By Richard Hubbard
LONDON (Reuters) - The prospect of Western military action against Syria hit emerging market assets hard, pushed oil to a six-month high and sent world shares sliding for a second day on Wednesday.
In the scramble for safety investors turned to gold, which hit a 3-1/2 month peak above $1,430 an ounce, and bought the dollar on a view that it was the ultimate refuge from the risks of intensified upheaval in the Middle East.
Emerging markets, such as Syria's neighbour Turkey, already being pummelled by an expected reduction in U.S. stimulus measures, took further hits. The Turkish lira and India's rupee both touched record lows against the dollar.
The moves stem from signs the United States and its allies are gearing up for a strike against President Bashar al-Assad's forces, blamed for last week's chemical weapons attacks, which traders fear could prompt retaliatory action, engulfing a region which supplies a third of the world's oil.
"The market feels an attack on Syria is highly probable but what they're concerned about is the retaliation," said Mike Gallagher, managing director of IDEAglobal.
"We could see a wider spillover into the region which could easily push oil prices up, at least temporarily, to $120 or $125 a barrel," Gallagher said.
At one point those concerns had pushed Brent crude above $117 a barrel and the U.S. benchmark to its highest level in over two years, though both subsequently eased off these highs in volatile trading.
In the Middle East, Dubai's stock index shed 1.4 percent to add to the 7.0 percent loss recorded on Tuesday, leaving it near a six-week low.
Heavy selling earlier across Asian markets, particularly in southeast Asia sent MSCI's main emerging equity index down 0.7 percent and left its world equity index, which tracks share moves in 45 countries, down 0.5 percent at seven-week lows.
U.S. stock index futures pointed to some respite when trading opens after Wall Street stocks suffered their worst day since late June on Tuesday.
EUROPE TAKES PROFITS
In Europe, stocks were down for a third consecutive day as the concerns over Syria added to a political crisis in Italy and the worries abut Fed tapering to fuel profit taking on an 8 percent rally seen since late June.
The FTSEurofirst 300 index of top European shares was down 0.4 percent by later morning having posted its largest daily drop in two months on Tuesday.
"The market seems to be looking to trade down on a combination of profit-taking from the strong move into August and the news on Syria and contagion effects in the Middle East," said Atif Latif, director at Guardian stockbrokers.
The euro was down 0.3 percent against the dollar at $1.3355 but was slightly firmer against the yen at 130.
Amid the worries over Syria investors largely shrugged off data showing euro zone bank lending contracting further in July, which highlighted the fragility of the bloc's nascent recovery and should keep pressure on the European Central Bank to maintain its expansive monetary policy.
However, flight to quality demand buoyed German government bonds, sending the 10-year Bund yield down 3 basis points to 1.824 percent as it moves further away from Friday's 1-1/2 year highs of 1.98 percent.
Britain's pound meanwhile slipped against both the dollar and the euro as investors focused on a speech in which new Bank of England governor Mark Carney is likely to reaffirm his intention to keep interest rates low until end-2016.
Many anticipate that Carney will try and talk down a sharp rise in UK money market rates following a run of strong economic data and reiterate that the bank rate will stay at a record low of 0.5 percent until the jobless rate falls to 7 percent.
(Additional reporting by Francesco Canepa; Editing by Elizabeth Piper/Ruth Pitchford)
