* European stocks, US futures slide

* Energy price spike stokes inflation fears

* Iran vows to close Strait of Hormuz

* Korean benchmark share index plunges 7.2%, leads Asia

declines

(Updates prices throughout)

By Lucy Raitano and Gregor Stuart Hunter

SINGAPORE/LONDON, March 3 (Reuters) - A selloff in

stocks and government bonds deepened while the dollar

strengthened on Tuesday, as widening conflict in the Middle East

fuelled a spike in energy prices and raised investor concern

about inflation.

U.S. S&P 500 e-mini futures were down 1.4% while

Nasdaq e-mini futures fell 1.8%, suggesting the selloff

may engulf Wall Street later following a volatile session on

Monday that saw the S&P 500 rally from an early slide to

close flat and the Nasdaq Composite climb 0.4%.

In Europe the STOXX 600 fell as much as 3.6% in

morning trading and was last down 2.8% - on track for its

biggest daily decline since April - following a 1.7% drop on

Monday.

Meanwhile, government bond markets from the euro zone to the

United States and Britain sold off sharply on concerns that

sustained higher inflation would likely force central banks to

turn more hawkish.

On Monday, U.S. President Donald Trump sought to justify a

broad, open-ended war on Iran, saying the campaign was ahead of

expectations.

Front and centre on traders' minds is a dramatic surge in

oil and natural gas.

"For Western Europe, the most notable development is another

surge in natural gas prices... which is bringing back quite a

lot of fears of potentially a repeat of what we saw in 2022,

when Russia invaded Ukraine," said George Moran, European macro

strategist at RBC Capital Markets.

"It feels like the market is interpreting this as much more of

an inflationary shock than a growth shock. Of course, it could

still have a growth impact," he said.

In natural gas markets, benchmark European LNG prices

leapt by 34%, having jumped 39% on Monday, while U.S. natural

gas futures were up nearly 6%.

Qatar halted its production of liquefied natural gas (LNG)

on Monday, prompting precautionary shutdowns of oil and gas

facilities across the Middle East. Qatari LNG production makes

up about 20% of global supply.

An official from Iran's Revolutionary Guards said on Monday

that the Strait of Hormuz was closed to marine traffic and the

country would fire on any ship trying to pass.

Brent crude futures tacked on another 8.9% to $84.64 on

Tuesday, up more than 16% on the week.

WORKING THROUGH THE RISK SCENARIOS

Investors are grappling with the uncertainty over how long the

conflict might last, with no end to hostilities in sight.

The U.S. embassy in Riyadh was hit by two drones resulting in a

limited fire and some material damage, the kingdom's defence

ministry said in a post on X on Tuesday.

"Events like that are adding to fears about a more protracted

conflict," wrote Deutsche Bank research analysts in a morning

note. They added that there are signs investors are still

pricing the conflict as temporary rather than protracted.

"In particular, it has mainly been the front end of energy

curves that have seen sharp spikes, while longer-dated contracts

have moved much less," they wrote.

On Tuesday, Prime Minister Benjamin Netanyahu said he expected

the war against Iran was "not going to take years".

The surge in energy prices complicates the Federal Reserve's

efforts to keep inflation under control, with policymakers

already showing signs of division around the impact of

artificial intelligence on the U.S. economy. The U.S. will take

action to mitigate rising energy prices due to the spike in the

price of oil, Secretary of State Rubio said on Monday.

ISM manufacturing data released on Monday showed U.S.

activity grew steadily in February, but a gauge of factory gate

prices raced to a near 3-1/2-year high amid tariffs,

highlighting upside pressure on inflation even before the

attacks on Iran.

Fed funds futures are pricing an implied 95.4% probability

that the U.S. central bank will hold rates at the end of its

two-day meeting on March 18, according to the CME Group's

FedWatch tool. The odds of a June hold, previously below 50%,

edged up on Monday and are now slightly better than a coin-toss.

The dollar index, which measures the performance of

the U.S. currency against six others, held close to a six-week

high at 99.168 as investors shunned those currencies they

perceive to be most vulnerable to higher energy prices. The

yield on the U.S. 10-year Treasury note was up nearly 5 basis

points at 4.1%.

With the dollar holding strong, gold was down 2.7% at

$5,185.80 an ounce. Bitcoin fell 2.2% to $67,871.41.