GLOBAL MARKETS-Resurgent oil drags down U.S. stocks, dollar

(Recasts with U.S. markets, adds byline; changes dateline; previous LONDON)

* U.S. stocks drop as crude oil surges to fresh high

* Dollar tumbles on bearish consumer sentiment data

* European stocks rise as oil drives up energy shares

By Herbert Lash

NEW YORK, May 16 (Reuters) - Oil prices streaked toward $128 a barrel on Friday, knocking down U.S. stocks and the dollar, while a slump in U.S. consumer confidence to a 28-year low added to worries about the health of the U.S. economy.

Gold, a traditional hedge against inflation, broke above a key psychological level of $900 per ounce for the first time in three weeks as crude oil surged to a record of $127.82.

U.S. Treasury debt prices rose on a renewed flight to safety bid in the aftermath of the surprisingly weak sentiment report, which revived fears U.S. consumer spending may sag sharply in coming months.

The dollar extended losses against the euro and gave up gains versus the yen after the Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence fell in May to 59.5, its lowest level since June 1980 -- the height of U.S. stagflation.