NEW YORK (Reuters) - Geopolitical uncertainty over a possible U.S.-led military strike against Syrian President Bashar al-Assad's forces pushed oil prices to a six-month high on Tuesday and sent equities worldwide sharply lower.
Both Brent and U.S. crude gained upward of more than $3 a barrel as fears mounted that Western intervention could further destabilize the Middle East, which pumps a third of the world's oil. <O/R>
U.S. and European stocks suffered their worst day since June. Investor nervousness was reflected in a jump of nearly 12 percent on the CBOE volatility index .VIX, Wall Street's so-called fear gauge.
A number of nations and groups, including Britain, France, Canada and the Arab League, joined the United States in urging a firm response to Bashar al-Assad's government and said the world should not stand by as chemical weapons are used. Russia, Syria's key ally and arms supplier, opposes military action.
Western sources who attended a meeting in Istanbul between envoys of an alliance opposed to 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 move is as much about the potential spillover effect in the region as it is the potential for a U.S. strike," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. He added that because geopolitical risk had been "ratcheted up," portfolios would need to be reallocated away from riskier investments like stocks.
"Doing that in a market that was already acting sloppy is cause for further weakness," he said.
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.
A rise in U.S. government debt prices and stronger Swiss and Japanese currencies indicated the flight to safety was gathering momentum.
The benchmark 10-year U.S. Treasury note was up 20/32, its yield at 2.7123 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 dollar last traded down 1.5 percent against the yen, at 97.04 yen, not far from a one-week low of 96.97 yen reached earlier and well off a near three-week high of 99.15 yen set on Friday. The euro also struggled against the yen, falling 1.3 percent to 129.94 yen.
Against the Swiss franc, the dollar fell 0.6 percent, to 0.9178 franc, while the euro was down 0.5 percent at 1.2286 francs.
The growth-linked Australian dollar was down 0.4 percent at US$0.8994, while against the yen it lost 1.8 percent, to 87.28 yen. The New Zealand dollar fell 2.1 percent against the yen, to 75.74 yen.
Spot gold .XAU= rose more than 1 percent to $1,423.41, its highest price in more than three months.
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' bracing 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 .XU100 slid to the lowest in a year.
The S&P 500 closed under its 100-day moving average for the first time since June 24, a sign of weak near-term momentum. The day's decline extended recent declines that came on uncertainty over when the Federal Reserve will start to slow its stimulative monetary policies.
The Dow Jones industrial average .DJI ended down 170.33 points, or 1.14 percent, at 14,776.13. The Standard & Poor's 500 Index .SPX was down 26.30 points, or 1.59 percent, at 1,630.48. The Nasdaq Composite Index .IXIC was down 79.05 points, or 2.16 percent, at 3,578.52.
Brent crude futures settled at $114.36 a barrel, up $3.63 or 3.28 percent, their biggest daily percentage gain since early May. U.S. crude settled at $109.01 a barrel, up $3.09 or 2.92 percent.
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.
Russia has urged Washington not to use military force against 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.
The pan-European FTSEurofirst 300 .FTEU3 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 .MIAPJ0000PUS fell 1.2 percent, while Tokyo's Nikkei .N225 ended 0.7 percent lower. That left the MSCI all-country world equity index .MIWD00000PUS down 1.4 percent for a second day of falls.
Reporting by Angela Moon, additional Reporting by Rodrigo Campos, Ellen Freilich and Julie Haviv; editing by Dan Grebler