* World equity markets extend decline for seventh day
* Debt crisis sends euro zone back into recession
* Yen sinks to 6-1/2-month low vs U.S. dollar
By Ellen Freilich and Herbert Lash
NEW YORK, Nov 15 Global stocks fell for a seventh day on Thursday after data showed the euro zone entered a recession in the third quarter and on fear of the U.S. "fiscal cliff," and oil prices declined despite a flare-up of violence in the Gaza Strip.
The disappointing economic data overshadowed the news of a second day of fighting in the Gaza Strip, which sparked worries of an escalation that could ultimately disrupt oil supplies.
A Hamas rocket killed three Israelis north of the Gaza Strip, drawing the first blood from Israel, as the Palestinian death toll rose to 15 in a military showdown lurching closer to all-out war and a threatened invasion of the enclave.
Most oil prices pushed lower in afternoon trade, but front-month December Brent crude rose, bolstered by short-covering ahead of the contract's expiry later in the day. Overall trade remained choppy as investors remained concerned about the violence in Gaza.
Benchmark Brent crude rose $1.31 to $110.92 a barrel. January Brent, which will become the front-month contract on Friday, dipped 81 cents to $107.67 a barrel.
"I have a hard time seeing (oil) prices falling back much at the moment, at least while tension is still high," said Filip Petersson, an analyst at SEB in Stockholm.
"We would probably need to hear some kind of statements that indicate the Israelis are stepping down, but I think that's unlikely to happen at the moment."
U.S. stocks fell in choppy trading, with the S&P500 stock index down for a third day after Wal-Mart Stores Inc, the world's biggest retailer, reported disappointing quarterly sales and on concerns about the U.S. government's budget woes may slow 2013 economic growth.
U.S. stocks have struggled to hold onto gains in recent days as investors fret the economy could slip into recession if no deal is reached to avoid the "fiscal cliff" - some $600 billion in spending cuts and tax hikes due to begin taking effect in January.
The S&P500 index is down about 2.0 percent for the week so far.
At mid-afternoon, the Dow Jones industrial average was down 32.49 points, or 0.26 percent, at 12,538.46. The Standard & Poor's 500 Index was down 2.11 points, or 0.16 percent, at 1,353.38. The Nasdaq Composite Index was down 8.39 points, or 0.29 percent, at 2,838.42.
Shares of Wal-Mart fell 3.7 percent to $68.69 after the retailer reported quarterly sales rose 3.4 percent, below analysts' expectations, as it cited weakness in China and Japan, as well as in the United States.
Disappointing economic data also weighed on stocks and U.S. oil prices, which settled down 87 cents to $85.45 a barrel.
Hurricane Sandy in the U.S. North East drove new claims for jobless benefits to a 1-1/2-year high last week, a sign the deadly storm could hold back economic growth by leaving tens of thousands of people temporarily out of work.
A drop in the Philadelphia Federal Reserve's index of business activity in the U.S. mid-Atlantic region was also tied to the impact of Sandy, which disrupted business in the area due to power outages and commuting problems for workers.
EUROPE BACK IN RECESSION
In Europe, stocks ended lower, with a key index hitting a two-month low on the economic data.
The FTSEurofirst 300 index of top European shares closed 0.9 percent lower at 1,078.64 points, a level not seen since early September.
"The global economy faces some severe headwinds. Against that backdrop we see short-term de-risking of portfolios," said Abi Oladimeji, head of investment strategy at Thomas Miller Investment.
Economic growth in Germany, Europe's largest economy, cooled to 0.2 percent over the July-September period compared with the previous three months, while data showed the wider 17-nation euro zone has slipped back into recession.
Output in the euro area as a whole fell 0.1 percent in the third quarter after falling 0.2 percent in the April to June period, making it the second recession since 2009.
"The double-dip is a fact," said Martin Van Vliet, an economist at ING Bank. "What you notice is that the recession in southern Europe is slowly creeping to other countries."
World stocks were on course for a seventh successive day of losses. MSCI's world equity index fell 0.35 percent at 317.54 points and has now lost over 3.0 percent this month.
The yen tumbled to its lowest level against the U.S. dollar since late April after the leader of Japan's main opposition party called for a move toward negative interest rates, sapping the currency's appeal despite its safe-haven status.
"The catalyst has clearly been politics, including a further step-up in political pressure on the BoJ to ease aggressively," said Jens Nordvig, global head of G10 strategy at Nomura Securities in New York, referring to the Bank of Japan.
The dollar was up 1.16 percent at 81.17 against the yen.
The euro rallied to a two-week high against the yen and also rose against the dollar, despite the gloomy euro zone data.
The euro was up 0.32 percent at $1.2775.
U.S. Treasury debt prices rose slightly in safe-haven buying amid worries over a looming fiscal crisis and the relatively poor overall health of the U.S. economy.
The benchmark U.S. Treasury 10-year note was up 1/32 in price to yield 1.586 percent.