(Adds close of U.S. markets)
* U.S., European shares slide on financial sector worries
* Resurgent crude oil prices add to strain on Wall Street
* Oil prices rebound on reassessment of Chinese price hike
* Dollar sags on resurgent oil, ECB's tough inflation talk
* U.S., euro zone government debt rises on safe-haven bid
By Herbert Lash
NEW YORK, June 20 (Reuters) - A resurgence of oil prices
and financial sector credit fears on Friday knocked global
equities to near year's lows and dragged down the dollar as
interest rates fell on save-haven U.S. government debt.
Oil prices rebounded a day after China raised fuel prices
-- a move that sparked a one-day stock rally -- as escalating
tensions between Israel and Iran and supply disruptions in
Nigeria lifted crude almost $3 a barrel.
The dollar fell broadly on expectations the Federal Reserve
will keep a loose rein on monetary policies when it meets next
week because of the resurgence of oil and credit fears.
Hit by the expiration of four futures or options contracts
and another downgrade of financial shares by a major American
investment bank, U.S. stock indices fell about 2 percent. A
major European stock index fell 1.8 percent.
With the health of the financial sector under renewed
scrutiny and higher crude prices pushing up inflation jitters,
U.S. and euro zone government debt prices rallied.
Investors dumped banking shares on both sides of the
Atlantic after Merrill Lynch cut its earnings estimates for
2008 and 2009 for a dozen large U.S. banks on higher loan
losses and the need to raise reserves to cover those losses.
Costlier oil and a note from a credit rating agency slammed
automakers' shares. General Motors Corp <GM.N> and Ford Motor
Co <F.N> plummeted after Standard & Poor's said it may cut
their ratings. GM fell almost 6.2 percent and Ford fell about
8.4 percent.
"Couple oil with all the financial concerns coming back to
light and you have all the fixings for a down day," said Edward
Bretschger, director of equity sales and trading at Calyon
Securities in New York.
Shares of Merrill Lynch and other investment banks fell
amid trader speculation that Merrill may give a profit warning.
A Merrill Lynch spokeswoman declined to comment. Merrill's
<MER.N> stock lost 4.6 percent.
Short sellers, investors who bet share prices will fall
further, targeted financial stocks in particular.
Short interest in both Washington Mutual <WM.N> and
American International Group <AIG.N> climbed more than 23
percent in a new positions report. For the U.S.-listed shares
of Switzerland's UBS <UBS.N>, short interest nearly doubled.
The quarterly expiration of futures and options contracts,
an event known as "quadruple witching" that tends to boost
volume and volatility as investors adjust or exercise their
derivative positions, was felt on equity markets.
"Quadruple witching played a big part today because we are
seeing heavy volume in the market overall as people unwind
their June futures, options and stock positions," said Joe
Kinahan, chief derivatives strategist at online brokerage
thinkorswim Inc in Chicago.
The Dow Jones industrial average <> fell 221.30 points,
or 1.83 percent, at 11,841.79. The Standard & Poor's 500 Index
<.SPX> fell 25.03 points, or 1.86 percent, at 1,317.80. The
Nasdaq Composite Index <> fell 55.97 points, or 2.27
percent, at 2,406.09.
European stocks fell to their lowest close since March 17
in the wake of Bear Stearn's collapse.
Banks led decliners in Europe amid jitters about the
financial industry, high oil prices and raising inflation.
Dutch-Belgian financial group Fortis <FOR.AS> fell 5.1
percent, British mortgage lender HBOS <HBOS.L> lost 4.9
percent, Swiss UBS <UBSN.VX> shed 3.3 percent and Germany's
Deutsche Bank <DBKGn.DE> dropped 3.1 percent.
The FTSEurofirst 300 index <> of top European shares
closed 1.8 percent lower at 1,222.51 points. It lost 3.5
percent over the week.
Oil's gains marked a reversal from heavy losses on Thursday
that was triggered by China's higher fuel prices -- a move that
could slow demand in the world's second-largest energy
consumer.
U.S. July crude rose $2.69 to $134.62 a barrel, off highs
of $136.80. London Brent was up $2.86 at $134.86.
Gold ended slightly lower in pre-weekend profit taking,
despite a recovery in crude oil prices. Spot gold <XAU=> was at
$901.35/902.75 by New York's last quote.
Asian shares fell to their lowest in a week on Friday, with
Japan's Nikkei stock average <> falling 1.3 percent.
The MSCI index of stocks in the Asia-Pacific region outside
Japan <.MSCJIAPJ> dropped 0.5 percent.
(Reporting by Jennifer Coogan, Ellen Freilich and Lucia
Mutikani in New York; Santosh Menon and Jan Harvey in London
and Peter Starck in Frankfurt)
(Reporting by Herbert Lash. Editing by Richard Satran)
