*

Mid-East escalation brings geopolitical risks back to fore

*

Tension gives battered safe-haven dollar a boost

*

Investors watch for sustained oil price rallies

(Updates prices and commentary from U.S. investors)

By Sinéad Carew and Amanda Cooper

NEW YORK/LONDON, June 13 (Reuters) -

U.S. investors on Friday sought refuge in safe-haven assets

like the dollar and gold, as oil prices surged after Iran

retaliated against Israel's biggest-ever military strike against

the major crude producer.

Iran launched airstrikes at Israel

hours after unprecedented Israeli strikes, stoking some

fears of a broader regional conflagration. Explosions were heard

on Friday in Jerusalem and Tel Aviv, the country's two biggest

cities. Earlier, Israel blasted Iran's huge Natanz underground

nuclear site and killed its top military commanders.

Investors said the markets would probably muddle through

the latest hostilities unless Iranian oil facilities were

attacked or other countries are drawn into the war. Worries

about possible disruptions to oil shipments prompted crude

prices to spike as much as 14%. Oil futures settled 7% higher on

the day.

"We're entering the next phase of the conflict here with

the Iranian response," said Jim Baird, chief investment officer

at Plante Moran Financial Advisors in Southfield, Michigan.

The money manager said he expected "a bit more of a

flight-to-quality trade if we see stocks sell off further" and

that this could benefit gold and Treasuries.

"The question is still how long will this persist? How

intense will it be? Will other parties be drawn in? From a big

picture economic perspective, I don't think it changes anything

materially," he said.

Safe-haven gold prices rose more than 1% and Wall

Street's three major equity indexes ended down more than 1%.

The outbreak of war brought oil prices into focus. Iran

is among the world's largest exporters of crude and borders the

Strait of Hormuz, a major choke-point for crude tankers through

which roughly a fifth of global consumption flows and which Iran

has previously threatened to close in retaliation to Western

pressure.

As oil prices surged and investors sought safe havens,

U.S. government bond yields rose on bets that higher energy

prices could stoke inflation.

Still, despite the spike in crude prices, the global

benchmark Brent remained well under $80 a barrel. Irene Tunkel,

Chief U.S. Equity Strategist at BCA Research said she does not

see long-term U.S. market implications unless prices soar above

$100 a barrel, which would hurt consumer spending.

She said that was unlikely unless oil infrastructure is

destroyed or "Iran somehow closes the Strait of Hormuz and (the

conflict) spills out of Iran and energy production in Iraq is

shifted."

The strategist also noted that the S&P 500

pullback on Friday, followed a strong rally from April lows.

U.S. President Donald Trump said there was still time for

Iran to halt the Israeli attacks by reaching a deal to curb its

nuclear programme.

The attacks came at a time when investors were wondering how

central banks would handle interest rates if U.S. consumer

prices rise due to Trump's tariffs.

Jack Janasiewicz, portfolio manager at Natixis Investment

Managers in Boston, said the potential for higher inflation from

rising oil prices looked "less supportive" for U.S. government

bond prices. But he noted that investors typically take

geopolitical crises in their stride.

"Historically speaking with these kind of geopolitical

events, you get the knee-jerk reaction from the market but the

longer-term ramifications tend to fade. History tells us to kind

of look past a lot of this stuff," said Janasiewicz.

OIL PRICE RALLY

Janasiewicz said the ultimate gains in oil prices will

depend on how long the war lasts and whether U.S. supply could

be ramped up to cap prices if there is a supply disruption.

"From a U.S. perspective it's at least a little bit more

insulated because domestic producers could certainly ramp up"

production, Janasiewicz said.

The dollar index, which has recently borne the brunt

of investor risk aversion, again took up the mantle of safe

haven on Friday and was last up about 0.5%.

"The dollar is reverting to that traditional role of safe

haven, which we haven't seen for months," City Index strategist

Fiona Cincotta said.

Despite Wall Street's sell-off, stock prices were still not

far off record highs, and some investors had warned that market

participants may not be cautious enough.

Marlborough fixed income fund manager James Athey said

there was a risk investors dive back into riskier assets too

quickly if tensions do not ratchet up quickly from here.

"In general, markets tend to look through these sorts of

events quite quickly but of course therein lies the risk of

complacency," he said.

"The situation is genuinely tense and fraught and risk

assets are still priced for perfection," he said.