Growth worries hit equities

NEW YORK (Reuters) - Credit worries hit the world's largest insurer AIG International on Monday, lifting bond prices and keeping a lid on stocks, which suffered their biggest weekly pullback in five years last week.

Oil jumped after Venezuela threatened to cut off oil shipments to the United States in a dispute with Exxon (XOM.N) over payments for nationalized properties, and commodities in general gained on a weakening dollar.

AIG International (AIG.N) said difficulties in valuing its credit derivatives portfolio had triggered auditor questions over its internal controls, sending its shares down 11 percent. The worries over the blue-chip U.S. insurer pushed European stocks lower as well, with financials such as Societe Generale (SOGN.PA) and Fortis (FOR.AS) among the decliners.

Credit spreads widened and the AIG jitters triggered a flight to safety that favored U.S. Treasury debt.

"There is an increasing realization that this is not (just) a subprime (mortgage) issue; this is a credit bubble issue that is hitting everywhere," said T.J. Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York.

"The concerns about AIG are affecting the financials and are clearly having a negative effect on sentiment," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

"You also had some comments from leaders of the G7 which may have alarmed some."

Two-year U.S. Treasury note yields were trading not far above their lowest levels since 2004 as investors sought shelter in the highest-rated government securities. Benchmark 10-year Treasury note prices, which move inversely to yields, rose 11/32 for a yield of 3.61 percent, compared with 3.65 percent late on Friday.

Worries about a deeper global economic slowdown had already battered global equities earlier in the day and also hit the dollar while commodity prices soared, adding inflation fears to the mix.

U.S. crude surged to a one-month high above $94 a barrel. Venezuelan President Hugo Chavez on Sunday threatened to cut off supplies after an Exxon Mobil lawsuit froze $12 billion of Venezuelan assets to step up Exxon's push for compensation from a nationalized oil project.

Copper prices touched their highest in more than three months early in the day in London, underpinned by falling inventories, analysts and traders said.

Benchmark U.S. wheat futures surged more than 5 percent to a record $11.53 a bushel before dropping back a few cents. Platinum hit a record high of $1,915 an ounce, bringing its rise this year to 25 percent. Gold was steady, but at $925 an ounce, near its all-time high of $936.50.

Finance leaders from the Group of Seven major economies said over the weekend that the crumbling U.S. housing market had hurt the world economy and that conditions may worsen as debt-laden banks clamp down on credit.

The FTSEurofirst 300 index of top European shares closed unofficially 0.8 percent lower at 1,291.96 points.

The Dow Jones industrial average was up 0.30 percent at 12,219.96 in early afternoon after trading lower much of the morning.

The euro was initially up 0.3 percent before drifting to a lower close after comments from European Central Bank policy-makers which dampened speculation about a rate cut. Governing Council member Axel Weber told a German newspaper that the ECB had not relaxed its view on inflation risks.

The dollar was down 0.6 percent at 106.72 yen.

The Japanese currency benefited from the risk-averse mood, as worries about global growth and falling equity markets prompted currency investors to exit risky trading bets funded by cheap borrowing in the yen.

(Editing by Jonathan Oatis)