Portugal Colonial - Equities sink on Middle East woes, US rate cut doubts

Sentiment was further rocked by fears the US Federal Reserve might not cut interest rates as much as previously expected, with the focus now on upcoming key jobs data.

Oil steadied after international benchmark Brent bulldozed its way overnight to a five-month peak of $91.30 and New York's WTI struck a similar high on simmering geopolitical woes in the crude-producing Middle East.

The dollar held steady before the US nonfarm payrolls report, which is a key indicator of the health of the world's largest economy.

- 'Escalation of tensions' -

Optimism was at a premium on trading floors after the deadly strike on the Iranian consulate in Damascus, which Tehran blamed on Israel and threatened retaliation.

"The risk-off tone to markets is driven by an escalation of tensions in the Middle East, after Israel said that it had increased preparations for a retaliatory strike by Iran after Israeli forces attacked Iran's diplomatic compound in Syria earlier this week," said XTB analyst Kathleen Brooks.

"Ever since the Israel/Hamas war started in October, the bigger risk for geopolitical security and thus for financial markets, has been a war between Iran and Israel," she said.

That prospect sent prices up more than one percent Thursday, stoking fears of elevated global inflation that could delay rate reductions.

Friday's stock sell-off followed a plunge across the board on Wall Street that analysts said could also be partially blamed on profit-taking after a months-long rally that has seen several indexes hit records this year.

- 'Storm clouds' -

Minneapolis Fed chief Neel Kashkari said Thursday that there was a chance of no US rate cuts this year, sending Wall Street diving -- and with shock waves reverberating across Asia and Europe on Friday.

"Storm clouds circled equity markets as investors started to fret about when interest rates would be cut given heightened inflationary pressures from oil... and negative comments from a key figure," said Russ Mould, investment director at stockbroker AJ Bell.

"Kashkari questioned if the US central bank needed to cut rates at all this year if we continued to see sticky inflation.

"On paper, the argument in favour of holding rates is growing by the day even though investors would dearly love to see cut after cut to relieve the financial pressures on consumers and businesses."

Confidence in three Fed cuts this year, beginning in June, is being tested by a string of recent data indicating the US economy remains in rude health, while bank officials have done little to soothe concerns.

- Key figures around 1050 GMT -

London - FTSE 100: DOWN 0.9 percent at 7,905.43 points

Paris - CAC 40: DOWN 1.4 at 8,039.00

Frankfurt - DAX: DOWN 1.4 percent at 18,138.99

EURO STOXX 50: DOWN 1.4 percent at 4,999.38

Tokyo - Nikkei 225: DOWN 2.0 percent at 38,992.08 (close)

Hong Kong - Hang Seng Index: FLAT at 16,723.92 (close)

Shanghai - Composite: Closed for a holiday

New York - Dow: DOWN 1.4 percent at 38,596.98 (close)

Dollar/yen: UP at 151.36 yen from 151.22 yen on Thursday

Euro/dollar: DOWN at $1.0836 from $1.0840

Pound/dollar: DOWN at $1.2634 from $1.2641

Euro/pound: UP at 85.76 pence from 85.73 pence

Brent North Sea Crude: DOWN 0.1 percent at $90.71 per barrel

West Texas Intermediate: DOWN 0.2 percent at $86.46 per barrel

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