GLOBAL MARKETS - Oil near $126 hits stocks as credit worries back

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Oil prices bounded to nearly $126 a barrel on Friday, hitting global stock markets along with worries about the financial sector following losses at the world's largest insurer, AIG.

European shares were down more than 1.5 percent and Japan closed down more than 2 percent. Wall Street looked set for a poor start.

Weighing on many stocks was American International Group's posting of its largest ever quarterly loss on Thursday after writing down assets linked to subprime mortgages. It said it would raise $12.5 billion to strengthen its balance sheet.

Investors are generally persuaded that the worst of the subprime woes and accompanying credit crisis is behind them, but are still highly sensitive to bad news on the subject.

Japanese shares were also shaken by Toyota Motor Corp, the world's biggest automaker, forecasting its first annual net profit decline in seven years as it faces the triple blow of a stronger yen, rising materials prices and a slowing U.S. economy.

The Nikkei average closed down 2.1 percent or 287.92 points at 13,655.34. It has, however, gained nearly 20 percent from a year low hit on March 17.

Europe's FTSEurofirst 300 was down 1.7 percent.

"(There are) writedowns at AIG and the capital raising, some poor results from European insurers, some stocks downgrades in the financial sector. And the oil price is pretty high, which might be unsettling people a little," said Kevin Gardiner, global equity strategist at HSBC.