(Adds close of U.S. markets)
* Oil jumps $5 a barrel, rekindling inflation fears
* Financial stocks at 5-year lows on write-off speculation
* Debt prices rebound amid doubts on future rate hikes
By Herbert Lash
NEW YORK, June 11 (Reuters) - Fears of inflation and more
trouble in the battered financial sector jolted U.S. and
European stocks on Wednesday as oil prices jumped $5 a barrel
and the Federal Reserve warned of rising price pressures
hitting a sluggish American economy.
Investment sentiment soured as shares of Lehman Brothers
fell more than 13 percent on a Financial Times report that said
it is looking to raise more capital and on rumors of a large
write-down at Goldman Sachs pulled financial shares lower.
The plethora of negative factors pushed investors into the
relative safe haven of U.S. government debt securities, whose
prices rose after a two-day retreat.
Traders were seeing less likelihood of a sharp hike in
interest rates this year, although futures contracts still
reflected expectations for a quarter percentage point increase
by October.
The dollar fell against the euro, snapping its best two-day
advance against the currency since 2005, as investors weighed
the outlook for U.S. and European interest rate hikes.
Officials from the Fed and the European Central Bank have both
sounded the inflation alarm in recent days.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.52 percent at 73.252. Against the
yen, the dollar <JPY=> fell 0.49 percent at 106.90.
The euro <EUR=> rose 0.60 percent at $1.5555.
Oil prices moved sharply higher in volatile trading after
weekly U.S. inventory data showed a sharp fall in crude stocks.
Crude jumped to near the record $139.12 a barrel after the
report showed stockpiles down for the fourth week in a row,
intensifying worries of a worsening global energy crunch. The
drop was four times the amount analysts' expected.
"Inventories were taken down more sharply than expected,"
said Al Goldman, chief market strategist at Wachovia Securities
in St. Louis. "There have been some wild and woolly projections
on where oil is going and this kind of fed into it."
U.S. crude oil prices <CLc1> rose $5.07 to settle at
$136.38 a barrel, within reach of last week's record near $140.
London crude <LCOc1> rose $4.00 to $135.02 a barrel.
Other commodity prices also ignited inflation fears, which
drove a sell-off in U.S. equity markets.
"It's inflation fears at this stage; more so than anything
else," David Bianco, head of U.S. equity strategy at UBS, said
about who inflation has caused investor angst.
"That's perceived to be what is going to be the cause of
the global economic downturn... that inflation is going to hurt
profits. People don't believe the earnings are sustainable."
Lending further concern over rising prices, U.S. corn
futures soared more than 4 percent to a fresh record for the
fifth consecutive trading session as flood waters expanded in
the U.S. Midwest, harming the already diminished 2008 corn
crop. Soy surged 5 percent and wheat 7 percent.
Corn prices have jumped 80 percent over the past year, with
nearly 17 percent of that coming in June. Traders said prices
may go higher still.
The Dow Jones industrial average <> fell 206.07 points,
or 1.68 percent, at 12,083.69. The Standard & Poor's 500 Index
<.SPX> fell 22.94 points, or 1.69 percent, at 1,335.50. The
Nasdaq Composite Index <> fell 54.93 points, or 2.24
percent, at 2,394.01.
The Standard & Poor's 500 financial sector <.GSPF> dropped
more than 3 percent to a five-year low, led by declines in
investment bank shares.
Lehman <LEH.N> shares tumbled. The Financial Times report
said the bank had sought capital from Korean financial
institutions, and may enter a deal later this year.
Shares of energy-hungry companies, including airlines, took
a beating. Delta Air Lines <DAL.N> fell 9.6 percent at $5.35,
while package delivery service FedEx Corp <FDX.N> slid 3.9
percent to $86.65.
Shares of retailers also fell, with Wal-Mart Stores Inc
<WMT.N> down 1.8 percent at $58.69.
Alcoa Inc <AA.N> was the top drag on the Dow, falling 8.1
percent to $39.24 after JPMorgan cut its rating on the aluminum
producer.
European shares fell amid heightened financial sector
worries and fears of higher inflation and slower growth.
Royal Bank of Scotland <RBS.L> dropped 9 percent after the
UK bank said results would be held back by the impact of the
global credit crunch even as the performance and write-downs on
risky assets remained in line with its previous outlook.
The DJ Stoxx European bank index <.SX7P> fell 2.8 percent,
weighed by British mortgage bank HBOS <HBOS.L>, which fell 11.6
percent to below its planned rights issue price of 275 pence
per share.
The FTSEurofirst 300 <> index of top European shares
ended with a loss of 1.7 percent at 1,249.46 points, its lowest
close since March 20.
U.S. gold futures rallied, driven up by bullish funds who
bought day-earlier dips as oil's advance resumed and by dollar
weakness, traders said.
Gold tends to move up on the inflationary implications of
rising crude oil prices, which climbed more than $3 to $135 a
barrel on signs of tightening global oil supplies.
Asian stocks rebounded from a two-month low, with Japan's
Nikkei share average <> rising 1.2 percent and MSCI's
index of other Asia-Pacific shares <.MIAPJ0000PUS> gaining 0.3
percent after earlier touching April lows.
(Reporting by Ellis Mnyandu, Burton Frierson, Nick Olivari and
Carole Vaporean in New York and Ikuko Kao in London and Peter
Starck in Frankfurt)
(Reporting by Herbert Lash. Editing by Richard Satran)
