GLOBAL MARKETS-Oil jumps, dollar rallies with gold as conflict grips Middle East

(Updates prices to U.S. afternoon trading after oil settlement)

* Oil prices settle 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 while the dollar and safe-haven gold rallied on Monday as the U.S.-Israeli air war against Iran widened and looked set to last for weeks, prompting worries that it could upend a global economic recovery and perhaps reignite inflation.

In response, global equity indexes underperformed U.S. stocks and Treasury yields rose on inflation fears.

Oil futures settled sharply higher after the 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, while investors worried about how long the war would last.

U.S. crude prices settled up 6.28%, or $4.21, at $71.23 a barrel while Brent settled at $77.74 per barrel, up 6.68%, or $4.87.

MSCI's gauge of stocks across the globe also pared losses but was still down 4.79 points, or 0.45%, to 1,051.97. Earlier, the pan-European STOXX 600 index finished down 1.35% on the day.

After earlier falling more than 1%, the S&P 500 advanced modestly in afternoon trading with support from the energy , defense and technology sectors.

"A lot of the worry today is about inflation and oil because of the conflict happening in the Middle East," said Lindsey Bell, chief investment strategist at 248 Ventures, adding that these concerns kept investors focused on U.S. equities where they saw greater certainty in "earnings and economic growth than in other parts of the world."

The technology sector was the second-biggest percentage gainer behind energy.

"In times of uncertainty, tech becomes defensive because it has the earnings growth, margin expansion and positive cash flow that other sectors don't have," Bell said. Chris Zaccarelli, chief investment officer at Northlight Asset Management, said that global markets were on edge but investors did not seem to be panicking or predicting a worldwide economic collapse.

At 02:48 p.m. ET (1948 GMT), the Dow Jones Industrial Average rose 30.49 points, or 0.06%, to 49,008.41, the S&P 500 rose 20.04 points, or 0.29%, to 6,898.93 and the Nasdaq Composite rose 130.78 points, or 0.57%, to 22,798.30.

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 0.58 points at 20.44. 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 concern about the potential for a global inflation spike due to the surge in oil prices.

The yield on benchmark U.S. 10-year notes rose 8.6 basis points to 4.048%, from 3.962% late on Friday, while the 30-year bond yield rose 6.6 basis points to 4.699%.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 10.8 basis points to 3.487%. 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, rose 0.75%.

The euro was down 0.86% at $1.171 while against the Japanese yen, the dollar strengthened 0.73% to 157.17. Against the Swiss franc, the dollar strengthened 1.21% to 0.778.

In cryptocurrencies, bitcoin gained 4.88% to $68,894.65. 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 0.96% to $5,328.09 an ounce. U.S. gold futures rose 1.74% to $5,321.50 an ounce. (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)