* Dollar extends drop in wake of Yellen, Draghi comments
* S&P, Dow edge lower; European stocks hurt by strong euro (Updates to afternoon U.S. trading, adds settled oil prices)
By Saqib Iqbal Ahmed
NEW YORK, Aug 28 (Reuters) - U.S. crude oil futures fell on Monday but gasoline prices surged to 2-year highs as Tropical Storm Harvey kept hammering the U.S. Gulf Coast, knocking out several refineries which backed up crude supplies and disrupted fuel production.
The U.S. dollar dropped to its lowest in roughly 16 months against a basket of major currencies and a more than 2-1/2-year low against the euro, following comments from central bankers on Friday and worries over the storm hurting the U.S. economy.
Harvey made landfall in Texas late on Friday as the most powerful hurricane to hit the region in more than 50 years and caused large-scale flooding, forcing refineries in the area to close.
U.S. crude futures fell as the refinery shutdowns could reduce demand for American crude.
“The reduced inputs to those Gulf refineries will result in an increase in crude inventories,” said Tony Headrick, energy market analyst at CHS Hedging.
“That outweighs the outages in crude oil production from the storm.”
U.S. crude settled down $1.30, or 2.7 percent, at $46.57 a barrel.
The refinery shutdowns sent U.S. gasoline prices soaring. Spot prices for U.S. gasoline futures surged 7 percent to a peak of $1.7799 per gallon, before easing to $1.7135.
In the U.S. equity market, the Dow and the S&P were slightly lower.
“We’re looking at this as more of a shorter term phenomenon and the energy stocks have held in relatively well,” said Matt Miskin, market strategist at John Hancock Investments.
“The market is not seeing that as a significant move but we’ll have to see how the dynamics play out over the course of the week.”
The Dow Jones Industrial Average fell 16.63 points, or 0.08 percent, to 21,797.04, the S&P 500 lost 0.29 point, or 0.01 percent, to 2,442.76 and the Nasdaq Composite added 15.08 points, or 0.24 percent, to 6,280.72.
European shares fell as the euro strengthened after European Central Bank chief Mario Draghi did not express concern about a strong currency in a closely watched speech.
MSCI’s world index, which tracks shares in 46 countries, was little changed on the day.
The U.S. dollar extended its weakness from last week.
“The disappointment from (U.S. Federal Reserve Chair Janet) Yellen at Jackson Hole on Friday has carried over to trading this week,” said Kathy Lien, managing director at BK Asset Management in New York.
Yellen did not address monetary policy at the summit of central bankers in Wyoming. The impact of Harvey was also weighing slightly on the greenback, she added.
The dollar index, which tracks the greenback against six major currencies, was down 0.58 percent at 92.202, after falling to 92.184, its lowest since May 2016.
U.S. benchmark Treasury yields fell to two-month lows after strong demand for a five-year note auction and as market participants waited on U.S. economic data that will culminate on Friday with the August employment report.
Benchmark 10-year notes gained 5/32 in price to yield 2.155 percent.
The weaker dollar helped gold rise to a more than nine-month high.
Additional reporting by Sam Forgione and Julia Simon in New York and Sruthi Shankar and Tanya Agrawal in Bengaluru; Editing by Bernadette Baum and James Dalgleish