rates unchanged as they assess the economic fallout from the surge in crude prices.

The Bank of England's rate setters voted unanimously to keep UK rates on hold and said they were "ready to act" to stave off risks from war in the Middle East.

The yield on two-year gilts GB2YT=RR, surged 25 basis points to 4.36% after earlier touching a 14-month high of 4.486%, although Bank of England Governor Andrew Bailey said financial markets are getting ahead of themselves in expecting interest rate rises.

The European Central Bank held its rates as well, warning that the Iran war was clouding the outlook for growth and inflation. The Bank of Japan and the U.S. Federal Reserve had both voiced their concerns about the conflict during their earlier policy statements, which left their respective rates unchanged.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 1.8 basis points to 4.275% while the 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Fed, jumped 10 basis points to 3.843%. The two-year yield has shot up about 45 basis points in March.

Earlier this week, the Reserve Bank of Australia hiked rates to a 10-month high and warned of a "material" risk to inflation from the oil price spike.

In addition, Switzerland's central bank kept its rates at zero, and signaled it was ready to intervene to curb the recent surge in the Swiss franc, one of the traditional safe havens in volatile markets.

The dollar index =USD, which measures the greenback against a basket of currencies, fell 0.38% to 99.82, with the euro EUR= up 0.46% at $1.1502.

Against the Japanese yen JPY=, the dollar weakened 0.91% to 158.41 but remained near the key 160 per dollar level following the BOJ's policy statement, leaving investors on watch for possible FX intervention after strong comments from Japanese Finance Minister Satsuki Katayama earlier in the day.

The Bank of Japan had left its short-term policy rate at 0.75% as widely expected overnight, but it joined the U.S. Federal Reserve and Bank of Canada in striking a cautious tone about the war and pricing pressures.