*

Wary investors move to "risk off" mode as geopolitical

tension

mounts

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Crude oil prices spike higher on outbreak of hostilities

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US VIX volatility measure at highest point in 3 weeks

(Updates Saturday story with comment, details)

By Saqib Iqbal Ahmed, Suzanne McGee and Linda Pasquini

NEW YORK/GDANSK, June 14 (Reuters) -

Investors were on edge ahead of markets reopening late on

Sunday, with risks ranging from heightened prospects of a broad

Middle East war to U.S.-wide protests against President Donald

Trump that threatened more domestic chaos.

Israel and Iran launched fresh attacks on each other into

Sunday, with Prime Minister Benjamin Netanyahu saying Israeli

strikes would intensify as Tehran called off nuclear talks that

Washington had held out as the only way to halt the bombing.

Meanwhile, Yemen's Iran-aligned Houthis joined the fray.

Oil prices rose by 7% on Friday, as Israel and

Iran traded strikes, and investors will be watching closely to

see how the price reacts when markets open later.

"So far we are at a stage of 'controlled

confrontation'", said Lombard Odier's chief economist Samy

Chaar, where it is too soon to call for real and persistent

economic damage despite high risk.

"For now, you get spikes in the oil price, you get

volatility, everyone's a bit nervous, but there is no clear sign

that we're moving towards the no-return type of scenario," he

said.

On Saturday, Israel appeared to have also hit Iran's oil

and gas industry for the first time, with Iranian state media

reporting a blaze at a gas field.

Israel's air offensive against Iran that began early on

Friday, killing commanders and scientists and bombing nuclear

sites in a stated bid to stop Tehran building an atomic weapon,

knocked risky assets including stocks, on Friday. It also lifted

oil prices and prompted a rush into gold and the dollar, which

resumed its role as a safe-haven asset for the first time in

months.

Oil prices at close to six-month highs could pose a risk

to the inflation outlook, as central banks around the world

grapple with the impact on prices from Trump's trade tariffs and

the effect on economic growth.

Lombard Odier's Chaar said a spike in oil prices should not

in theory derail monetary policy for now, as possible disruption

to Iranian oil supplies could be partly offset by output rises

elsewhere.

"It seems to me that long gone are the days when a

central bank would hike rates because of a spike in the oil

prices," Chaar said, adding that policymakers will more likely

stay focused on economic fundamentals and demand drivers.

Investors are nervous though, and the S&P 500 appears to

have stalled after rallying about 20% from its trade war-induced

April low to near record highs.

"The overall risk profile from the geopolitical situation is

still too high for us to be willing to rush back into the

market," said Alex Morris, chief investment officer of F/m

Investments in Washington.

Meanwhile,

protests

, organised by the "No Kings" coalition to oppose

Trump

's policies, and the

assassination

of two Minnesota state lawmakers on Saturday, added to

downbeat sentiment.

U.S. stock futures are set to resume trading at 6 p.m. (2200

GMT) on Sunday.

With risky assets sinking, investors' expectations for

near-term stock market gyrations jumped.

The Cboe Volatility Index, often called the Wall

Street "fear index", rose 2.8 points to finish at 20.82 on

Friday, its highest close in three weeks.

Michael Thompson, co-portfolio manager at boutique

investment firm Little Harbor Advisors, said he would be

watching near-term volatility futures prices for any rise toward

or above the level for futures set to expire months from now.

"This would indicate to us that near-term hedging is

warranted," he said.