By Ian Chua

LONDON (Reuters) - Oil prices rebounded above $134 on Friday having suffered their biggest fall in three months while worries about the financial sector knocked global stocks and the dollar lower, setting the scene for a weak start on Wall Street.

Safe-haven assets such as government debt benefited from flight to safety flows, sending bond yields lower.

Citigroup's (C.N: Quote, Profile, Research) warning it could take substantial write-downs in the second quarter and Moody's move to strip the insurance arms of bond insurers Ambac Financial Group (ABK.N: Quote, Profile, Research) and MBIA Inc (MBI.N: Quote, Profile, Research) of their Aaa ratings had fuelled worries about the financial sector. ID:nN19404809 ID:nN19337994

"A downgrade to the insurers leaves the financial sector 'holding the baby' of the consequential write-downs and it does their balance sheets, which are already sorely impaired, no good whatsoever," said Marc Ostwald, bond analyst at Insinger de Beaufort in London.

"It always seems to be the case with the financial sector where it never rains but pours."

U.S. crude CLc1 jumped $2.49 to $134.42, recouping about half of Thursday's near $5 fall -- the biggest drop since March 19 -- after China announced a surprise increase of about 18 percent in retail gasoline and diesel prices, effective Friday.

Markets are still grappling with the possible impact of the Chinese move, which came just days before an emergency meeting on Sunday in Saudi Arabia between consumers and producers to discuss rising oil prices.

The firmer oil price gave energy stocks such as Total (TOTF.PA: Quote, Profile, Research) a small boost, but weakness in bank shares including UBS (UBSN.VX: Quote, Profile, Research) and Royal Bank of Scotland (RBS.L: Quote, Profile, Research) dominated the wider market.