GLOBAL MARKETS-World stocks hit fresh highs, caution grows

                                
 * World stocks reach more than 2-1/2-year highs
                                
 * China raises bank reserve requirements
                                
 * Middle East tensions boost oil; gold at 5-week high
(Updates prices, adds details)
                                
 By Wanfeng Zhou
                                
 NEW YORK, Feb 18 (Reuters) - Major stock markets rose to
over 2-1/2-year highs on Friday as upbeat corporate earnings
offset China's latest tightening move and oil prices steadied
on concerns Middle East political tensions could disrupt
supply.
                                
 The MSCI all-country world stock index <.MIWD00000PUS> rose
0.4 percent to 348.07, after hitting its highest since late
July, 2008.
                                
 Robust earnings and merger activity have fueled a rally in
developed stock markets in recent months. Some analysts
cautioned that the risk of a pullback is growing, but they
added that any retreat will likely be limited and should be
seen as a buying opportunity.
                                
 Major U.S. stock indexes are headed for a third week of
gains, though volume has been light in the most recent leg of
the rally.
                                
 "I've never seen a market like this," said Paul Mendelsohn,
chief investment strategist at Windham Financial Services. A
market watcher for 35 years, he is taking profits in every area
but commodities.
                                
 "No matter where we start out in the morning, buyers come
in," he said. "I'm showing by every technical and quantitative
standard I have, this market is at extreme levels."
                                
 The Dow Jones industrial average <.DJI> was up 37.47
points, or 0.30 percent, at 12,354.34. The Standard & Poor's
500 Index <.SPX> was down 0.77 points, or 0.06 percent, at
1,339.59. The Nasdaq Composite Index <.IXIC> was off 3.23
points, or 0.11 percent at 2828.10.
                                
 Caterpillar Inc <CAT.N> rose 1.8 percent to $105.14 after
the equipment maker said machinery sales through dealers
accelerated in the three months through January. For details,
see [ID:nN18186151]
                                
 "There is definitely high anxiety because everyday it looks
like the market is at the top and it's going to have to
correct," said James Dailey, portfolio manger of TEAM Asset
Strategy Funds in Harrisburg, Pennsylvania.
                                
 The CBOE Volatility Index VIX <.VIX>, Wall Street's
so-called "fear gauge", was on track to end the week about 5
percent higher. The index is usually inversely correlated to
the S&P and a rise in the VIX typically means a drop in the
stock market.
                                
 For analysis stories on stock rally, see [ID:nN18156073]
[ID:nN16292615]
                                
 World equities earlier came under pressure after China
raised banks' required reserves half a percentage point to 19.5
percent for the biggest banks, the second such increase this
year as government continues the fight against inflation.
[ID:nTOE71H068]
                                
  China has increased interest rates three times in the past
four months and ordered banks to issue fewer loans. But its
annual inflation still rebounded to 4.9 percent in January from
4.6 percent a month earlier.
                                
 European shares <.FTEU3> ended near 29-month highs, with
miners hit after China's tightening move.
                                
 In Paris, China rejected plans to use real exchange rates
and currency reserves to measures global economic imbalances,
casting doubt on the ability of Group of 20 major economic
powers to reach agreement at a meeting on Friday.
                                
 OIL IN FOCUS
                                
 Crude oil prices earlier jumped after Egypt approved the
passing of two Iranian warships through the Suez Canal. Israel
has called Iran's plans to send navy ships through the Suez
Canal a "provocation". [ID:nLDE71G0CU]
                                
 U.S. March light crude futures rose to a high of 87.88 a
barrel <CLc1> before retreating. Brent crude futures <LCOc1>
gained hit above $103 a barrel in volatile trading before
easing back.
                                
 Spreading unrest in the Middle East and North Africa also
stoked fears of potential disruption to oil flows and pushed up
prices.
                                
 At least two people were killed in Yemen on Friday when
clashes broke out between police and protesters, witnesses
said, and thousands turned out in Bahrain and Libya to mourn
protesters killed in government crackdowns. [ID:nLDE71H15V]
                                
 Tensions in the Middle East pushed safe-haven gold to a
fresh five-week high at $1,390.40 an ounce. Spot gold <XAU=>
last traded at $1,387.76. Silver hit fresh 31-year highs.
                                
 The euro <EUR=> rose above $1.37 after a senior European
Central Bank official was quoted in a media report as saying
that the central bank may have to raise interest rates as
global inflation pressure mounted.
                                
 (Additional reporting by Caroline Valetkevitch and Julie
Haviv in New York and Jessica Mortimer in London
 (Editing by Theodore d'Afflisio)