GLOBAL MARKETS-Inflation fear hits stocks as oil marks new high

(Updates with U.S. markets, changes dateline to New York, byline)

By Burton Frierson

NEW YORK, May 20 (Reuters) - Global stocks tumbled on Tuesday on heightened fears of inflation as crude oil approached $130 a barrel and producer price data showed rising wholesale price pressures on both sides of the Atlantic.

European stocks posted their worst one-day drop in two months, while in U.S. markets the Dow industrials slumped almost 200 points as slack earnings from leading retailers suggested weakening consumer spending.

Oil rose to a record high of $129.60 CLc1 a barrel in New York as investment banks and influential U.S. oil investor T. Boone Pickens gave bullish price forecasts. Pickens said he sees oil prices reaching $150 a barrel this year.

Underlying U.S. producer prices in April saw their biggest annual gain since December 1991, and in Germany, Europe's largest economy, producer price inflation accelerated to a 20-month high.

The rise in oil, combined with the producer price reports, suggested that soaring commodities would become embedded in companies' costs.

The dollar fell and government bond prices gained as investors bet the economy would crack when companies are forced to settle for slimmer profit margins or to pass on their rising costs to increasingly hard-pressed consumers.

"It is definitely negative for equities," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York