Iraq jitters hit European shares

By Atul Prakash

LONDON (Reuters) - Europe's top share index slipped to a three-week low on Wednesday as concerns that violence in Iraq could escalate further prompted investors to take refuge in safer assets such as German bonds.

The FTSEurofirst 300 index of top European shares fell 0.7 percent to its lowest since early June, while Germany's DAX share index dropped 0.5 percent by 1015 GMT. The MSCI world equity index, which tracks shares in 45 countries, fell 0.3 percent to a one-week low.

"Iraq tensions have overshadowed relatively good economic data this week," said Lorne Baring, managing director of B Capital Wealth Management in Geneva.

"Investors are still concerned about American foreign policy and what will be the next step in terms of any military intervention as opposed to diplomacy in the Middle East region."

Militants attacked one of Iraq's largest air bases as the first U.S. teams arrived to assess the Iraqi security forces and decide how to help counter a mounting Sunni insurgency. Advances by militants have threatened to rupture the country two-and-a-half years after the withdrawal of U.S. troops.

The weakness in European stocks followed a sell-off in overseas markets. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4 percent, while Japan's Nikkei ended 0.7 percent lower. In volatile U.S. trading, the S&P 500 closed 0.6 percent weaker after hitting a fourth record high following upbeat U.S. data.

Risk-averse investors turned their attention to relatively safer assets. Yields of German government bonds, perceived as safe havens, fell towards their lowest this year. German 10-year yields were 3 basis point lower at 1.29 pct

"It's a volatile situation in Iraq and Treasuries and Bunds benefit from flight to quality," said Nick Stamenkovic, bond strategist at RIA Capital Markets in Edinburgh.

Oil markets were mixed as traders weighed the likelihood of supply disruptions from Iraq. Analysts said lingering worries that continued violence in Iraq would dent supplies from OPEC's second-largest producer kept a floor under prices.

U.S. crude for August delivery advanced 0.6 percent, while Brent crude for August fell 0.5 percent.

"Oil prices have been unusually stable in recent years, but events in Iraq are causing a reassessment of medium-term oil market fundamentals that we expect to translate into a phase of higher long-term prices and more volatile trading conditions," strategists at Barclays said in a note to clients.

In the currency market, the dollar slipped against the yen, with some investors cautious ahead of the final reading of first-quarter U.S. GDP.

It is forecast to be revised down and is likely to boost expectations that the Federal Reserve is in no hurry to tighten policy. The dollar was down 0.1 percent versus the yen at 101.90.

(Additional reporting by Blaise Robinson in Paris, Marius Zaharia and Anirban Nag in London and Lisa Twaronite in Tokyo; Editing by Catherine Evans)