* MSCI World Index set for worst first six months on record
* Oil prices record biggest first-half gains in 9 years
* Euro/dollar sets three-week high, then retreats sharply
* European stocks recover all early losses by midday
By Mike Dolan
LONDON, June 30 (Reuters) - Crude oil prices surged to a
record high above $143 per barrel on Monday as tensions simmered
between Israel and Iran over Tehran's nuclear programme and the
dollar hit three-week lows against the euro before steadying.
Oil's rise added to the deep concerns about rising inflation
and slowing economies plaguing world markets on the last day of
another torrid half-year -- set to be the worst six-month period
for global stock indices <.MIWD00000PUS> since 2002 and the
biggest first half loss on record for MSCI's world index.
After recording its biggest first-half rise in 9 years,
crude oil <CLc1> rose was up more than two dollars or 1.7
percent to $142.50 a barrel by 1130 GMT -- having set a new
record of $143.67 earlier on Monday.
"The price of oil right now is creating a big burden on the
world economy," U.S. Treasury Secretary Henry Paulson said in
Moscow.
Middle East tensions simmered over the weekend. Iran's
foreign minister said on Sunday he did not believe Israel was in
a position to attack his country over its nuclear programme,
while an Iranian general announced plans to prepare 320,000
graves for enemy soldiers. []
"Oil is now a very jittery and news-sensitive market that is
running on rumours and concerns of future supply disruptions,"
said Mark Pervan, a senior commodities analyst at the Australian
& New Zealand (ANZ) Bank in Melbourne.
And is a sign that a vicious circle may have developed, some
investors said oil price rises were not only feeding inflation
but also feeding off it.
"Inflation concerns encourage investment in real assets such
as oil and gold," said Frances Hudson, an investment director at
Standard Life Investments.
OIL/DOLLAR DANCE
The latest oil rise was also helped by the U.S. dollar's
fall to a one-month low against a basket of major currencies
<.DXY> and a three-week low against the euro.
Illustrating the extent of the inflation pulse being sent by
oil and boosting the euro <EUR=> briefly against the dollar,
data released on Monday showed euro zone inflation rising to a
record 4 percent this month.
The euro caught a bid because that inflation picture makes
the prospect of a European Central Bank interest rate rise on
Thursday even more likely.
Weak equity markets and U.S. consumer confidence at a
28-year low, meantime, mean expectations for how soon the
Federal Reserve could boost interest rates stateside.
Because of the July 4 holiday on Friday, the June U.S.
employment report is released within an hour of the ECB decision
on Thursday.
"The dollar has been pressured from a number of channels:
the relative pricing in central banks, the shift higher in the
oil price and the very sharp declines in stock markets," said
Teis Knuthsen, head of FX research at Danske Markets.
"But we are also concerned that the markets are pricing in
aggressively the risk of a series of rate hikes from the ECB ...
so potentially there is a chance that euro/dollar could falter
after the meeting."
The euro retreated sharply from the three-week high of
$1.5817 later as heavy selling emerged near key chart points
around the $1.5850 mark and kept it from testing April's record
highs around $1.6020.
China's Premier Wen Jiabao, meeting with U.S. Secretary of
State Condoleezza Rice on Monday, urged the United States to
stabilise the dollar, state television reported.
The choice of wording on the dollar marked a slight
difference from comments earlier this year by Wen, when he said
China was concerned about the sustained depreciation of the
dollar and did not know when it would bottom out.
STOCKS UNDER MORE PRESSURE
European equities <> were steady to lower in a
volatile session on the last day of the quarter as the high oil
price fuelled concerns about consumer demand, inflation and
higher interest rates
"The oil price is hollowing out spending and causing
potential cost pressures...It's the talisman," said Philip
Isherwood, a strategist at Dresdner Kleinwort.
The FTSEurofirst 300 <>, which was down 0.05 percent
at 1191.81 points at 1200 GMT, is on track for a 20-percent loss
in the first half, in sharp contrast to an 8.2-percent gain in
the first half last year.
While oil prices lifted heavyweight oil shares BP <BP.L>,
Royal Dutch Shell <RDSa.L> and Total <TOTF.PA> by between 1.4
and 2 percent, airlines such as British Airways <BAY.L>,
Lufthansa <LHAG.DE> and Air France-KLM <AIRF.PA> shed between
1.5 and 3 percent.
"It's been completely and totally diabolical," David Buik of
Cantor Index in London said of the first half. "We're clean out
of confidence and sentiment is poor ... I foresee significant
pain going through the summer."
Earlier, MSCI's index of shares in the Asia-Pacific region
outside of Japan was down 0.04 percent <.MIAPJ0000PUS>, near a
three-month low plumbed on Friday.
The broader pan-Asia index <.MIAS00000PUS> was up 0.4
percent -- although down around 14 percent so far this year in
the largest first-half drop since 1992 when Japan was in a
recession.
Japan's Nikkei share average <> fell 0.5 percent on
Monday and chalked up its biggest first-half decline since 1995.
The index has fallen 12 percent since the start of the year.
Hong Kong's Hang Seng index <> was essentially flat,
with declines in some market heavyweights such as HSBC <HSBA.L>
<0005.HK> offsetting gains in resource-related shares.
(Reporting by Kevin Plumberg in Hong Kong, Toni Vorobyova
and Rebekah Curtis in London and Fayen Wong in Perth)
