(Recasts with U.S. markets, adds byline; changes dateline;
previous LONDON)
* Declining dollar sends oil to new high, hurting stocks
* Dollar falls as euro zone inflation scales record peak
* Bonds fall on doubts Fed is ready to start raising rates
By Herbert Lash
NEW YORK, June 16 (Reuters) - Oil surged to a record high
of almost $140 a barrel on Monday, stoking inflation worries,
as the dollar fell against the euro on a decline in a key U.S.
regional manufacturing index, dampening investor enthusiasm for
stocks.
Record annual inflation in the euro zone all but sealed the
case for interest rate hike by the European Central Bank in
July, while the Federal Reserve Bank of New York's "Empire
State" index showed manufacturing in the state shrank in June
for the fourth time in five months, casting doubt on the health
of the sluggish U.S. economy.
The U.S. data diminished expectations of a Fed rate hike.
The dollar also eased on more anti-inflation talk from a
European Central Bank official following the jump in euro-zone
annual inflation to a record 3.7 percent in May.
Crude oil jumped to an intra-day high of $139.89 a barrel,
before paring gains to trade about $2 higher than Friday's
closing settlement price.
U.S. and European shares were mostly lower, although
banking shares helped lift shares in American exchanges while
banks were the worst-performing sector in European markets.
Brokerage downgrades of blue chips General Electric <GE.N>,
AT&T Inc <T.N> and Verizon <VZ.N> contributed to declines in
the Dow and the broad-based Standard & Poor's 500 Index.
Declines were offset by a rebound of 4 percent in shares of
investment bank Lehman Brothers Holdings Inc <LEH.N>, which
posted a $2.8 billion quarterly loss that was in line with a
previously revised forecast.
"Empire started us off and before you knew it the dollar
started to sink," said Joe Saluzzi, co-manager of trading at
brokerage Themis Trading in Chatham, New Jersey. "Stocks are
reactionary right now; dollar being down and oil being up,
that's certainly hurting the market."
Benchmark U.S. indexes were mixed before 1 p.m. The Dow
Jones industrial average <> was down 64.89 points, or 0.53
percent, at 12,242.46. The S&P 500 <.SPX> was down 3.31 points,
or 0.24 percent, at 1,356.72. The Nasdaq Composite Index
<> was up 7.59 points, or 0.31 percent, at 2,462.09.
A 1.2 percent rise in the Philadelphia semiconductor index
<.SOXX> helped lift the Nasdaq.
General Electric <GE.N> shares fell 0.7 percent to $28.95
after J.P. Morgan Securities cut the industrial conglomerate to
"neutral" from "overweight" and slashed its 2009 earnings
forecast. The stock touched a more than 4-1/2-year low in
pre-market trade.
Blue chip phone companies weighed on the S&P and the Dow
after flyonthewall.com reported UBS cut its ratings on both
Verizon Communications <VZ.N> and AT&T <T.N>.
Shares of AT&T fell 2.1 percent to $35.92 and Verizon stock
lost 3.2 percent to $36.14. RBC also lowered its price target
on AT&T shares.
In Europe a rally in crude oil to new highs supported
commodity shares but rekindled concern about inflation. Banks
and food producers led declined.
The FTSEurofirst 300 index <> of top European shares
fell 0.4 percent to 1,262.92 points, having fallen earlier by
as much as 1.1 percent.
Banks were the worst performing sector, weighed down by
continental European banks. Credit Suisse <CSGN.VX> fell 0.5
percent, Deutsche Bank <DBKGn.DE> lost 1 percent and Santander
<SAN.MC> fell 1.6 percent.
Barclays <BARC.L> featured among the day's main gainers,
rising by as much as 12.6 percent at one point, after saying it
planned to sell billions of pounds of shares to new and
existing shareholders. The bank ended up 3.5 percent.
Crude oil's surge to just below $140 a barrel, even after
top exporter Saudi Arabia said it would raise output, weighed
on the broader stock market in late trade.
It "almost beggars belief. The Saudis say they will
increase supply and yet the oil price has responded with
another new high," said Investec strategist Roger Cursley.
"That is thoroughly negative for everything except the
basic resources sectors as far as I can see," he said.
U.S. government debt rose after the report on weak New York
state manufacturing and inklings of doubt grew as to whether
the Federal Reserve was ready to raise interest rates.
Encouraging those doubts was a Robert Novak column in The
Washington Port asserting that market speculation about higher
interest rates appeared to be "dead wrong."
The Novak column helped bond prices, said Andrew Brenner,
senior vice president and co-head of structured products and
emerging markets at MF Global in New York.
U.S. Treasury debt prices rose. The benchmark 10-year U.S.
Treasury note <US10YT=RR> was up 4/32 to yield 4.24 percent.
The 30-year U.S. Treasury bond <US30YT=RR> added 4/32 to yield
4.78 percent.
Gold rose 3 percent as the dollar weakened further against
the euro.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.46 percent at 73.582. Against the
yen, the dollar <JPY=> was off 0.07 percent at 108.07.
The euro <EUR=> rose 0.70 percent at $1.5486.
The dollar hit a four-month high against the yen at
108.85.
U.S. light sweet crude oil <CLc1> rose $1.81 to $136.67 a
barrel.
Spot gold prices <XAU=> rose $15.70 to$885.90.
Earlier in Asia, Japan's Nikkei share average <>
closed 2.7 percent higher with the yen near a four-month low
against the dollar.
(Reporting by Jennifer Coogan Lucia Mutikani, Ellen Freilich
and Jan Harvey, Amanda Cooper, Jane Merriman and Ikuko Kao in
London; Editing by Leslie Adler)
