Gold, oil retreat on rumor Gaddafi is dead

Visitors are seen in front of an electronic board showing stock prices at the Tokyo Stock Exchange in Tokyo February 22, 2011.

NEW YORK (Reuters) - Gold slipped and crude oil prices dropped sharply from 2-1/2-year highs on Thursday on speculation Libyan leader Muammar Gaddafi had been shot, but other markets barely reacted to the rumor.

Brent oil prices had soared more than 7 percent to almost $120 a barrel on concerns the unrest sweeping North Africa could spread to other major oil-producing countries and put a dent in the global economic recovery.

"Libya, to the extent it keeps pushing oil higher, will continue to have an impact throughout the economy," said David Spika, investment strategist at Westwood Holdings Group Inc in Dallas, which oversees $12.5 billion in assets.

"If oil gets to $125 per barrel, that will be significant. You could see a lot of deterioration at that level," he said.

The U.S. government said it had no reason to believe that Gaddafi is dead, speculation that sent prices tumbling more than $2 a barrel in late afternoon trade.

Forces loyal to Gaddafi launched a fierce counter-attack on rebels holding towns near the capital, and the United States did not rule out military action in response to the Libyan crackdown.

Crude prices had begun to ease on reports that Saudi Arabia was in talks with European refiners to make up for the loss of Libyan crude and rumors of a possible release of U.S. emergency oil stockpiles.

The White House said it has the capacity to act in the event of a major disruption of oil supplies caused by the unrest. It is discussing the situation with the International Energy Agency and oil-producing nations.

The IEA again urged the Organization of Petroleum Exporting Countries to draw on excess production capacity if required, adding that both consumers and producers had the tools to deliver enough oil to the market.

Brent crude hit a high of $119.79 a barrel early in the session and settled up 11 cents at $111.36. But in post-settlement trade it dropped to $109.60.

U.S. light sweet oil settled down 82 cents at $97.28 a barrel after touching $103.41, the highest since September 2008.

Fears of uprisings erupting elsewhere in the Middle East lifted the Swiss franc to a record high against the U.S. dollar and helped spot gold prices hit a two-month high of $1,417.92 an ounce on safe-haven buying.

The dollar slipped to a record low of 0.9240 Swiss franc on electronic trading platform EBS. The dollar later trimmed losses against the euro after U.S. initial jobless claims fell in the latest week, suggesting a steady improvement in the labor sector.

By late in the New York session, spot gold prices fell $4.98 to $1,404.90 an ounce.

The Dow and broad-market S&P 500 stock indices closed slightly lower, but the Nasdaq ended higher.

The Dow Jones industrial average .DJI closed down 37.28 points, or 0.31 percent, at 12,068.50, according to preliminary figures. The Standard & Poor's 500 Index .SPX was down 1.30 points, or 0.10 percent, at 1,306.10. The Nasdaq Composite Index .IXIC ended up 14.91 points, or 0.55 percent, at 2,737.90.

U.S. Treasury debt prices rose on safe-haven buying and worries that oil price gains could crimp consumer spending and harm U.S. economic recovery.

The benchmark 10-year U.S. Treasury note was up 9/32 in price to yield 3.45 percent.

Copper, considered a harbinger of economic sentiment, rose after better-than-expected U.S. jobless data.

The euro rose 0.40 percent to $1.3801, and against the yen, the dollar was down 0.74 percent 77.097.

(Writing by Herbert Lash; Editing by Dan Grebler)