* U.S., European shares pull back after strong gains * Spanish and Italian political fears hit bonds * Euro edges lower from multi-month highs vs dollar, yen By Wanfeng Zhou NEW YORK, Feb 4 Major stock markets fell on Monday as investors booked profits on recent strong gains, while the euro slipped from multi-month highs against the dollar and yen on political uncertainty in Spain and Italy. Oil prices retreated from 4-1/2-month highs as investors paused for breath after a rally powered by signs of an improving global economic outlook and geopolitical tensions in the Middle East. U.S. stocks moved lower in early trade. The S&P 500 rose to a five-year high and the Dow to 14,000 for the first time since October 2007 last week after jobs and manufacturing data showed the U.S. economy's recovery remained on track. "We should get a pullback. Markets have been on a tear and they have been on a tear for good, sound economic and earnings-driven reasons," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey. Political uncertainty in Europe also weighed on shares and the euro and drove peripheral bond yields sharply higher. In Spain, Prime Minister Mariano Rajoy was facing calls to resign over a corruption scandal in which he denies any wrongdoing. "The prospect of Rajoy's resignation has roiled the markets," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. "Any fresh political instability in (the) euro zone's most important periphery economy could undermine the sense of investor confidence and send Spanish yields higher, making it much more difficult for the government to implement its austerity measures." In Italy, former Prime Minister Silvio Berlusconi, one of the top candidates in this month's general election, is seeing a resurgence in popularity, which threatens the reforms implemented by the outgoing technocrat government. The Dow Jones industrial average dropped 112.34 points, or 0.80 percent, at 13,897.45. The Standard & Poor's 500 Index was down 10.47 points, or 0.69 percent, at 1,502.70. The Nasdaq Composite Index was down 16.31 points, or 0.51 percent, at 3,162.78. MSCI's world equity index fell 0.8 percent to 354.98. The FTSEurofirst 300 lost 1.1 percent to 1,155.34, led by euro zone banks after weak results from Commerzbank. Spanish 10-year government bond yields rose 20 basis points to 5.42 percent while Italian yields were 9 bps higher at 4.42 percent. The euro traded at $1.3571, down 0.5 percent on the day, having hit a session low of $1.3547. It had risen to $1.3711 on Friday, a level unseen since late 2011. But the euro's dip may prove temporary, strategists said, and it could resume its move up if the European Central Bank, which meets on Thursday, expresses no concern about the currency's recent gains. Against the yen, the euro was down 0.7 percent at 125.88 yen , off a 33-month high of 126.96 yen struck last week. The dollar was little changed at 92.67 yen. In commodities trading, Brent oil fell $1.22 to a low of $115.54 per barrel before recovering slightly to around $115.86, down 90 cents. Brent had risen for three straight weeks. U.S. crude dropped $1.36 to a low of $96.41 per barrel after rising for eight consecutive weeks, the longest such winning streak since July-August 2004. "The market is long due a correction," VTB Capital oil and commodities markets strategist Andrey Kryuchenkov said. "The market is firmly in an uptrend, but so over-bought." Spot gold was little changed at $1,666.54 an ounce. U.S. Treasuries prices rose as bargain-minded investors emerged and pushed benchmark yields back below 2 percent after they climbed overnight to their highest levels in over nine months. The benchmark 10-year U.S. Treasury note was up 12/32, the yield at 1.9799 percent. Overnight, Asian shares climbed to 18-month highs. China added to the optimism about the global economy by reporting on Sunday that its services sector had grown for a fourth straight month in January, although the slim gain also signaled that the global recovery underway is a modest one.
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