(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 slid on Friday as
fears that surging oil prices will shackle economic growth
soured investor sentiment.
For the U.S. equity market, it was the worst week since
February.
Crude oil rebounded from a sharp loss on Thursday, lifted
by a weak dollar and long-term supply concerns that briefly
pushed oil to a peak over $135 this week.
U.S. Treasury debt prices also recovered some of the
previous day's 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 spiraling inflation.
Oil worries pushed the American Stock Exchange index of
airline stocks <.XAL> down 4.3 percent while shares of
restaurant chains, also seen as vulnerable, were lower.
"Oil prices are what's driving us down again. As they just
continue to go higher and higher, that's putting pressure on
the economy, and as people think the economy is not going to do
so well, that's hurting stocks," said Giri Cherukuri, head
trader at OakBrook Investments LLC in Lisle, Illinois.
Economic bellwethers United Tech <UTX.N> and Caterpillar
<CAT.N> were among the top drags on the Dow.
General Motors' <GM.N> shares fell to a 26-year low after
the automaker said strikes by the United Auto Workers and a
just-ended strike at supplier American Axle & Manufacturing
Holdings Inc <AXL.N> will reduce its earnings by $2.8 billion.
GM shares fell 4.5 percent to $17.60.
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.
All three major U.S. stock indexes posted their worst
percentage drop in a week since February. For the week, the Dow
Jones industrial average fell 3.9 percent, the Standard &
Poor's 500 Index dropped 3.5 percent and the Nasdaq lost 3.3
percent.
On Friday, the Dow <> fell 1.2 percent to 12,479.63,
the S&P <.SPX> fell 1.3 percent to 1,375.93 and the Nasdaq
<> declined 0.81 percent to 2,444.67.
Shares of restaurant chain Cheesecake Factory <CAKE.O>
fell 6.4 percent to $19.53 and Darden Restaurants <DRI.N>, the
operator of the Red Lobster chain, fell 4.4 percent to $31.74.
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 3.1
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. New York oil futures for July delivery <CLN8>
settled up $1.38 at $132.19 a barrel. London crude hit a record
high of $135.14 a barrel earlier in the week, and New York
crude touched $135.09.
"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.
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.
U.S. government debt rose. The benchmark 10-year U.S.
Treasury note <US10YT=RR> rose 18/32 to yield 3.85 percent. The
2-year U.S. Treasury note <US2YT=RR> rose 6/32 to yield 2.44
percent. The 30-year U.S. Treasury bond <US30YT=RR> rose 5/32
to yield 4.58 percent.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.24 percent at 71.969. Against the
yen <JPY=>, the dollar fell 0.75 percent at 103.29.
The euro <EUR=> rose 0.27 percent at $1.5771.
(Reporting by Kristina Cooke, Lucia Mutikani, 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)
