(New throughout, updates prices as of 2015 GMT)

By Lewis Krauskopf and Naomi Rovnick

NEW YORK/LONDON, April 12 (Reuters) -

U.S. stocks sold off sharply on Friday while the dollar

jumped as investors grappled with rising geopolitical tensions

and persistent inflation that could lead to diverging monetary

policy between the U.S. and Europe.

MSCI's gauge of stocks across the globe

was last down 1.2%, its biggest one-day drop in about six

months, dragged down by U.S. performance.

Wall Street's main indexes all slumped well over 1% with

the S&P 500 posting its biggest one-day drop since Jan.

31, as first-quarter earnings season kicked off on a dour note

with reports from major banks.

"We have a mix of elevated geopolitical risk, inflation

worries and mild (earnings) disappointments," said Angelo

Kourkafas, senior investment strategist at Edward Jones.

Worries that Iran might retaliate for an airstrike on its

embassy in Damascus that it blamed on Israel have hovered over

markets, propping up oil and prompting moves into gold and other

safe-haven assets. Israel did not claim responsibility for the

airstrike on April 1.

U.S. President Joe Biden said on Friday he expected Iran to

attack Israel "sooner, rather than later" and warned Tehran not

to proceed.

There are "concerns that there may be an attack on Israel by

Iran," said Kristina Hooper, chief global market strategist at

Invesco. "Geopolitical risk has been driving a lot of the

moves."

Central bank outlooks were also in focus. The European

Central Bank signaled on Thursday it could start cutting rates,

while a hotter-than-expected inflation reading on Wednesday

pushed back bets for the Federal Reserve's first cut until later

in the year.

The dollar index gained 0.69% and hit its highest

level in over five months. The euro was down 0.76%.

"We've got a dollar, U.S. interest rate strength play,

that's what's going on here," said Joseph Trevisani, senior

analyst at FX Street in New York.

The Japanese yen bucked the trend, firming 0.02%

against the dollar in a rebound after hitting a 34-year low

during the day as investors watched for signs of intervention

from Tokyo officials.

On Wall Street, the Dow Jones Industrial Average fell

475.84 points, or 1.24%, to 37,983.24, the S&P 500 lost

75.65 points, or 1.46%, to 5,123.41 and the Nasdaq Composite

lost 267.10 points, or 1.62%, to 16,175.09.

Investors were digesting results from JP Morgan,

Citigroup ( C/PN ) and Wells Fargo ( WFC ), with the S&P 500 Banks

index dropping 3.3%.

Europe's STOXX 600 index rose 0.14%.

The yield on benchmark U.S. 10-year notes fell

5.9 basis points to 4.518% from 4.576% late on Thursday.

Federal Reserve Bank of Boston President Susan Collins is

eyeing a couple of interest rate cuts this year amid

expectations it could still take some time to get inflation back

to targeted levels.

Market pricing implied investors expect the Fed to reduce

its main funds rate by about 48 basis points this year after

traders started 2024 betting on about 150 bps of cuts.

Oil prices rose on Middle East tensions.

U.S. crude settled up 0.75% at $85.66 a barrel and

Brent settled at $90.45 per barrel, up 0.79% on the day.

Spot gold lost 1.24% at $2,343.76 an ounce, taking a

breather after rising above $2,400 per ounce to an all-time

high.