GLOBAL MARKETS-Oil at 2-1/2-year high; European stocks up

Mon Mar 7, 2011 7:51am EST

* European stocks rise on bargain-hunting but gains limited

* Gold near record peak, silver at 31-year high

* Euro shrugs off Greece ratings cut, supported by rate view

By Emelia Sithole-Matarise

LONDON, March 7 (Reuters) - Crude oil prices jumped to a 2-1/2-year peak on Monday as worries about supply disruption increased due to widening clashes in Libya though European stocks rose as investors picked up bargains after recent falls.

Unrest in the oil-rich Middle East stoked demand for precious metals, with gold -- often sought in times of geopolitical tensions -- rising close to a lifetime high at $1,434.82 an ounce, while silver surged to a 31-year peak.

Risk premia on Greek, Portuguese and Spanish debt also rose after Moody's cut Greece's credit rating by three notches, but the euro shrugged off the move to hit a four-month high against the dollar on expectations the European Central Bank may raise interest rates next month. [ID:nLDE7260D6]

U.S. crude oil futures CLc1 jumped 2 percent, topping $106.60, their highest price in 30 months as a counter-offensive by Libya's Muammar Gaddafi against rebels deepened concern that Africa's largest holder of oil reserves is headed for civil war. [ID:nL3E7E700D]

U.S. crude is up by more than a fifth in the last two weeks.

European stocks shrugged off falls in Asian markets, with the pan-European FTSEurofirst 300 index .FTEU3 rising 0.5 percent as investors bought beaten-down stocks after two weeks of losses.

U.S. stock index futures also rose, indicating Wall Street will rebound from Friday's falls. [ID:nN07297697]

Further gains were, however, limited as investors fret that a prolonged period of high oil prices could stifle economic growth and erode corporate profits, while adding to inflationary pressures.

"There was a pretty aggressive selloff towards the last couple of hours of trading on Friday and we have seen investors come in and buy from the lows (but) as long as you have crude prices as high as they are that's going to limit further gains for equities," said Joshua Raymond, market strategist at City Index. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on oil and equities correlation:

r.reuters.com/mut38r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ German government bonds, the euro zone benchmark, failed to gain much traction from underperforming lower-rated bonds after the Moody's move. Analysts said last week's aggressively hawkish ECB stance made some investors more sensitive to the risk of inflationary prices from high oil prices.

Yields were up across the German curve, with 10-year Bund yields last up two basis point at 3.305 percent DE10YT=TWEB.

"The ECB sees it as an upside risk on inflation so some in the market see it as more of an inflation risk than a risk to growth," said Niels From, chief analyst at Nordea. "We would have to have a more dramatic rise in oil prices for growth to be a concern."

In currencies, the euro EUR= rose to a four-month high of $1.4029 after breaking above resistance at $1.40 on Friday on the view that the ECB will tighten monetary policy before the Federal Reserve.

"Sentiment is bullish at the moment and we could see a test of the 1.4080/00 area," said Richard Wiltshire, chief foreign exchange dealer at ETX Capital.

"The euro will stay bid on any dips ahead of April's rate announcement. I would assume they can't change their rhetoric, and we have seen a growing number of ECB officials talking about rate hikes sooner rather than later". (Additonal reporting by Harpreet Bhal and Jesscia Mortimer; Editing by Toby Chopra)