(Updates prices after U.S. stock market open)

* Oil prices up sharply on supply concerns due to US-Iran

war

* Gold prices jump, Treasury yields rise

* Wall Street indexes pare losses, Europe underperforms

* Dollar gains against major currencies

By Sinéad Carew and Alun John

NEW YORK/LONDON March 2 (Reuters) - Oil and gas prices

surged, the dollar gained and stock indexes fell around the

world while safe-haven gold rallied on Monday as the

U.S.-Israeli air war against Iran widened and looked set to last

for weeks, threatening to upend a global economic recovery and

perhaps reignite inflation.

Israeli and U.S. strikes on Iran and retaliation by Tehran

forced shutdowns of oil and gas facilities across the Middle

East and disrupted shipping in the crucial Strait of Hormuz,

pushing oil and gas prices sharply higher.

U.S. crude rose 6.86% to $71.62 a barrel and Brent

rose to $78.74 per barrel, up 8.07% on the day as

investors worried about how long the war would last and disrupt

energy markets.

After falling more than 1% at one point, the S&P 500 pared

its losses with some support from the energy and defense

indexes, both rising more than 1%.

With European stocks underperforming U.S. stocks, investors

appeared to be stepping away from investments that had performed

best so far this year, said Chris Zaccarelli, chief investment

officer at Northlight Asset Management, in Charlotte, North

Carolina.

"The actions that the United States and Israel took over

the weekend has global markets on edge," said Zaccarelli. "For

the most part there's a little bit of a knee-jerk reaction to

take a little bit of risk off the table, a slight downturn in

markets but, generally speaking, it doesn't seem like investors

are panicking or predicting a worldwide economic collapse."

On Monday at 10:27 a.m. ET (1527 GMT), the Dow Jones

Industrial Average fell 165.31 points, or 0.34%, to

48,810.58, the S&P 500 fell 27.69 points, or 0.40%, to

6,851.19 and the Nasdaq Composite fell 61.92 points, or

0.27%, to 22,606.30.

The CBOE volatility index, sometimes referred to as

Wall Street's fear gauge, pared gains after rising earlier to

its highest point since November. It was last up 1.7 points at

21.56.

MSCI's gauge of stocks across the globe

fell 10.30 points, or 0.97%, to 1,046.46.

The pan-European STOXX 600 index fell 1.77%.

In government bonds, U.S. Treasury yields rose across

durations as an early bout of safe-haven buying over the risk of

a drawn-out conflict gave way to investor concern about the

potential for a spike in global inflation due to a surge in oil

prices.

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

7.6 basis points to 4.038%, from 3.962% late on Friday, while

the 30-year bond yield rose 5.3 basis points to

4.6864%.

The 2-year note yield, which typically moves in

step with interest rate expectations for the Federal Reserve,

rose 9.2 basis points to 3.471%.

In currency markets, the dollar was by far the biggest gainer,

rallying even against safe-haven currencies such as the Swiss

franc and Japanese yen. Moves in the oil market impact currency

markets given the U.S. is a net energy exporter while both

Europe and Japan rely heavily on imports.

The dollar index, which measures the greenback

against a basket of currencies including the yen and the euro,

was eyeing its biggest one-day move since late January.

The euro was down 0.91% at $1.1705. Against the

Japanese yen, the dollar strengthened 1.03% to

157.64. Sterling weakened 0.66% to $1.3395.

Against the Swiss franc, the dollar strengthened

1.34% to 0.779.

In cryptocurrencies, bitcoin gained 4.60% to

$68,705.98.

In precious metals, safe-haven gold advanced on Monday, driven

by escalating concerns of prolonged conflict in the Middle East

after U.S. and Israeli strikes against Iran.

Spot gold rose 1.15% to $5,338.49 an ounce. U.S.

gold futures rose 1.8% to $5,324.50 an ounce.

Investors will also be watching for key U.S. economic data

this week, including retail sales and the payrolls report. Any

weakness could shake confidence in the economy after a

disappointing fourth quarter, but would also likely narrow the

odds on rate cuts from the Federal Reserve.