(Recasts with U.S. markets, adds byline; changes dateline;
previous LONDON)
* U.S., European shares slide on financial sector jitters
* Resurgent crude oil prices add to strain on Wall Street
* Oil prices rebound on reassessment of Chinese price hike
* Dollar sags on resurgent oil, ECB's tough inflation talk
* U.S., euro zone government debt rises on safe-haven bid
By Herbert Lash
NEW YORK, June 20 (Reuters) - Renewed worries about rising
oil prices and the credit-battered financial sector on Friday
slammed U.S. and European equity markets, pulled down the
dollar and sent investors scurrying to the safety of government
debt.
Crude rebounded a day after China raised fuel prices as a
view took hold that higher gasoline and diesel prices may boost
rather than curb demand in the world's No. 2 oil consumer.
The dollar fell broadly as traders decided the Federal
Reserve will need to stay relatively easy in its policies when
it meets next week because of the resurgence of oil and credit
fears.
Investors dumped banking shares on both sides of the
Atlantic after Merrill Lynch cut its earnings estimates for
2008 and 2009 for a dozen large U.S. banks on higher loan
losses and the need to raise reserves to cover those losses.
With the health of the financial sector under renewed
scrutiny and higher crude prices pushing up inflation jitters,
U.S. and euro zone government debt prices rallied.
"We are starting to see a slip in confidence in the overall
outlook of the U.S. economy yet again," said Greg Salvaggio,
vice president of trading at Tempus Consulting in Washington.
Shares of Merrill Lynch and other investment banks fell
amid trader speculation that Merrill may give a profit warning.
A Merrill Lynch spokeswoman declined to comment; Merrill's
<MER.N> stock lost nearly 5 percent.
Short sellers, investors who bet share prices will fall
further, targeting financial stocks in particular.
Short interest in both Washington Mutual <WM.N> and
American International Group <AIG.N> climbed more than 23
percent in a new positions report. For the U.S.-listed shares
of Switzerland's UBS <UBS.N>, short interest nearly doubled.
"Between the financials falling and oil going back up, it's
put so much pressure on the market I don't know how we're going
to get a rally," said Al Kugel, chief investment strategist at
Atlantic Trust in Chicago.
The financials "just keep finding more bad news," Kugel
said. "I thought they threw out everything but the kitchen sink
in the first-quarter earnings, but they keep digging into the
vault and finding more toxic paper."
Before 1 p.m., the Dow Jones industrial average <> was
down 136.70 points, or 1.13 percent, at 11,926.39. The Standard
& Poor's 500 Index <.SPX> was down 16.75 points, or 1.25
percent, at 1,326.08. The Nasdaq Composite Index <> was
down 48.00 points, or 1.95 percent, at 2,414.06.
European stocks fell to their lowest close since March 17
in the wake of Bear Stearn's collapse. Stocks fell on investor
jitters about the financial industry, high oil prices and
rising inflation.
Banks led decliners. Dutch-Belgian financial group Fortis
<FOR.AS> fell 4.8 percent, British mortgage lender HBOS
<HBOS.L> lost 4.2 percent, Swiss UBS <UBSN.VX> shed 3.3 percent
and Germany's Deutsche Bank <DBKGn.DE> dropped 3.1 percent.
The FTSEurofirst 300 index <> of top European shares
closed 1.8 percent lower at 1,222.51 points. It lost 3.4
percent over the week.
Oil prices rose above $136 a barrel after The New York
Times cited U.S. officials saying that Israel had conducted a
large military exercise this month that looked like a rehearsal
for a potential attack on Iranian nuclear facilities.
U.S. light sweet crude oil <CLc1> rose $2.97 to $134.90.
More tough inflation comments from a European Central Bank
official raised the specter of higher interest rates in the
euro zone beyond an expected hike in July and put pressure on
the dollar.
At the same time, German producer price inflation rose at a
much faster-than-expected pace in May to its highest level
since July, fanned by surging energy costs.
"That's pushing the euro up. With the ECB forever concerned
about inflation and the inflation data out of Europe coming in
stronger than expectations, that's going to keep the focus on
rate hike expectations in the euro zone," said Ron Simpson,
director of FX research at Action Economics in Tampa, Florida.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
15/32 to yield 4.15 percent. The 30-year U.S. Treasury bond
<US30YT=RR> rose 24/32 to yield 4.71 percent.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.63 percent at 73.031. Against the
yen, the dollar <JPY=> fell 0.62 percent at 107.33.
The euro <EUR=> rose 0.83 percent at $1.5628.
Gold rose on a recovery in crude oil prices and the ECB
official's anti-inflation comments.
Asian shares fell to their lowest in a week on Friday, with
Japan's Nikkei stock average <> falling 1.3 percent.
The MSCI index of stocks in the Asia-Pacific region outside
Japan <.MSCJIAPJ> dropped 0.5 percent.
(Reporting by Jennifer Coogan, Ellen Freilich and Lucia
Mutikani in New York; Santosh Menon and Jan Harvey in London
and Peter Starck in Frankfurt)
(Reporting by Herbert Lash. Editing by Richard Satran)
