(Recasts with U.S. markets, changes dateline; previous
LONDON)
* Oil prices slip below $140 a barrel on dollar's strength
* European stocks rise on oil weakness, cheaper valuations
* Dollar gains on U.S. outlook after last week's jobs data
By Herbert Lash
NEW YORK, July 7 (Reuters) - Oil prices retreated sharply
and the dollar rallied on Monday, easing inflation jitters and
helping lift European stocks, but U.S. equities fell sharply
after financial stocks turned lower.
The dollar gained as investors reassessed the U.S. economy
after a last week's government report on the labor market
showed the outlook was less bleak than many had expected.
That contributed to a drop in crude oil to under $142 a
barrel. Investors were also encouraged by signals from Iran
that some thought indicated Tehran may be more flexible in
negotiations on its nuclear program.
Government debt in the euro zone rose as investors pared
bets the European Central Bank would raise interest rates again
following last week's long-anticipated hike. An early gain on
Wall Street at first curbed the safe-haven appeal of U.S.
government debt, but prices later rose as U.S. stock markets
fell, led down by financial stocks.
In the absence of any positive news, financial stocks
resumed their downward trend, said Joe Saluzzi, co-manager of
trading at Themis Trading in Chatham, New Jersey. An S&P index
of financial shares <.GSPF> was down 3.4 percent.
Around 1 p.m., the Dow Jones industrial average <> was
down 135.32 points, or 1.20 percent, at 11,153.22. The Standard
& Poor's 500 Index <.SPX> was down 20.84 points, or 1.65
percent, at 1,242.06, and the Nasdaq Composite Index <>
was down 27.48 points, or 1.22 percent, at 2,217.90.
The decline in oil prices initially lifted the appeal of
beaten-down stocks in the wake of the market's recent sell-off,
while speculation on two deals, one new and the other involving
renewed talk about Microsoft and Yahoo, also buoyed stocks.
Microsoft <MSFT.O> said it would be willing to reopen talks
to buy all or part of the Internet company. Yahoo <YHOO.O>
shares rose more than 11 percent.
Merger speculation about Spain's Iberdrola <IBE.MC> lifted
utility shares in Europe. Iberdrola rose 7.8 percent after the
company's No. 2 shareholder said it saw no alternative to a
merger between Iberdrola and Gas Natural <GAS.MC> of Spain.
Rivals EDF <EDF.PA>, Centrica <CNA.L> and Suez <LYOE.PA>
gained between 3 percent and 5.5 percent.
Oil and gas producers were among the top performers in
Europe despite falling oil prices. Traders cited a rebound from
weakness last week.
"The fact that the sellers have been so persistent and
there's been nothing but selling over the last six weeks means
we are due a period of remission," said Mike Lenhoff, chief
strategist at Brewin Dolphin.
"If on top of that, we get something like some decent news
out of the commodities markets, oil in particular, that's
great," he said.
The FTSEurofirst 300 index of top European shares <>
ended 1.3 percent higher at 1,178.69 points.
The euro suffered from an unexpected drop in euro-zone
investor morale in July to its lowest level since June 2005. An
unexpected decline in German May industrial output also
darkened the outlook for the euro zone.
"I think the dollar's improved tone this week is due to
several factors, one of them is still the residual effects of
the jobs data, which did not post the steep losses that the
market had priced in," said Omer Esiner, senior currency
strategist, at Ruesch International in Washington.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.11 percent at 72.78. Against the yen,
the dollar <JPY=> was up 0.27 percent at 107.10.
The euro <EUR=> fell 0.03 percent at $1.57.
The relentless march high in oil prices took a pause from a
recent rally that has produced almost daily new record highs
and lifted by almost 50 percent this year.
"It's mainly the stronger dollar," said Nauman Barakat,
senior vice president at Macquarie Futures USA, of oil's drop.
"We might see further correction all the way down to the $140
area."
Gold fell along with other commodity prices across the
board -- from metals to softs to grains -- as funds sold after
returning from the long U.S. holiday weekend.
"Copper's down, silver's down, crude oil is down. Gold was
holding support pretty well and when crude dropped $2.50, we
dropped," said Jonathan Jossen, an independent gold trader at
the COMEX division of New York Mercantile Exchange.
U.S. Treasury debt prices were higher.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
22/32 to yield 3.90 percent. The 30-year U.S. Treasury bond
<US30YT=RR> rose 29/32 to yield 4.48 percent. The 2-year U.S.
Treasury note <US2YT=RR> was up 9/32, with the yield at 2.40
percent.
Asian stocks rose, snapping a six-day losing streak, on
optimism that China's banking sector has thrived despite market
turmoil.
Japan's Nikkei share average <> finished 0.9 percent
higher, its first gain after 12 straights sessions of losses.
It was the longest losing streak since 1954.
Shares in the Asia-Pacific region traded outside of Japan
edged up 0.3 percent, according to an MSCI index <.MSCIAPJ>.
(Additional reporting by Richard Leong, Gertrude
Chavez-Dreyfuss, John Parry and Carole Vaporean in New York,
Alex Lawler, Kirsten Donovan and Amanda Cooper in London;
Editing by Dan Grebler)
