(Adds close of U.S. markets)
* Oil surges to near $134 barrel, raising inflation fears
* Federal Reserve slashes 2008 economic growth forecast
* Stocks tumble; gold and euro hit one-month peaks
By Herbert Lash
NEW YORK, May 21 (Reuters) - Global stocks tumbled on
Wednesday as a U.S. Federal Reserve outlook for possible higher
inflation and a weaker economy hit investors already fretting
over oil's record surge.
Crude rose almost $5 a barrel to its third straight record
futures market high after a U.S. government report showed a
surprise drop in crude stockpiles, rekindling fears of a supply
crunch.
The rapid rise in crude oil, up 33 percent so far this
year, stoked fears of global inflation and sagging economic
growth. The new surge in energy prices has undermined equity
markets that have recently been erasing their 2008 losses.
The Fed signaled in minutes from a policy-makers' meeting
in April that it was unlikely to cut interest rates further.
The comments led U.S. Treasury debt prices to pare losses and
pushed U.S. stocks indices, already trading down on surging oil
and inflation fears, lower still late in the session.
The dollar fell to a one-month low against the euro and
touched a one-week trough versus the yen . Earlier, a bullish
economic outlook for Germany helped lift the euro.
The market's concerns over rising oil were reflected in
company disclosures on energy-related issues. The chief
executive of aircraft maker Boeing said he was concerned record
crude prices are crimping the growth of his major airline
customers.
Shares of Boeing fell 4.86 percent to $81 and were the
biggest drag on the Dow industrials. The comments came hours
after AMR Corp's American Airlines announced it would slash
domestic capacity in the face of soaring fuel prices.
An index of airline stocks <.XAL> slid 12 percent and
retailers, home builders and financial services stocks also
lost ground.
Oil stocks climbed to 52-week highs.
"The market is starting to decide that at some point higher
oil is going to be an economic drag. Given the fact that
inflation ripples through the economy slowly the market is
right to have that concern," said Chip Hanlon, president of
Delta Global Advisors, Inc, in Huntington Beach, California.
The rising prices for materials have stoked fears of
broader inflation and posed problems for central banks under
pressure to cut interest rates to stimulate slowing economies.
The third straight record high in oil pulled other key
commodities higher. Gold hit one-month highs, and corn and soy
rose in Chicago commodity markets.
The Reuters-Jefferies CRB Index <.CRB> of 19 commodity
futures closed up 1.7 percent to a new record high of 434.40.
The Dow Jones industrial average <> fell 227.49 points,
or 1.77 percent, at 12,601.19. The Standard & Poor's 500 Index
<.SPX> was down 22.69 points, or 1.61 percent, at 1,390.71. The
Nasdaq Composite Index <> was down 43.99 points, or 1.77
percent, at 2,448.27.
Wall Street:
U.S. crude <CLc1> settled up $4.19 at $133.17 a barrel
after hitting a fresh peak of $133.72. London Brent <LCOc1>
rose $5.21 to $133.05.
"The higher oil price is going to affect the consumer. It
affects the psychology much like lower stock prices affect the
wealth effect," said Alan Lancz, president of investment
advisory firm Alan B. Lancz & Associates Inc in Toledo, Ohio.
"Something has got to give. If it's not oil, it's going to be
stock prices."
European stocks extended the previous day's sharp losses as
the spike in crude oil heightened inflation fears and clouded
the outlook for corporate profits.
Oil stocks such as BP <BP.L> and Royal Dutch Shell <RDSa.L>
helped cushion the market's fall. BP gained 3.2 percent, while
Royal Dutch Shell surged 4.5 percent.
The FTSEurofirst 300 <> index of top European shares
closed 0.7 percent lower at 1,340.63 points, its lowest close
since May 1.
U.S. gold futures ended just below $930 an ounce as a sharp
rally of crude oil prices stirred inflation fears. Gold's role
as an inflation hedge rose on the surge in crude prices.
The New York gold contract for June delivery settled up
$8.40 at $928.60 an ounce, soaring earlier to $933, the highest
level since April 22.
The benchmark 10-year U.S. Treasury note <US10YT=RR>
fell 9/32 to yield 3.81 percent. The 2-year U.S. Treasury note
<US2YT=RR> fell 6/32 to yield 2.40 percent. The 30-year U.S.
Treasury bond <US30YT=RR> fell 6/32 to yield 4.55 percent.
(Reporting by Richard Valdmanis, Ellis Mnyandu, Steven C.
Johnson in New York and Lewa Pardomuan in London.
(Reporting by Herbert Lash. Editing by Richard Satran)
