* U.S. lays groundwork for possible action against Syrian government
* Brent hits 6-month high over $114 as West weighs strike on Syria
* Congress must act to raise debt limit-U.S. Treasury Secretary
By Angela Moon
NEW YORK, Aug 27 (Reuters) - The possibility of Western military action against the Syrian government pushed oil prices to a six-month high and sent equities worldwide substantially lower on Tuesday.
Both Brent and U.S. crude gained upward of $3 a barrel as fears mounted that Western intervention could further destabilize the Middle East, which pumps a third of the world's oil.
Wall Street fell for a second day, with the S&P 500 and Nasdaq down more than 1 percent. Investor nervousness was reflected in a jump of more than 15 percent on the CBOE volatility index, Wall Street's so-called fear gauge, in the last two days.
Western sources who attended a meeting in Istanbul between envoys of an alliance opposed to Syrian President Bashar al-Assad and the Syrian National Coalition said "action to deter further use of chemical weapons by the Assad regime could come as early as in the next few days."
"This is the largest geopolitical risk since the start of the Iraq war. I am not saying it will escalate to that point, but this war of words with Russia is the first time the U.S. is pitted against another global in a long time. That creates an uncertainty this market is not accustomed to," said Mike O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
Adding to the selloff, U.S. Treasury Secretary Jack Lew said it was essential for Congress to raise the government's borrowing limit by mid-October or the country will face an unprecedented default. He warned that the administration would not allow for it to be used as political leverage.
In Europe, stocks registered their biggest daily drop in two months as the threat of a military strike against Syria prompted investors to take profit on some of this summer's best performers and to buy insurance against future losses.
A rise in U.S. government debt prices and a stronger Swiss Japanese currencies suggested the flight to safety was gathering momentum.
The benchmark 10-year U.S. Treasury note was up 17/32, the yield at 2.7233 percent.
The safe-haven yen and Swiss franc gained and riskier currencies like the Australian and New Zealand dollars fell as geopolitical tensions rose.
The Swiss franc and the yen usually climb in times of financial market stress and geopolitical uncertainty, while growth-linked higher-yielding currencies sell off.
Spot gold rose to its highest since early June at around $1,420 an ounce. Gold has rallied more than $200 since late June, when prices hit three-year lows.
Emerging market currencies such as the Turkish lira and the Indian rupee bore the brunt of the flight as doubts over the Syrian situation added to pressure from investors' positioning for an end to the supply of cheap dollars from the U.S. Federal Reserve's monetary stimulus.
The Indian rupee lost as much as 2.5 percent to reach a record low of 65.93 per dollar, while Turkey's lira weakened to 2.03 to the dollar, also a record low. Turkey's share index also slid.
Brent crude rose $3.41 to $114.14 a barrel by 12:22 p.m. EDT (1622 GMT). It hit a six-month high of $114.17, and was on track for its biggest daily percentage gain since early May.
U.S. crude rose rose $3.00 to $108.92 a barrel, after earlier hitting $109.32, matching its high for the year so far. On Monday, it fell 0.5 percent when data showed U.S. durable goods orders had dropped the most in nearly a year.
Russia's rouble, which normally benefits from stronger oil prices, hit a four-year low against the dollar-euro basket on concern over the situation in Syria.
As Syria's key ally and arms supplier, Russia has urged Washington not to use military force against President Bashar al-Assad's government. Traders said its response to any U.S. move against Syria would be key to whether the current shift into safer assets turned into a major flood.
On Wall Street, the Dow Jones industrial average was down 142.37 points, or 0.95 percent, at 14,804.09. The Standard & Poor's 500 Index was down 22.03 points, or 1.33 percent, at 1,634.75. The Nasdaq Composite Index was down 68.67 points, or 1.88 percent, at 3,588.90.
The pan-European FTSEurofirst 300 index of top European shares ended down 1.7 percent at 1,202.36, trimming its gains since the start of July to 4.4 percent.
Asian markets fell 1.2 percent, while Tokyo's Nikkei ended 0.7 percent lower. That left the MSCI all-country world equity index down 1.2 percent for a second day of falls, though it remains off its lows for the month.