GLOBAL MARKETS-Bombs, oil at 21-yr high hit stocks and dollar

[Gregz]

By Carol Bishopric

NEW YORK, May 17 (Reuters) - The killing of an Iraqi leader in a car bombing on Monday and record high oil prices sent global stocks tumbling, sliced more than 1 percent off the dollar against the euro and helped drive investors into safe-haven bonds.

In the United States, all three major stock market gauges closed at their lowest levels this year.

"My big concern a few weeks ago was the stock market was too focused on interest rates, but clearly it's now focused on instability in the Mideast, which is leading to higher oil prices," said Robert Mikkelsen, senior managing director of equity capital markets at The Advest Group.

European equities fell to 2004 lows, before trimming some losses. And stocks were hurt in Tokyo, Hong Kong, Argentina and Brazil.

In India, stocks on the Bombay exchange fell as much as 17 percent -- the worst drop in its 129 year history -- before closing down 11 percent, on concerns about the incoming government's economic policies.

Supply fears drove U.S. crude oil futures to the highest price since the New York Mercantile Exchange began trading oil futures 21 years ago.

NYMEX crude for June delivery <CLM4> rose 17 cents or 0.41 percent to end at $41.55 a barrel, a 21-year settlement high. In overnight electronic trading, NYMEX June futures rose to $41.85, the highest level that NYMEX crude has reached since the exchange introduced oil futures trading in 1983.

London's July Brent crude <LCOc1> hit $38.50 a barrel.

Analysts said the oil market remains jittery following the killing of the president of the U.S.-appointed Iraqi Governing Council on Monday in a car bombing in Baghdad, and bomb explosions in Turkey.

Abdul Zahra Othman Mohammad, also known as Izzedin Salim, was killed by a car bomb as he waited to enter the main U.S.-led coalition compound in Baghdad.

In Turkey, bombs exploded outside branches of British bank HSBC on Sunday, just before British Prime Minister Tony Blair was due in the country.

STOCKS FALL, DOLLAR DROPS VS EURO

The Dow Jones industrial average <.DJI> ended down 105.96 points, or 1.06 percent, at 9,906.91, while the broader S&P 500 Index <.SPX> fell 11.60 points, or 1.06 percent, to 1,084.10. These mark the lowest closing levels for both the Dow and S&P 500 since December 2003.

The Nasdaq Composite Index <.IXIC> slid 27.61 points, or 1.45 percent, to 1,876.64, its lowest finish since last October.

U.S. Treasury bond prices rallied in response to the violence in Iraq as investors bought safe-haven government debt, pushing down the yield on the benchmark 10-year note to 4.69 percent from Friday's close of 4.77 percent -- and well below last week's two-year high of 4.90 percent.

"Bonds are up on rising geopolitical risks -- the assassination of the head of the Iraqi Council and also the bombs exploding in Turkey -- and falling global equities," said Mary Anne Hurley, vice president of fixed-income trading at D.A. Davidson.

The major stock indexes rose from their session lows in mid-morning trading after the U.S. military reported an artillery shell had exploded in Iraq, releasing a small amount of the nerve agent sarin. It was the first news of the discovery of any of the weapons on which the Bush administration made its case for war.

Argentina's MerVal <.MERV> leading share index slid 6.71 percent to its lowest level since October, dragged down by surging world oil prices and losses in neighboring Brazil, where the Sao Paulo Stock Exchange's benchmark Bovespa index <.BVSP> lost 2.63 percent.

In Europe, th FTSE Eurotop 300 index <.FTEU3> closed down 1.43 percent, after falling about 2 percent to 2004 lows.

Tokyo's Nikkei stock average<.N225> slid 3.18 percent to end at 10,505.05, the lowest closing level since Feb. 12.

Other Asian stock indexes also tumbled, with post-election uncertainty in India dragging the stock market there down 11 percent. In Hong Kong, the Hang Seng Index<.HSI> ended down 2.74 percent at 10,967.65 on investors' worries about surging oil prices and concerns that China's economy may be overheating.

The dollar fell primarily on the heightened global security fears, which encouraged investors to dump the U.S. currency after a week-long rally.

The euro gained against the dollar, up 1.25 percent at $1.2026 <EUR=>. The dollar fell 1.5 percent to 1.2750 Swiss francs <CHF=>. Sterling gained 0.68 percent to $1.7698 <GBP=>.

But the dollar rose 0.2 percent against the Japanese currency in late New York trading to 114.28 yen.<JPY=>

GOLD UP, BOND PRICES CLIMB

In New York, COMEX June gold closed up $2.50 at $379.60 an ounce in afternoon trading, although the news about sarin in Iraq took some of the bloom off some of the earlier flight-to-safety sentiment driven by the dollar's weakness.

The economic and geopolitical worries drove investors into bonds, despite their relatively high prices.

In late afternoon U.S. trade, the yield on the benchmark 10-year note <US10YT=RR> was 4.69 percent, down from 4.77 percent at Friday's close. The note's price, which moves in the opposite direction of its yield, was up 20/32 at 100-15/32.

Monday's bond market gains followed an eight-week sell-off, the U.S. Treasury market's worst losing streak in a decade. (Additional reporting by Vivian Chu, Elizabeth Lazarowitz, Alden Bentley, Carole Vaporean, Robert Gibbons, John Parry and Gertrude Chavez in New York, Kyle Peterson and Ros Krasny in Chicago, Marie Maitre in Paris, Mariko Katsumura in Tokyo)