By Richard Hubbard
LONDON (Reuters) - Uncertainty about the possibility of military action against the Syrian government lifted oil towards a five-month high on Tuesday, undercut world share prices and drove demand for safe-haven assets like the yen.
Emerging markets were hit hard again as doubts over the Syrian situation added to pressure coming from investors' positioning for an end to the availability of cheap dollars which has helped support many developing nations.
Dealers said the move into safe-haven assets, spurred by reports from Washington that a strike may be imminent, were not on a huge scale as investors are waiting to see how the situation unfolds.
"Certainly there hasn't been any panic but with the headlines out there, there has been some risk-off trading," said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.
U.S. Secretary of State John Kerry, in the most forceful reaction yet to the August 21 gas attack outside Damascus, set the stage for possible action when he said President Barack Obama "believes there must be accountability for those who would use the world's most heinous weapons against the world's most vulnerable people".
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Kerry said Obama was consulting with allies before he decides on how to respond and those comments saw U.S. stocks end 0.4 percent lower in light volumes on Monday.
The Wall Street sell-off started the move into safer assets with the yen rising broadly to leave the greenback down 0.4 percent at 98.07 yen and the Australian dollar down 0.8 percent to 88.25 yen.
The euro had fallen 0.3 percent against the Japanese unit though it was steady against the dollar at $1.3372.
Meanwhile, Russia's rouble was up 0.2 percent against the dollar at 33.14 but down 0.4 percent versus the euro to 44.34 to be at an early September 2009 low of 38.19 versus its dollar-euro basket which is used by the central bank to gauge market interventions.
Russia is Syria's key ally and arms supplier, and has urged Washington not to use military force against President Bashar al-Assad's government.
Traders said Russia's response to any U.S. move against Syria would be key to whether the current shift into safer assets turned into a major flood.
In the oil markets the tension over Syria has added to ongoing worries and other nations in the Middle East, which pumps a third of the world's oil.
Brent crude oil for October was over $111 a barrel, though just under Monday's high of $111.68, which was its highest price since April 2.
SHARES SUCCUMB
European shares were down 1.3 percent by mid-morning following a drop of 1.2 percent across Asian markets outside Japan. Tokyo's Nikkei ended 0.7 percent lower, while the safe-haven yen rose broadly.
That left the MSCI world equity index down around 0.5 percent for a second day of falls, though it remains off its lows for the month.
More evidence that the recovery in Europe's largest economy, Germany, was gathering momentum in the latest monthly survey of sentiment by the influential Ifo think-tank had little impact on market sentiment.
The Ifo institute said its business climate index, based on a survey of some 7,000 firms, rose to a better-than-forecast 107.5 in August, its fourth consecutive rise and the highest level since April 2012.
Germany's main DAX index was down 1.4 percent after the surprisingly strong data, with key French <.FCHI> and Italian indexes both around 1.5 percent lower.
Italian shares were experiencing their second day of heavy selling after falling about 0.8 percent on Monday on concern over the stability of the ruling coalition, with Silvio Berlusconi's centre-right party threatening to bring down the government.
The share sell-off in Europe had only minimal impact on 10-year German bond yields, which were only a touch lower at 1.89 percent - just off 1-1/2 year highs of 1.98 percent hit last week.
German yields have risen sharply in recent weeks on expectations that an improved global economic outlook could prompt the Federal Reserve to reduce monetary stimulus in September, while other major central banks might struggle to keep their promise to keep interest rates low for a long time.
Among emerging markets already suffering because of the U.S. Fed outlook and further pressured by developments over Syria, its near neighbour Turkey was hit especially hard, with the lira falling to a record low around two to the dollar.
In Asia, the Indian rupee and the Malaysian ringgit had notable falls. The rupee hit a record low at 65.71 per dollar, while the ringgit reached a three-year low around 3.3300 per dollar.
Investors also gave some commodities a wide berth with copper shedding 1.1 percent to $7,278 a tonne but gold found demand due to its safe-haven status, rising to its highest level since June 7 to trade at $1,410 an ounce.
Gold has rallied more than $200 since the end of June when prices troughed at three-year lows and traders suspect some profit-taking is in order.
(Editing by Stephen Nisbet)