(Adds close of U.S. market)
* Oil soars to record $139.12 a barrel on U.S. jobs report
* U.S. stocks slide about 3 percent on stagflation fears
* Dollar slips, bonds rally on jump in unemployment rate
By Herbert Lash
NEW YORK, June 6 (Reuters) - Oil shot to a record $139 a barrel on Friday, pushed lower by a falling dollar after a report of the sharpest one-month rise in the U.S. unemployment rate in 22 years sparked fears of 1970s-like stagflation and led to a rout in global equities.
Oil zoomed past a record high set in May, marking its biggest one-day gain in dollar terms ever, on dollar weakness and tensions in the Middle East.
U.S. crude's <CLc1> dramatic $11 jump fueled concerns about inflation and a reduction of spending power of American consumers, whose layouts account for more than two-thirds of the U.S. economy.
The dollar dropped across the board and U.S. government debt rallied after data showed the unemployment rate shot up to 5.5 percent -- its highest in more than 3-1/2 years -- and the U.S. economy lost jobs for a fifth straight month.
The dollar fell against major currencies, with the U.S. Dollar Index <.DXY> down 0.93 percent at 72.362, and against the yen, the dollar <JPY=> fell 0.94 percent at 104.92.
The euro <EUR=> rose 1.17 percent at $1.5767.
The evidence of further labor weakness and an almost 9 percent spike in oil prices triggered the decline in the dollar the put in motion the oil rally, which rises when the U.S. currency declines, and pushed stocks into a rout.
The Dow Jones industrial average <
> fell 394.64 points, or 3.13 percent, at 12,209.81. The Standard & Poor's 500 Index <.SPX> slipped 43.37 points, or 3.09 percent, at 1,360.68. The Nasdaq Composite Index < > slid 75.38 points, or 2.96 percent, at 2,474.56.It was the Dow's biggest percentage decline since February in 15 months and all 30 of its components fell.
The Labor Department data pared expectations that the Federal Reserve will raise short-term interest rates any time soon and risk pushing a fragile economy into recession. That prospect will likely keep the dollar weak and spur inflation.
"This is the worst economic environment," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York. "I don't see how this is not stagflation."
Slow growth and rising inflation ravaged the U.S. economy in the 1970s and was called stagflation. The data ties the hands of Federal Reserve Chairman Ben Bernanke, Adams said.
"It's a double-edged sword. If Bernanke raises rates to fight inflation, he's going to really slow down the economy. But if he doesn't raise rates like he said he was going to, the dollar is going to go weak and that's why oil is going through the roof."
The dollar's dimmed outlook and crude oil's spike came after European Central Bank President Jean-Claude Trichet said on Thursday the bank may hike interest rates as early as July to stem growing inflationary pressures in the euro zone.
U.S. interest rate futures implied about a 56 percent chance of a quarter percentage point hike in October, down from a high of 82 percent shortly before the jobs data.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose28/32 to yield 3.94 percent. The 30-year U.S. Treasury bond <US30YT=RR> gained 47/32 to yield at 4.64 percent.
European stocks fell 1.9 percent to a seven-week closing low after the U.S. payroll report, while U.S. equity markets were off more than 2.5 percent.
Banks were among the biggest losers in Europe and financial stocks led U.S. declines as investors fled stocks sensitive to slower growth.
UBS <UBSN.VX> slipped 6.4 percent and Royal Bank of Scotland <RBS.L> slid 5.2 percent, while insurer American International Group <AIG.N>> fell 6.8 percent to a decade low and financial services firm American Express Co <AXP.N> fell 5.9 percent.
The FTSEurofirst 300 <
> index of top European shares closed at 1,283.99 points, a closing level last seen in mid April. The index lost 3.7 percent during the week.Airline shares were among the worst hit, with Air France-KLM <AIRF.PA> down 6 percent in Europe and U.S. carriers American Airlines, owned by AMR Corp <AMR.N> and Continental Airlines both off about 8.7 percent.
Companies that promote alternative energy and drillers were the biggest gainers.
European exporters such as automakers got hammered as the euro gained against dollar. BMW <BMWG.DE> shed 4.4 percent and Daimler <DAIGn.DE> fell 4.7 percent. the outlook for consumer spending is gloomy."
"This confirms that oil prices are closely following the dollar and stocks are suffering from the spike, particularly airlines. Just look at how their shares have been dumped," said Jean-Francois Virolle, chief strategist at Global Equities in Paris.
"Automakers are suffering too, hit from all sides: the rising euro, rising steel prices, rising oil prices... while outlook for consumer spending is gloomy."
Remarks by Israel's transport minister that an attack on Iranian nuclear sites looked "unavoidable" and a Morgan Stanley report predicting oil could reach a record high of $150 by July 4 also sent crude prices roaring upwards.
"We are calling for a short-term spike in oil prices," the U.S. investment bank said.
U.S. crude <CLc1> settled up $10.75 at $138.54 a barrel before touching an all-time high of $139.12. London Brent crude <LCOc1> settled $10.15 higher at $137.69, off the record $138.12 hit earlier.
New York gold futures jumped nearly 3 percent, ending at just below $900 an ounce on a combination of record oil and the dollar's drop.
The August gold contract <GCQ8> in New York settled up $23.50 at $899.00 an ounce.
Euro zone government bond futures tested negative territory as investors fled following a brief rally in the wake of the U.S. employment report.
Japanese government bond prices sank after a sell-off in European and U.S. bonds the previous day when Trichet's remarks sparked investor jitters.
The yield of the benchmark 10-year Japanese government bond <JP10YTN=JBTC>, which moves inversely to price, rose to 1.79 percent, just shy off a 10-month high.
Japan's Nikkei average <
> climbed 1 percent to a five-month closing high, and the MSCI index of Asia-Pacific stocks outside Japan rose 0.8 percent <.MIAPJ0000PUS>. (Reporting by Walker Simon, Gertrude Chavez-Dreyfuss, Richard Leong in New York and Margaret Orgill in London. Editing by Richard Satran)