(Adds close of U.S. markets)
* Oil rebounds to over $131 a barrel after early sharp dip
* U.S., European shares rise; data lifts technology
* Strength in U.S. factories bolsters dollar, socks bonds
By Herbert Lash
NEW YORK, May 28 (Reuters) - Oil rebounded to over $131 a
barrel on Wednesday after a sharp drop earlier in the session,
while U.S. stocks rose as a surprisingly sharp gain in U.S.
business investment offset renewed credit market jitters.
Technology shares such as IBM <IBM.N> and Hewlett-Packard
<HPQ.N> helped lift stocks after a closely watched proxy for
U.S. business spending in April posted the biggest gain since
the end of last year.
The stronger-than-expected data knocked U.S. and euro zone
government bond prices lower and bolstered the dollar on views
that stronger U.S. growth could lead the Federal Reserve to
stop trimming interest rates, and even raise them.
Oil rose more than $2 a barrel on fears about Nigerian
supplies, rebounding from a sharp drop early in the session
triggered by concerns about a slowdown in world energy demand.
Gold ended lower on heavy volume for a second straight day,
but recouped initial sharp losses as crude oil turned higher.
Gold tends to move in line with oil prices as it boosts
bullion's appeal as a hedge against inflation.
The Dow Jones industrial average <> rose 45.68 points,
or 0.36 percent, to 12,594.03. The Standard & Poor's 500 Index
<.SPX> gained 5.49 points, or 0.40 percent, to 1,390.84. The
Nasdaq Composite Index <> added 5.46 points, or 0.22
percent, at 2,486.70.
Demand for the U.S. currency increased early, buoyed by
reports of rising German inflation and after oil slid toward
the day's early session lows of $125.96 a barrel.
But oil later snapped back amid renewed banking jitters
sparked by an announcement late Tuesday by KeyCorp <KEY.N>. The
large Midwestern regional bank said its mounting loan losses
could cause write-offs to double from its prior forecast.
"Financials are doing pretty poorly with Key Corp coming
out and saying 'Loan losses -- Oh, by the way, we're not done
with them,' that says these kinds of things not likely to go
away for a while because real estate is still in trouble," said
Paul Nolte, director of investments at Hinsdale Associates, in
Hinsdale Illinois.
"That's really the big pressure on the markets today, it's
not energy. If oil was up $5, the market would be down more
than 200 points," he added.
KeyCorp plunged 11 percent to $19.44 and AIG fell 4.6
percent to $34.95.
"The KeyCorp news last night showed we are not out of the
woods yet in financials," said Kurt Brunner, portfolio manager
at Swarthmore Group in Philadelphia.
The financial crisis concerns led American International
Group <AIG.N> to fall 4.6 percent after Citigroup said the
insurer may need more capital even after raising $20 billion
last week.
Technology and chemical stocks propelled shares higher in
Europe, helped by the early slide in crude oil prices.
The pan-European FTSEurofirst 300 index <> closed 0.9
percent higher at 1,326.69 points, snapping a three-day losing
streak.
The DJ Stoxx European technology index <.SX8P> gained 2.2
percent, with German software company SAP AG <SAPG.DE> rising
4.8 percent to 34.95 euro.
U.S. bond yields climbed to their highest since the start
of the year after U.S. data showing new orders for durable
goods fell a less-than-expected 0.5 percent in April.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
almost a full point to yield at 4.03 percent. The 30-year U.S.
Treasury bond <US30YT=RR> slipped more than a point to yield
4.72 percent.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.19 percent at 72.525, while against
the yen <JPY=> the dollar rose 0.42 percent at 104.68.
The euro <EUR=> fell 0.27 percent at $1.5642.
The dollar earlier traded at a two-week high against the
yen, but it pared some of its gains and was last up 0.4 percent
at 104.68 <JPY=>.
Non-defense capital orders excluding aircraft rose 4.2
percent, marking the biggest increase since December.
"You strip out defense and aircraft and you had a 4.2
percent pop. It really becomes hard to suggest that we have got
a full-fledged recession here," said T.J. Marta, fixed income
strategist at RBC Capital Markets in New York.
Oil posted its early sharp drop, before rebounding, on
signs Asian demand could start to falter as consumer nations
look to cut subsidies by raising fuel prices.
Growing evidence also suggests consumers are struggling to
cope with surging prices after oil peaked at more than $135 a
barrel.
U.S. crude <CLc1> settled up $2.18 to $131.03 a barrel, off
earlier lows but still below a record $135.09 hit last week.
London Brent crude <LCOc1> rose $2.63 to $130.93 a barrel.
U.S. gold futures ended lower on heavy volume for a second
straight day, but bullion recouped initial sharp losses as
crude oil turned higher after tanking early.
The June gold contract <GCM8> in New York settled down
$7.40 at $900.50 an ounce.
Asian stocks slid for the sixth day out of seven as
inflation fears and a cloudy U.S. economic outlook left
investors skittish.
Japan's Nikkei share average <> fell 1.3 percent and
is down 10.4 percent so far this year.
MSCI's index of stocks outside Japan <.MIAPJ0000PUS> fell
0.7 percent, dragged down by a 1.3 percent slide in Australia's
stock market <> on losses at resource-related companies.
(Reporting by Kristina Cooke, Vivianne Rodrigues and Chris
Reese in New York, and Atul Prakash, Santosh Menon and Eva
Kuehnen in London; Editing by Dan Grebler)
