NEW YORK (Reuters) - Crude oil prices jumped to a 2-1/2-year peak and gold hit an all-time high on Monday as investors worried that widening unrest in Libya could spread to other oil-producing nations in the Middle East.
Rumours that Libyan leader Muammar Gaddafi was seeking a deal with rebels caused oil to erase some gains. But U.S. crude prices remained more than 1 percent higher, trading around $105 a barrel.
The increase in the price of oil weighed on both European and U.S. stocks, with technology shares on Wall Street also hit by a downgrade on the semiconductor industry by Wells Fargo.
The euro fell against the dollar after having earlier hit a four-month high as expectations of a euro zone interest rate hike next month faded.
U.S. crude oil futures jumped to as high as $106.95 per barrel, the highest level since September 2008, as Gaddafi's counter-offensive against rebels deepened concerns that Africa's largest holder of oil reserves is headed for civil war. Prices were still 1.08 percent higher at $105.55 after rumours that the Libyan leader was trying to secure a safe exit from the country merely curbed initial gains.
"The major risk remains the prospect of the political unrest spreading to the Gulf-producing region," said Caroline Bain, economist at the Economist Intelligence Unit. "However, even if there is civil unrest in Saudi Arabia, it is not a given that oil production will be affected."
The prospects of further unrest in oil-rich Middle Eastern countries drove investors to seek safe-haven assets. Gold spot prices hit a record high of $1,444.40 an ounce while silver rose as high as $36.52 an ounce, its highest since early 1980.
"If we do see tension escalating further, then we could witness a new high in gold," said Ong Yi Ling, investment analyst at Phillip Futures in Singapore.
The Dow Jones industrial average .DJI fell 37.58 points, or 0.31 percent, to 12,132.30, while the Standard & Poor's 500 Index .SPX lost 7.13 points, or 0.54 percent, at 1,314.02. The Nasdaq Composite Index was down 37.63 points, or 1.35 percent, at 2,747.04.
The semiconductor index shed 3.1 percent after Wells Fargo downgraded the chip industry to "market weight" from "overweight," saying the sector will grow moderately in 2011 compared with the past two years.
In Europe, the FTSEurofirst 300 index .FTEU3 of top shares declined 0.26 percent.
Risk premium on Greek, Portuguese and Spanish debt rose after Moody's cut Greece's credit rating by three notches
Refinancing costs paid by peripheral euro-zone countries were on the rise after Moody's slashed the rating of Greece by three notches, signalling more downgrades in the near future.
Portuguese 10-year yields rose to a euro lifetime high of 7.65 percent, up around 9 basis points on the day.
U.S. Treasury prices fell on Monday, even as oil prices continued to rise, with investors viewing Friday's rally as overdone as they prepared for $66 billion in new Treasury supply to hit markets this week.
Ten-year note yields, for example, may need to rise by 7 to 10 basis points to generate interest if no safety bid emerges, said Thomas Roth, executive director in U.S. government bond trading at Mitsubishi UFJ Securities in New York.
The Treasury will sell $32 billion (19.7 billion pounds) in new three-year notes on Tuesday and $21 billion and $13 billion in reopenings of 10-year notes and 30-year bonds on Wednesday and Thursday.
Benchmark 10-year notes fell 10/32 in price on Monday with yields rising to 3.54 percent, up from 3.49 percent late on Friday.
The euro was last little changed at $1.3992 falling from an earlier fresh four-month high of $1.4036 on electronic trading platform EBS.
Additional reporting by Rodrigo Campos, Jan Harvey, Harpreet Bhal and Jessica Mortimer, Editing by Leslie Adler