* Oil surges to 2-1/2 year high on Libya violence
* Shares fall on price fears, earnings disappointments
* Euro zone manufacturing, Ifo upbeat
* Gold, euro zone bonds gain
By Jeremy Gaunt, European Investment Correspondent
LONDON, Feb 21 (Reuters) - Oil prices charged to fresh 2-1/2
year highs on Monday as traders reacted to increasing violence
in major producer Libya, which fed investor fears about rising
inflation and unsettled other markets.
Globally, equities were lower and there was no input from
U.S. markets, where there was a holiday.
But European equities fell more than 1 percent on a
combination of uncertainty over the future of the oil price,
increasing signs that higher interest rates may be coming and
more evidence of a surprisingly poor earnings season.
Together, the worries overshadowed reports of solid economic
growth.
Gold powered to the highest levels in seven weeks, helped
along by both inflation fears and risk aversion.
Protests broke out in the Libyan capital Tripoli for the
first time following days of unrest in the city of Benghazi and
some army units defected to the opposition in what has become
one of the bloodiest revolts to convulse the Arab world.
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Financial markets are particularly sensitive to the violence
in Libya because it exports around 1.1 million barrels per day
of crude.
Brent oil <LCOc1> was up more than $2 a barrel and closing
in on $105 at a new 2-1/2 year high.
Rising oil prices feed into inflation, one of the main
current concerns of investors, who are otherwise in a generally
bullish mood on expectations that the global economic recovery
is now sustainable.
"The situation in Libya looks pretty bad and we're seeing
safe-haven flows on the back of that," said Alan McQuaid, chief
economist at Bloxham Stockbrokers in Dublin.
MSCI's all-country world stock index was down a quarter of a
percent and the FTSEurofirst 300 <> declined more than 1
percent.
The European weakness came despite euro zone manufacturing
data above consensus and the strongest Ifo sentiment data out of
Germany since reunification.
European stocks have been hit by mixed earnings. Thomson
Reuters Proprietary Research reported on Monday that the number
of European companies missing fourth quarter expectations is
outpacing those beating them.
The earnings growth rate, actual and predicted, for the
STOXX 600 is 18.9 percent, compared with a December estimate of
36.1 percent.
Shares in Carlsberg <CARLb.CO>, for example, fell on Monday
after the brewer posted a surprise fall in fourth-quarter
operating profit.
EURO WAVERS
The euro slipped as the rising tensions in the Middle East
dented risk sentiment.
But it earlier hit its its highest level in more than 10
days against a background of hawkish comments from European
Central Bank officials that added to expectations a rise in
interest rates is on the way this year. []
The common currency was trading at $1.3657 <EUR=>, down
around 0.2 percent on the day. It rose to $1.3727 earlier in the
session, the highest since Feb. 10, extending a rise on Friday
that was also related to comments from an ECB Executive Board
member.
With an Irish election on Friday likely to see coming to
power a party which is openly calling for a renegotiation of its
EU bailout agreement, strategists say there is a risk that the
euro could come under pressure.
Euro zone policymakers are also struggling toward a more
comprehensive package that they hope can put an end to debt
troubles.
"With neither the core nor the periphery signalling
willingness to find a compromise on the issues for now, the
chances are that potential political impasses could erode euro
sentiment going forward," said Valentin Marinov, strategist at
Citi FX.
Core euro zone bond yields were lower as investors bought
safer assets in the face of the Middle East and North Africa
events.
(Additional reporting by William James and Anirban Nag; editing
by Stephen Nisbet)
