(Adds close of European markets, oil settlement prices)
* Crude prices slip from 1-year high as supply glut weighs
* U.S. stocks weaken as crude slumps and Fed rate hike seen
* U.S. yields hit highest since June as risk appetite rises
By Herbert Lash
NEW YORK, Oct 11 (Reuters) - Slumping crude prices and a dour start to Wall Street's corporate earnings season pulled down U.S. and European equities on Tuesday, while the dollar hit an eight-month high on increasing bets U.S. interest rates will rise in December.
Wall Street fell more than 1 percent after shares of aluminum producer Alcoa and diagnostics test maker Illumina plunged, with worries over the make-up of the U.S. Congress after November's election also weighing on stocks.
Shares of Alcoa tumbled 11 percent and Illumina plummeted 26 percent, casting a shadow over the market. Wall Street's "fear gauge," the CBOE Market Volatility index, rose 21 percent to an almost four-week high of 16.25.
The UK benchmark FTSE 100 equity index reversed course after it set a record intraday high that was helped by further sterling weakness.
The British pound has lost more than 4 percent of its value against the dollar over the past week as investors fret about a "hard exit" by Britain from the European Union.
In the United States, investors are looking to Wednesday's release of the minutes from the Fed's policy-setting meeting in September for signs of a December rate hike.
The futures market perceives a roughly 70-percent chance that the Fed will lift rates in December, a view that pushed the benchmark 10-year U.S. Treasury yield to a more than four-month high.
"Recent data on jobs, manufacturing and services growth have shown compelling strength that could green light a U.S. rate hike by the end of the year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The dollar index, which measures the greenback against six major currencies, jumped 0.79 percent to 97.691, after hitting 97.731 - its highest since late July.
The euro fell to more than a two-month low against the dollar and was last down 0.75 percent at $1.1054. Against the yen, the dollar was down 0.31 percent at 103.26 .
Crude oil retreated from one-year highs on concerns a proposed cut by the world's largest oil exporters might not be enough to reduce a global supply glut.
The International Energy Agency, the energy watchdog of the West, said it was unclear how rapidly global oil supply could fall in line with demand even if Russia and OPEC agreed on a steep enough cut.
Brent crude oil settled down 73 cents at $52.41 a barrel and U.S. West Texas Intermediate crude slipped 56 cents to settle at $50.79.
The Dow Jones industrial average fell 238.59 points, or 1.3 percent, to 18,090.45. The S&P 500 slid 31.52 points, or 1.46 percent, to 2,132.14 and the Nasdaq Composite lost 93.59 points, or 1.76 percent, to 5,235.09.
The market is in a corrective phase, with overvalued dividend stocks being sold, said Rahul Shah, chief executive of Ideal Asset Management.
"If we grind forward like this and you have overvalued sectors come down and undervalued sectors rise, you could set the base for a market that could have a strong rally in the future," Shah said.
In Europe, the pan-regional FTSEurofirst 300 index fell 0.6 percent to close at 1,342.19. MSCI's all-country stock index fell 1.28 percent.
Weaker commodity stocks weighed in Europe. The STOXX Oil & Gas index fell 1.5 percent, making it the region's second-biggest sectoral loser after the STOXX Basic Resources index fell 2.1 percent as metal prices retreated.
The 10-year U.S. Treasury note fell 6/32 in price to yield 1.7568 percent.
Reporting by Herbert Lash; Editing by Nick Zieminski