(Updates with U.S. markets, changes dateline to New York,
byline)
* Oil rebound rekindles inflation fears
* Stocks slide; Dow, Nasdaq set for worst week in 3 months
* Dollar falls; set for biggest weekly slide since March
By Herbert Lash
NEW YORK, May 23 (Reuters) - World stocks sagged on Friday,
with key U.S. equity markets poised for their worst week since
February amid fears oil prices will take a large toll on
consumer spending and corporate earnings.
Crude oil rebounded from Thursday's sharp loss, helped by a
weaker dollar and nagging concerns about stagnating output in
Russia and other producers outside OPEC.
U.S. Treasury debt prices also recouped some of the
previous day's steep losses as falling stocks rekindled
safe-haven buying ahead of a long U.S. and British holiday
weekend.
Investors remained focused on crude oil prices that have
doubled over the past year and left investors fearing a return
of stagflation: sluggish growth with creeping inflation.
Stocks of energy-sensitive industries such as restaurants
and airlines fell and another data point on the slumping U.S.
housing market also gave investors little to cheer.
The pace of U.S. existing home sales fell slightly less
than expected, helping stocks come off their opening lows, but
the inventory of unsold homes surged 10.5 percent in April, a
sales rate that would put the supply of homes at 11.2 months.
"The rising price of crude is a detriment to the consumer.
It's not that big in terms of absolute dollars, but the
psychological impact is hurting sentiment," said Bucky Hellwig,
senior vice president at Morgan Asset Management in Birmingham,
Alabama.
"In addition to that, the value of the consumers homes
continues to fall and that's getting people thinking we have
another downleg in the economy and all that is very negative
for stocks," Hellwig said.
After midday, the Dow Jones industrial average <> was
down 143.63 points, or 1.14 percent, at 12,481.99. The Standard
& Poor's 500 Index <.SPX> was down 18.55 points, or 1.33
percent, at 1,375.80. The Nasdaq Composite Index <> was
down 29.30 points, or 1.19 percent, at 2,435.28.
Shares of restaurant chain Cheesecake Factory <CAKE.O> fell
5.9 percent to $19.65 and Darden Restaurants <DRI.N>, the
operator of the Red Lobster chain, fell 3.5 percent to $32.04.
European stocks fell 1.7 percent, losing ground for the
third day in four sessions, as oil prices weighed on sentiment
and a dip in metal prices prompted investors to book recent
lofty gains on mining shares.
The FTSEurofirst 300 <> index of top European shares
closed lower at 1,322.22 points, ending the week with a 3
percent loss, its worst weekly performance since early March.
Mining stocks tumbled, with Rio Tinto <RIO.L> off 4.7
percent and BHP Billiton <BLT.L> down 4.6 percent.
"The market is rattled by the daily oil price rise that has
become almost unbearable. That's a real threat to growth and
also a big issue for inflation," said Jean-Claude Petit, head
of equities at Barclays Wealth Managers France.
Oil prices rebounded after falling more than 3 percent on
Thursday after hitting a record high of $135.09 a barrel.
Gasoline futures also bounced back from the prior day's
losses while heating oil extended gains.
"Although yesterday's price pullback would suggest that
this bull move is getting a bit long in the tooth, we are still
looking for a strong finish to the week," said Jim Ritterbusch,
president at Ritterbusch and Associates in Galena, Illinois.
Gains in U.S. government debt were capped by persistent
concerns that soaring food and energy prices were likely to
sustain inflation pressures, increasing expectations the
Federal Reserve will hike rates by the end of the year.
U.S. light sweet crude oil <CLc1> was up 54 cents at
$131.35 a barrel.
In Europe record high oil prices are likely to keep yields
elevated as investors bet that the European Central Bank might
be forced to raise interest rates this year -- a view many
analysts say is overdone.
The overall picture for euro zone government debt is still
rather bleak, said David Schnautz, fixed-income strategist at
Commerzbank in Frankfurt.
"The inflation theme is definitely the main topic right
now. As long as you get negative news on the inflation front,
even the more attractive yields at the moment don't seem to be
attractive enough," Schnautz said.
Asian stock markets were mixed after a volatile week.
Japan's Nikkei share average <> finished 0.2 higher,
boosted by demand for sectors that perform well during periods
of economic sluggishness but was down 1.5 percent on the week.
Stocks outside of Japan declined for a fourth day running,
shedding 1.1 percent <.MIAPJ0000PUS>, according to the MSCI
index.
The 10-year cash yield <EU10YT=RR> fell to yield
4.27percent, but was up sharply from last Friday's 4.19
percent. Two-year Schatz yield <EU2YT=RR> eased to yield 4.19
percent, much higher than the week ago's 3.99 percent level.
U.S. debt prices also were higher. The benchmark 10-year
U.S. Treasury note <US10YT=RR> was up 22/32 to yield 3.84
percent. The 2-year U.S. Treasury note <US2YT=RR> was up 6/32
to yield 2.43 percent. The 30-year U.S. Treasury bond
<US30YT=RR> was up 34/32 to yield 4.56 percent.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.33 percent at 71.902, and was down
0.93 percent at 103.10 against the yen <JPY=>.
The euro <EUR=> was up 0.34 percent at $1.5781.
Gold bounced back after a drop from a one-month high
spurred buying from bargain hunters, but jewellers stayed on
the sidelines, awaiting clues from the energy market.
Spot gold prices <XAU=> rose $2.70 to $923.55.
(Reporting by Jennifer Coogan, Steven C Johnson, John Parry in
New York, Margaret Orgill, Ian Chua and Lewa Pardomuan in
London and Blaise Robinson in Paris)
(Reporting by Herbert Lash. Editing by Richard Satran)
