GLOBAL MARKETS-Stocks fall, crude gains as central banks hold steady

By Chuck Mikolajczak

NEW YORK, March 19 (Reuters) - Global stocks slumped on Thursday as the latest escalation in the U.S. and Israel's war with Iran caused another spike in oil prices, while a host of 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 0.46% to $96.76 a barrel and Brent LCOc1 rose to $108.68 per barrel, up 1.21%. Brent had earlier in the day jumped above $119, the second time it had crossed that threshold this month, but prices eased as the Trump administration took steps to try and expand supply.

On Wall Street, U.S. stocks were lower, 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. Of the 11 major S&P 500 sectors, only energy .SPNY was in positive territory on the day.

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.

"There was a real reluctance to attack oil infrastructure and investors are now reevaluating where this goes going forward," including the possibility that the crisis lasts longer than anticipated, said Michael Arone, chief investment strategist at State Street Investment Management in Boston.

"The second part of it, of course, is that all these global central banks have acknowledged just how difficult the Iran conflict in the Middle East is to price into their outlooks and they're all in a holding pattern, and so both of those things are contributing to a risk-off environment today."

The Dow Jones Industrial Average .DJI fell 386.30 points, or 0.83%, to 45,839.97, the S&P 500 .SPX lost 45.45 points, or 0.68%, to 6,579.49 and the Nasdaq Composite .IXIC stumbled 183.18 points, or 0.83%, to 21,969.24.

MSCI's gauge of stocks across the globe .MIWD00000PUS fell 12.27 points, or 1.22%, to 993.20 while the pan-European STOXX 600 .STOXX index fell 2.39%, its biggest daily percentage drop since March 3 as the index closed at its lowest level in three months.

Benchmark government bond yields, which set the global cost of borrowing, also climbed 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 29.8 basis points to 4.404% after earlier touching a 14-month high of 4.486%, although Bank of England Governor Andrew Bailey said financial markets were getting ahead of themselves in expecting interest rate rises. Sterling GBP= strengthened 1.12% to $1.3402 against the dollar.

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 2.2 basis points to 4.279% while the 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Fed, jumped 11.5 basis points to 3.858%. The two-year yield has shot up about 46 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, dropped 0.81% to 99.39, with the euro EUR= up 0.95% at $1.1559.

Against the Japanese yen JPY=, the dollar weakened 1.28% to 157.82 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.