* Flight-to-safety trade on N. Korea attack sinks stocks
* Euro drops on Irish debt worries, Korea tensions
* Gold safe-haven status overcomes U.S. dollar strength
(Updates with U.S. market close, comment, Nikkei futures)
By Daniel Bases
NEW YORK, Nov 23 (Reuters) - North Korea's deadly shelling
of a South Korean island on Tuesday rattled global markets,
prompting investors to sell stocks and seek safe haven in the
U.S. dollar, gold and government bonds.
The euro, already soured by Ireland's debt crisis,
accelerated its decline as investors feared a rescue package
for Dublin may not stop problems from spreading to other
indebted euro zone countries. The euro plunged to a two-month
low beneath $1.34 and traded below 111 yen for the first time
since mid-September.
Jeff Kleintop, chief market strategist at LPL Financial in
Boston, said the news reminded traders how easily markets can
be disturbed by geopolitics.
"As we move into 2011, (U.S. President Barack) Obama is
going to be a lot less focused on domestic policy -- where we
have gridlock -- and more focused on foreign policy and
confronting some of these regimes," Kleintop said.
"That might mean higher geopolitical risk premiums going
forward."
An upward revision of U.S. third-quarter gross domestic
product growth added to the greenback's allure while
weaker-than-forecast sales of previously owned U.S. homes did
little to diminish the dollar. For details, see []
Gold's safe-haven status overcame the stronger U.S. dollar,
but crude oil fell.
Share prices in Tokyo are poised to drop on Wednesday from
their five-month closing high in the previous session as the
December futures contract for the Nikkei 225 stock index
<0#NK:> trading in Chicago fell 230 points, or 2.28 percent to
9,875.
North Korea's artillery barrage killed two South Korean
soldiers in one of the fiercest attacks on its neighbor since
the Korean War ended in 1953. South Korea fired back and sent
fighter jets to the area, close to a disputed maritime border
on the west of the divided peninsula. []
The iShares MSCI South Korea Index Fund <EWY.P> traded down
5.42 percent during New York hours. Shares of Korea Electric
Power <KEP.N> traded in New York lost 4.13 percent to $12.30.
The Dow Jones industrial average <> dropped 142.21
points, or 1.27 percent, at 11,036.37. The Standard & Poor's
500 Index <.SPX> fell 17.11 points, or 1.43 percent, at
1,180.73. The Nasdaq Composite Index <> lost 37.07 points,
or 1.46 percent, at 2,494.95.
The MSCI All-Country World equity index <.MIWD00000PUS>
fell 1.75 percent while the Thomson Reuters global stock index
<.TRXFLDGLPU> dropped 1.10 percent.
The FTSEurofirst 300 <> index of top European shares
fell 1.53 percent to 1076.71, its lowest close in six weeks.
"The Irish bailout continues to cause uncertainty amongst
European investors as concerns about the potential of contagion
to other countries have increased," said Angus Campbell, head
of sales at Capital Spreads.
IRISH JITTERS
The debt tensions in Ireland led to weak bank shares in
Europe in addition to pulling the euro down 1.91 percent at
$1.3365 <EUR=>, its weakest point since late September.
Bank of Ireland shares <BKIR.I> fell 24.94 percent. Other
banks to fall included Spain's Banco Santander <SAN.MC>, off
4.73 percent, and BBVA <BBVA.MC> off 3.90 percent.
The U.S. dollar rose 1.30 percent against a basket of
currencies that make up its major trading partners. The dollar
however fell 0.16 percent to 83.15 against the yen <JPY=>.
In Europe, Bund futures <FGBLc1> rose more than one point
to 128.94 as political disarray in Ireland cast doubt over
whether the government could pass its austerity budget and pave
the way for a European Union/IMF aid deal to tackle its debt
problems.
The premium investors demand to hold Spanish bonds over
German benchmarks rose to a euro-lifetime high of 237 basis
points after Madrid was forced to pay a high cost to sell
short-term bills, reflecting contagion risks from Ireland.
Irish spreads rose back above 600 bps and other peripheral
government bond yield spreads widened. The cost of insuring
higher-yielding euro zone sovereign debt against default also
was rising, even though traders said the European Central Bank
had been buying bonds, mainly Portuguese.
"Europe is in self-implode mode. There is a huge
flight-to-quality bid developing," a trader said.
Portugal and Spain are seen as the next weakest links and
an official from Portugal's main opposition party said it would
allow passage of the minority Socialist government's 2011
budget in the final vote on Nov. 26. []
Benchmark 10-year U.S. Treasuries rose 6/32 of a point in
price, driving the yield down to 2.78 percent <US10YT=RR>.
Spot gold prices <XAU=> rose $10.75 to $1,376.50, while
crude oil <CLc1> fell 67 cents $81.07 per barrel.
(Additional reporting by Steven C. Johnson, Rodrigo Campos,
Emelia Sithole-Matarise, Joanne Frearson, Kirsten Donovan,
Natsuko Waki, Chris Reese; Editing by Kenneth Barry)
