Oil jumps, stocks fall, dollar rallies as conflict grips Middle East

(Updates prices after U.S. stock market open)

* Oil prices up sharply on supply concerns due to US-Iran war

* Gold prices jump, Treasury yields rise

* Wall Street indexes pare losses, Europe underperforms

* Dollar gains against major currencies

By Sin?ad Carew and Alun John

NEW YORK/LONDON March 2 (Reuters) - Oil and gas prices surged, the dollar gained and stock indexes fell around the world while safe-haven gold rallied on Monday as the U.S.-Israeli air war against Iran widened and looked set to last for weeks, threatening to upend a global economic recovery and perhaps reignite inflation.

Israeli and U.S. strikes on Iran and retaliation by Tehran forced shutdowns of oil and gas facilities across the Middle East and disrupted shipping in the crucial Strait of Hormuz, pushing oil and gas prices sharply higher.

U.S. crude rose 6.86% to $71.62 a barrel and Brent rose to $78.74 per barrel, up 8.07% on the day as investors worried about how long the war would last and disrupt energy markets.

After falling more than 1% at one point, the S&P 500 pared its losses with some support from the energy and defense indexes, both rising more than 1%.

With European stocks underperforming U.S. stocks, investors appeared to be stepping away from investments that had performed best so far this year, said Chris Zaccarelli, chief investment officer at Northlight Asset Management, in Charlotte, North Carolina.

"The actions that the United States and Israel took over the weekend has global markets on edge," said Zaccarelli. "For the most part there's a little bit of a knee-jerk reaction to take a little bit of risk off the table, a slight downturn in markets but, generally speaking, it doesn't seem like investors are panicking or predicting a worldwide economic collapse."

On Monday at 10:27 a.m. ET (1527 GMT), the Dow Jones Industrial Average fell 165.31 points, or 0.34%, to 48,810.58, the S&P 500 fell 27.69 points, or 0.40%, to 6,851.19 and the Nasdaq Composite fell 61.92 points, or 0.27%, to 22,606.30.

The CBOE volatility index, sometimes referred to as Wall Street's fear gauge, pared gains after rising earlier to its highest point since November. It was last up 1.7 points at 21.56.

MSCI's gauge of stocks across the globe fell 10.30 points, or 0.97%, to 1,046.46.

The pan-European STOXX 600 index fell 1.77%.

In government bonds, U.S. Treasury yields rose across durations as an early bout of safe-haven buying over the risk of a drawn-out conflict gave way to investor concern about the potential for a spike in global inflation due to a surge in oil prices.

The yield on benchmark U.S. 10-year notes rose 7.6 basis points to 4.038%, from 3.962% late on Friday, while the 30-year bond yield rose 5.3 basis points to 4.6864%.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 9.2 basis points to 3.471%. In currency markets, the dollar was by far the biggest gainer, rallying even against safe-haven currencies such as the Swiss franc and Japanese yen. Moves in the oil market impact currency markets given the U.S. is a net energy exporter while both Europe and Japan rely heavily on imports.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was eyeing its biggest one-day move since late January.

The euro was down 0.91% at $1.1705. Against the Japanese yen, the dollar strengthened 1.03% to 157.64. Sterling weakened 0.66% to $1.3395.

Against the Swiss franc, the dollar strengthened 1.34% to 0.779.

In cryptocurrencies, bitcoin gained 4.60% to $68,705.98. In precious metals, safe-haven gold advanced on Monday, driven by escalating concerns of prolonged conflict in the Middle East after U.S. and Israeli strikes against Iran.

Spot gold rose 1.15% to $5,338.49 an ounce. U.S. gold futures rose 1.8% to $5,324.50 an ounce.

Investors will also be watching for key U.S. economic data this week, including retail sales and the payrolls report. Any weakness could shake confidence in the economy after a disappointing fourth quarter, but would also likely narrow the odds on rate cuts from the Federal Reserve. (Reporting by Wayne Cole in Sydney and Alun John in Europe, Sin?ad Carew in New York; Editing by Sam Holmes, Shri Navaratnam, Emelia Sithole-Matarise and Nia Williams)