World stocks fall, dollar slips as oil jumps

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) - World stocks and the U.S. dollar fell on Friday as oil prices rose on escalating violence

in Libya, overshadowing a U.S. jobs report that showed the economic recovery shifting up a gear.

Gold advanced above $1,430 an ounce and U.S. Treasury debt prices gained as the Libyan turmoil drove a flight to safety.

U.S. crude oil prices jumped to their highest since September 2008, and Brent crude rose above $116 a barrel as Libyan security forces clashed with rebels near the major oil terminal of Ras Lanuf.

The MSCI all-country world stock index .MIWD00000PUS was down 0.1 percent. On Wall Street, stocks ended lower and erased most of their gains for the week.

"It's really all about oil, and I suspect that's going to be the pattern next week as well. Gold's uncertainty hedge and ultimate currency roles continue to be very much in place," said Bill O'Neill, partner of LOGIC Advisors.

The U.S. unemployment rate unexpectedly fell and employers

added 192,000 jobs. The data had a muted impact, in part, because the market had rallied on Thursday on expectations of solid hiring by private employers.

The Labor Department reported hiring by U.S. employers in February hit the highest level since last May as unemployment dipped to 8.9 percent, an almost two-year low.

Fears that more geopolitical turmoil and higher oil prices could threaten to stifle rallies in coming weeks dampened sentiment on Wall Street. The CBOE Volatility Index VIX .VIX, Wall Street's fear gauge, rose 2.7 percent to 19.11.

Among stock sectors, bank shares fell after Bank of America Merrill Lynch said banks' first-quarter earnings could be hurt by rising oil prices as well as by reduced client activity.

Shares of Citigroup Inc (C.N), which the brokerage downgraded, fell 3 percent to $4.54.

On Friday, the Dow Jones industrial average .DJI tumbled 88.32 points, or 0.72 percent, to end at 12,169.88. The Standard & Poor's 500 index .SPX dropped 9.82 points, or 0.74 percent, to 1,321.15. The Nasdaq Composite Index .IXIC declined 14.07 points, or 0.50 percent, to 2,784.67.

For the week, the Dow was up 0.3 percent, while the S&P and Nasdaq were up 0.1 percent each. The S&P 500 is up 26 percent since the start of September when the recent rally began.

The U.S. employment data did little to alter expectations that the Federal Reserve would maintain its loose monetary policy, driving down the dollar down against major currencies. The dollar index was down 0.1 percent .DXY.

"(Fed Chairman Ben) Bernanke may be relieved to see another month of improvement in the unemployment rate, but given the underlying weakness of the report, the central bank will still argue that unemployment remains extremely high and therefore continued stimulus could be warranted," said Kathy Lien, director of currency research at GFT in New York.

And analysts said the dollar is likely to fall in the week ahead as investors continue to bet that interest rates in the euro zone will rise ahead of U.S. rates.

European Central Bank President Jean-Claude Trichet strongly hinted on Thursday at an interest rate rise in April.

For the week, the euro gained 1.7 percent against the dollar on electronic trading platform EBS, the third straight weekly gain. For the day, it was up at 1.3980 from its Thursday U.S. close of 1.3963.

In the U.S. government debt market, benchmark 10-year notes rose 20/32 in price to yield 3.49 percent, down from 3.56 percent on Thursday.

Brent crude for April delivery settled at $115.97 a barrel, gaining 1.03 percent after rising above $116. Brent oil has risen about 15 percent since the end of January.

U.S. crude for April delivery rose $2.51 to settle at $104.42 a barrel, the highest close since September 2008.

"Tension in the Middle East is like a runaway train," said Michael Hewson, an analyst at CMC Markets. "Once it starts, it's very difficult to stop. And if there is a danger that it impacts the supply chain, people will understandably get nervous."

Three-month copper on the London Metal Exchange fell to $9,895 a tonne from $9,910 on Thursday.

In the European stock market, the FTSEurofirst 300 .FTEU3 was down 0.6 percent.

(Additional reporting by Robert Gibbons, Frank Tang and Nick Olivari in New York; and Jeremy Gaunt and Claire Milhench in London; Editing by Kenneth Barry)