Oil falls, stocks rise as OPEC mulls output boost

Visitors are seen in front of an electronic board showing stock prices at the Tokyo Stock Exchange in Tokyo February 22, 2011.

NEW YORK (Reuters) - Oil prices fell on Tuesday as OPEC responded to the decline in Libya's crude output by considering a hike in production for the first time in more than two years, while the euro slipped for a second day on renewed euro zone debt worries.

U.S. stocks rallied as crude prices retreated after hitting a 2-1/2-year high on Monday, easing worries the economic recovery could be choked off. An upbeat profit forecast from Bank of America also lifted sentiment.

Asian stocks looked set to open higher, with Nikkei futures traded in Chicago rising 1.15 percent to 10,570.00 points. Further unrest in Libya and the Middle East, however, could still drive oil prices up and weigh on global equity markets.

An official output increase by the Organization of the Petroleum Exporting Countries would signal the group's determination to cap prices, but many oil-exporting countries were not convinced such a move was necessary.

Brent crude prices closed down 1.72 percent, at $113.06 per barrel, while U.S. light crude futures ended 0.4 percent lower at $105.02.

Financials led U.S. stocks higher after Bank of America's profit forecast. The rise lifted Wall Street out of the technical danger zone, with the S&P 500 jumping back above a six-month trend line. Holding this level is a sign of strength.

The market "is still trying to deal with the turmoil in the Mideast," said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, noting that with "any kind of pullback in oil prices, we've seen the effect where the market has jumped rather significantly,.

The Dow Jones industrial average .DJI rose 124.35 points, or 1.03 percent, to 12,214.38, and the Standard & Poor's 500 Index .SPX gained 11.69 points, or 0.89 percent, to 1,321.82. The Nasdaq Composite Index .IXIC closed up 20.14 points, or 0.73 percent, at 2,765.77.

Bank of America (BAC.N) shares shot up 4.7 percent to $14.69. The S&P financial index climbed 2.2 percent.

In Europe, the FTSEurofirst 300 .FTEU3 index of top shares ended up 0.31 percent at 1,147.43 points, after seesawing between positive and negative.

Greek shares .ATG fell 3.8 percent, while the banking index .FTATBNK dropped 6.3 percent, a day after Moody's cut Greece's credit rating by three notches, raising the specter of a debt restructuring. Shares of Greece's two top lenders slumped, with National Bank (NBGr.AT) down 6.8 percent and EFG Eurobank (EFGr.AT) down 6.1 percent.

MSCI's All-Country World Index of global stocks .MIWD00000PUS edged higher 0.2 percent while its emerging market benchmark .MSCIEF climbed 0.39 percent.

GREEK YIELDS AT RECORD HIGH

The euro fell against the dollar as concerns about the debt situation of peripheral euro zone countries increased with expectations of an interest rate hike by the European Central Bank next month.

A rise in interest rates would push up borrowing costs across the 17-country euro zone, increasing the cost of funding for highly indebted countries.

Concerns about Europe's debt problems have been on the rise since Moody's cut Greece's credit ratings on Monday.

Greece's borrowing costs spiked on Tuesday, with yields paid by 10-year government bonds climbing to 12.946 percent, their highest since the launch of the euro currency.

The euro fell 0.5 percent to $1.3902. It had climbed to a four-month high above $1.40 on Monday after ECB president Jean-Claude Trichet said last week that euro-zone interest rates could rise as early as next month, initially boosting the appeal of the European single currency.

"The problem with the interest rate-driven trade and Trichet's hawkish comments is that you have to see the other issues behind it," said John McCarthy, director of foreign exchange at ING Capital Markets in New York. "Higher rates will be devastating for the peripheral countries."

Gold eased below $1,430 an ounce, falling further from Monday's record high after the drop in oil prices eased some concerns about inflation. Spot gold was last at

$1,428.46.

The price of oil, however, was still considered a wild card in financial markets as the fighting in Libya continued.

Expectations that the disruption to Libya's oil supply will be prolonged drove more analysts to revise their oil price forecasts higher on Tuesday. Goldman Sachs increased its second-quarter 2011 Brent forecast by $4.50 a barrel to $105. Bank of America-Merrill Lynch raised its outlook to an average price of $122 in the second quarter, up from $86.

The U.S. government's energy forecaster boosted its full-year price forecast by $9 to $102 a barrel this year -- above the average $99.75 in 2008, when oil hit a record.

Prices of U.S. government debt fell as investors felt comfortable buying stocks. Some were also seeking price concessions in this week's U.S. Treasury auctions of $66 billion in debt.

Prices of 10-year Treasury bonds fell 8/32, while their yield rose to 3.544 percent. Despite the fall in prices, the government found strong demand during Tuesday's sale of three-year notes.

(Additional reporting by Wanfeng Zhou, Chuck Mikolajczak, Nick Olivari, Brenda Goh and William James; Editing by Leslie Adler)