NEW YORK (Reuters) - U.S. stocks erased gains, ending slightly down, and oil prices closed modestly lower on Monday as investors concluded Osama bin Laden's death will do little to ease global economic and political risks.
The U.S. dollar erased early gains and the euro hit a 17-month high against the greenback on bets euro-zone interest rates will keep rising to fend off inflation.
News that the al Qaeda leader had been killed by U.S. forces on Sunday initially encouraged investors to take on risk, driving stocks higher. Oil fell by more than 3 percent.
But investors refocused on the state of the global economy and the recognition that bin Laden's death would not lessen political risks in the Middle East and North Africa, which have driven oil prices higher in the past few months.
"This is a great story for freedom lovers, but it will only impact the economy insofar as it brings the price of oil down," said Christian Wagner, chief executive officer at Longview Capital Management in Wilmington, Delaware.
After its initial plunge, oil prices zigzagged between positive and negative as investors weighed geopolitical risks. Some feared retaliation from al Qaeda.
U.S. crude for June delivery closed 0.36 percent lower at $113.52 a barrel after falling to $110.82 overnight. In London, Brent crude for June fell 0.61 percent to $125.12 a barrel.
On Wall Street, bin Laden-generated gains faded in the afternoon as investors questioned the longevity of stocks' recent rally.
"We did see a knee-jerk reaction in the stock and oil markets. We drifted back a bit, but you have to put in context," said Phil Orlando, chief equity market strategist at Federated Investors in New York, with $355 billion under management.
"Stocks have had a tremendous run in the past two years. While bin Laden's death poses a longer-term positive, you can't blame some investors for wanting to take profits."
The Dow Jones industrial average .DJI edged down 3.18 points, or 0.02 percent, at 12,807.36, while the Standard & Poor's 500 Index .SPX lost 2.39 points, or 0.18 percent, at 1,361.22. The Nasdaq Composite Index .IXIC fell 9.46 points, or 0.33 percent, at 2,864.08.
In Europe, the FTSEurofirst 300 .FTEU3 index of top shares closed up 0.02 percent. The MSCI All-Country World Index .MIWD00000PUS gained 0.15 percent.
"We have geopolitical issues and we have economic issues," said Jason Brady, a managing director for Thornburg Investment Management in Santa Fe, New Mexico, with about $73 billion under management. "This is marginally better, but I am not changing my outlook at all."
The euro hit a 17-month high against the dollar as surprisingly strong manufacturing data in the euro zone bolstered the chances interest rates there could rise again to curb inflation.
The European single currency was up 0.16 percent against the dollar at $1.4823.
The greenback had initially strengthened against major currencies on bin Laden's death but erased most gains later.
The U.S. Dollar Index .DXY, which measures the dollar against a basket of currencies of key trading partners, was up 0.16 percent.
"In the end it's monetary policy expectations which are the driving force for dollar weakness," said Marcus Hettinger, currency strategist at Credit Suisse in Zurich.
U.S. Treasury prices initially slipped after the bin Laden news reduced the appetite for safe-haven bonds, but they later erased losses.
The benchmark 10-year U.S. Treasury note was up 2/32 points in price, its yield at 3.2825 percent.
Reporting by Steven C. Johnson, Chris Reese and Richard Leong in New York; Editing by Kenneth Barry