GLOBAL MARKETS-Stocks fall globally as energy price jump ignites inflation fears

Updates prices after oil settlement

By Sinéad Carew and Lucy Raitano

NEW YORK/LONDON, March 3 (Reuters) - Stock indexes around the world lost ground while the dollar rose on Tuesday, as a widening conflict in the Middle East created safe-haven demand and pushed oil prices up sharply, exacerbating investor concerns about inflation.

Oil futures settled up more than 4% after hitting their highest levels since 2024 after Iran disrupted shipping in the Strait of Hormuz, through which a fifth of the world's oil and liquefied natural gas typically passes. The war, in its fourth day, has intensified as Israeli and U.S. forces pounded targets across Iran, prompting Iranian retaliatory strikes around the Gulf while Israel also attacked Lebanon.

On Tuesday, U.S. President Donald Trump sought to justify a broad, open-ended war on Iran saying he had "a feeling" Iran would attack after nuclear negotiations stalled. Israel's military said it struck an Iranian compound aiming to develop "necessary capabilities" for nuclear weapons, without providing evidence.

Wall Street indexes pared earlier losses and were last down less than 1%. European stocks earlier closed down more than 3% and MSCI's Asia Pacific index .MIAP00000PUS finished off 3.5%. South Korea led declines in Asian markets with a weaker won helping to send the KOSPI <.KS11> down 7.2%.

“How much this war is disproportionately hitting Europe and other oil-importing countries is really being highlighted right now in the markets," said Kevin Gordon, head of macro research & strategy at Charles Schwab, New York.

In oil markets, U.S. crude CLc1 settled up 4.7%, or $3.33 at $74.56 a barrel after rising more than 6% on Monday and Brent LCOc1 ended at $81.40 per barrel, up 4.71%, or $3.66, on the day after a 6.7% rally in the prior session.

"This damage is being done because the war keeps spreading," said Gordon but he cautioned that the market is currently driven mostly by news headlines and that the "potential for whiplash in parts of the market is very high, because of that."

On Wall Street, at 02:46 p.m. ET (1946 GMT) the Dow Jones Industrial Average .DJI fell 223.43 points, or 0.46%, to 48,681.35, the S&P 500 .SPX fell 43.27 points, or 0.63%, to 6,838.35 and the Nasdaq Composite .IXIC fell 150.75 points, or 0.66%, to 22,598.11.

MSCI's gauge of stocks across the globe .MIWD00000PUS fell 17.14 points, or 1.62%, to 1,032.81 while the pan-European STOXX 600 .STOXX index finished down 3.08% after hitting its lowest level since late January.

Cboe's Volatility index .VIX, also known as Wall Street's fear gauge, was up about 1 point at 22.40 after earlier touching 28.15, its highest level since November 20.

BONDS MUTED, DOLLAR IN DEMAND

U.S. Treasury yields moves were more muted than earlier in the day with benchmark U.S. 10-year notes yields US10YT=RR unchanged from late Monday at 4.052%.

The 30-year bond US30YT=RR yield fell 0.2 basis points to 4.6971% while the 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 0.9 basis points to 3.496%, from 3.487% late on Monday.

In currencies, the U.S. dollar climbed against the euro, sterling and yen as the Middle East conflict triggered broad demand for safe‑haven assets and fuelled expectations of prolonged global inflation.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.47% to 98.98, with the euro EUR= down 0.57% at $1.1619.

Against the Japanese yen JPY=, the dollar strengthened 0.15% to 157.58 while sterling GBP= weakened 0.33% to $1.3361.

In cryptocurrencies, bitcoin BTC= fell 1.03% to $68,716.79.

GOLD LOSES SOME SHINE

The surge in energy prices also complicates the Federal Reserve's efforts to keep inflation under control, with policymakers already showing signs of division around the impact of artificial intelligence on the U.S. economy. The U.S. will take action to mitigate rising energy prices due to the spike in the price of oil, Secretary of State Marco Rubio said on Monday.

Oil inflation concerns came as ISM manufacturing data released on Monday showed U.S. activity grew steadily in February, but a gauge of factory gate prices raced to a near 3-1/2-year high amid tariffs, already highlighting upside pressure on inflation even before the attacks on Iran.

In precious metals, gold prices were weighed down by a stronger dollar and fading prospects of an interest rate cut as inflation concerns intensified.

Spot gold XAU= fell 3.79% to $5,125.00 an ounce. U.S. gold futures GCc1 fell 3.63% to $5,102.00 an ounce. Spot silver XAG= fell 6.3% to $83.80 an ounce.

(Reporting by Gregor Stuart Hunter and Rae Wee in Singapore, and Lucy Raitano in London, Sinéad Carew in New York, Suzanne McGee in Providence: Editing by Kirsten Donovan, Emelia Sithole-Matarise, Nick Zieminski and Chizu Nomiyama )

((sinead.carew@thomsonreuters.com))