*

Wary investors move to "risk off" mode as geopolitical

tension

mounts

*

Crude oil prices spike higher on outbreak of hostilities

*

US VIX volatility measure at highest point in 3 weeks

By Saqib Iqbal Ahmed, Suzanne McGee, Linda Pasquini

NEW YORK/GDANSK, June 15 (Reuters) - Investors were on

edge ahead of markets reopening late on Sunday, gripped by

anxiety over nationwide protests against President Donald Trump

and the escalating threat of a sweeping conflict in the Middle

East.

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.

"The market is very headline-driven and short-term focused,

so there's just a lot of volatility over the near term," said

Kathryn Rooney Vera, chief market strategist at StoneX Group.

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

traded strikes, and investors will be watching closely to see

how prices react when markets open later.

"So far we are at a stage of 'controlled confrontation,'"

said Lombard Odier's chief economist, Samy Chaar, in which 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."

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 from 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.

Rooney Vera at StoneX said she was worried about possible

supply restrictions in case of a closure of the Strait of

Hormuz, a narrow shipping lane between Iran and Oman. Any

closure could restrict trade and impact global oil prices.

"That could worsen inflationary pressures," she said.

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 a Minnesota

state lawmaker 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.

(Reporting by Saqib Iqbal Ahmed and Davide Barbuscia in New

York, and Linda Pasquini in Gdansk; Editing by Alden Bentley,

Richard Chang, Amanda Cooper, Susan Fenton and Matthew Lewis )