GLOBAL MARKETS-Stocks decline as crude gains with central banks on pause

* Brent breaches $119 a barrel as Iran conflict worsens

* US Treasury yields climb but off earlier highs

* Multiple central banks keep rates unchanged (Updates with close of US markets)

By Chuck Mikolajczak

NEW YORK, March 19 (Reuters) - Global stocks slumped on Thursday as oil prices spiked after the latest escalation in the U.S. and Israel's war with Iran, while a host of major central banks left interest rates unchanged as they attempt to assess rising price pressure.

Brent crude prices shot above $119 a barrel and further fanned inflation fears following attacks on Iran's South Pars gas field, along with the world's largest gas plant in Qatar as well as on oil refineries in both Saudi Arabia and Kuwait.

Trading in oil futures was volatile, and U.S. crude settled down 0.19% to $96.14 a barrel while Brent settled at $108.65 per barrel, up 1.18%. The session high for Brent above $119 was the second time it crossed that threshold this month. Prices eased as the Trump administration took steps to try to expand supply and aftercomments from Israeli Prime Minister Benjamin Netanyahu.

On Wall Street, U.S. stocks closed lower. Earlier declines in the small-cap Russell 2000 index briefly brought the index down more than 10% from its January 22 record closing high. The benchmark S&P 500 index closed below its 200-day moving average for the first time since May 9.

The 20-day daily correlation for the S&P 500 to both Brent and WTI crude is the most negative it has been since November 2004.

"It's been fairly binary in terms of when oil's rising and inflation and inflation expectations are rising, it's risk off, and when there's something out there to kind of stabilize oil prices, we tend to get a little bit of a rally," said Michael Arone, chief investment strategist at State Street Investment Management in Boston.

"What this suggests is that investors and capital market participants are still bought into the idea that this is a short-duration war with a resolution in sight in the next couple of months, and anything to refute that causes some challenges."

The Dow Jones Industrial Average fell 203.72 points, or 0.44%, to 46,021.43, the S&P 500 shed 18.21 points, or 0.27%, to 6,606.49 and the Nasdaq Composite lost 61.73 points, or 0.28%, to 22,090.69.

MSCI's gauge of stocks across the globe fell 8.84 points, or 0.88%, to 996.62 while the pan-European STOXX 600 index fell 2.39%, its biggest daily percentage drop since March 3 as the index closed at its lowest level in three months.

Benchmark government bond yields, which set the global cost of borrowing, also climbed as multiple central banks kept rates unchangedwhile assessing economic fallout from the surge in crude prices.

The Bank of England's rate setters voted unanimously to keep UK rates on hold and said they were "ready to act" to stave off risks from war in the Middle East.

The yield on two-year gilts surged 29.8 basis points to 4.404% after earlier touching a 14-month high of 4.486%, although Bank of England Governor Andrew Bailey said financial markets were getting ahead of themselves in expecting interest rate rises. Sterling strengthened 1.35% to $1.3432 against the dollar.

The European Central Bank held its rates as well, warning that the Iran war was clouding the outlook for growth and inflation. The Bank of Japan and the U.S. Federal Reserve had both voiced their concerns about the conflict during their earlier policy statements, which left their respective rates unchanged.

The yield on benchmark U.S. 10-year notes edged up 0.4 basis point to 4.261% while the 2-year note yield, which typically moves in step with interest rate expectations for the Fed, climbed 5.6 basis points to 3.799 after hitting 3.96%. The two-year yield has shot up 42 basis points in March.

Earlier this week, the Reserve Bank of Australia hiked rates to a 10-month high and warned of a "material" risk to inflation from the oil price spike.

Switzerland's central bank kept its rates at zero, and signaled it was ready to intervene to curb the recent surge in the Swiss franc, one of the traditional safe havens in volatile markets.

The dollar index, which measures the greenback against a basket of currencies, dropped 1.01% to 99.19, with the euro up 1.19% at $1.1586.

Against the Japanese yen, the dollar weakened 1.41% to 157.61 but remained near the key 160 per dollar level following the BOJ's policy statement, leaving investors on watch for possible FX intervention after strong comments from Japanese Finance Minister Satsuki Katayama earlier in the day.

The Bank of Japan had left its short-term policy rate at 0.75% as widely expected overnight, but it joined the U.S. Federal Reserve and Bank of Canada in striking a cautious tone about the war and pricing pressures.

(Reporting by Chuck Mikolajczak; Additional reporting by Marc Jones in London and Ankur Banerjee in Singapore; Editing by Sharon Singleton, Aidan Lewis, Nick Zieminski and David Gregorio)