* Oil rises to $138 a barrel
* Iran denies Israel attack
* European shares down more than 1 percent, U.S. set for
poor start
* Yen weak against both dollar and euro
By Jeremy Gaunt, European Investment Correspondent
LONDON, June 24 (Reuters) - European stocks fell sharply and
oil firmed on Tuesday on rumours of an attack by Israel on an
Iranian nuclear facility, prompting a denial by Iran.
Wall Street looked set for a lower start.
Oil, which was already under pressure from supply concerns,
rose to $138 a barrel, European shares fell more than 1 percent
and the safe-haven Swiss franc hit session highs against the
dollar and yen.
"There was a rumour ... that the Israeli air force had
launched an attack on Iranian nuclear facilities," said one
foreign exchange trader, echoing several traders in energy,
equity and fixed income markets across Europe.
An Iranian official in Iran, however, said there had been no
attack.
"This is just a rumour. No attack against Iran's nuclear
facilities has taken place," the official told Reuters.
The rumour reflected nervousness about growing tensions in
the Middle East, including a weekend report that the Israeli
military may have been practising for an attack.
Crude oil was up $1.13 a barrel at $137.86, also pressured
by a strike in oil producer Nigeria.
Europe's FTSEurofirst 300 <> stock index lost as much
as 1.7 percent before recouping some losses to stand down 1.2
percent.
Stock investors were also in cautious mood ahead of a U.S.
Federal Reserve decision on interest rates later in the week.
Policymakers are expected to keep rates unchanged at 2.0
percent, but recent hawkishness about inflation is in focus.
Earlier, Japan's Nikkei stock average ended flat.
"Oil prices are stuck not far off their highs and U.S.
financial shares are stuck at lows. There's no financial
meltdown, that's over, but there's still a lot of worries," said
Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
The benchmark Nikkei <> ended down 0.1 percent at
13,849.56, the lowest close since May 28. The broader Topix
<> was up 0.1 percent at 1,349.19.
WEAK YEN
Japan's yen was an active mover on the day, falling against
both the dollar and euro on a combination of increased risk
appetite, weak Japanese corporate surveys and interest rate
differentials with the United States and Europe.
"Yen weakness seems to be driven by talk of strong retail
outflows from Japan into overseas assets," said Adam Cole,
global head of FX currency strategy at RBC Capital Markets.
The euro hit an 11-month high against the yen, rising as far
as 168.26 yen according to Reuters data, its strongest since
July 2007 <EURJPY=>. It was later at 167.95 yen.
The dollar <JPY=> also gained against the yen, up 0.1
percent to 107.92 yen, but was down on the euro. The euro <EUR=>
brought $1.5556.
The safe-haven Swiss franc hit session highs versus the
dollar and euro on the Iran rumour. It backed off later and was
last at 1.003 francs to the dollar <CHF=> and 1.6190 francs to
the euro <EURCHF=>.
Euro zone government bonds were firmer, reversing earlier
losses. The interest rate-sensitive two-year Schatz yield
<EU2YT=RR> was down 2 basis points at 4.554 percent. The 10-year
Bund yield <EU10YT=RR> was also down 2 basis points at 4.598
percent.
(Editing by Gerrard Raven)
