Stocks fall as supply worry hits oil; U.S. dollar climbs

By Chuck Mikolajczak

NEW YORK (Reuters) - World stock markets fell on Tuesday as a drop in oil prices weighed on the energy sector, while hawkish comments from several U.S. Federal Reserve officials pushed the U.S. dollar to a one-month high.

After the market close, index provider MSCI said it will add mainland Chinese 'A' stocks to its widely followed Emerging Markets Index in a landmark decision for the global investment landscape.

Oil fell about 2 percent, with Brent settling at seven-month lows and U.S. crude at its cheapest since September, after increased supply from several key producers overshadowed high compliance by OPEC and non-OPEC oil producers with a deal to cut global output.

That slide weighed down energy stocks on Wall Street and in Europe. The S&P energy index <.SPNY> dropped 1.3 percent as the worst-performing of the 11 major S&P sectors and Europe's oil and gas sector <.SXEP> slumped 2.2 percent.

"People really thought $45 to $55 was kind of the range of oil, but it is getting weaker and weaker and U.S. producers are getting more and more efficient," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York

"So if that is the case, they are going to keep pumping."

U.S. crude settled down 2.2 percent at $43.23 per barrel and Brent settled 1.9 percent lower at $46.02.

The drop put U.S. crude in a bear market, traditionally defined as a drop of more than 20 percent from a recent high.

The Dow Jones Industrial Average <.DJI> fell 61.85 points, or 0.29 percent, to 21,467.14, the S&P 500 <.SPX> lost 16.43 points, or 0.67 percent, to 2,437.03 and the Nasdaq Composite <.IXIC> dropped 50.98 points, or 0.82 percent, to 6,188.03.

The Dow and benchmark S&P 500 hit fresh record highs on Monday, buoyed by a rebound in the tech sector.

The pan-European FTSEurofirst 300 index <.FTEU3> lost 0.66 percent and MSCI's gauge of stocks across the globe <.MIWD00000PUS> shed 0.69 percent.

Alongside MSCI's addition of China 'A' shares to the emerging markets benchmark, the index provider decided not to add Argentina to the same index and will consult on adding Saudi Arabia. Nigeria will remain under review as a frontier market.

The U.S. dollar strengthened for a second day, hitting a one-month high of 97.871 against a basket of major currencies as Federal Reserve officials maintained a hawkish tone on hiking interest rates.

On Monday, New York Fed President William Dudley said halting the rate-hiking cycle now would imperil the economy. That was followed by Boston Fed President Eric Rosengren, who said on Tuesday the era of low interest rates in the United States and elsewhere poses financial stability risks.

In addition, Chicago Federal Reserve Bank President Charles Evans said he was increasingly concerned that a recent softness in inflation is a sign the Fed will struggle to get price pressures back to its 2 percent objective. Dallas Federal Reserve President Robert Kaplan said the Fed needs to be careful about raising U.S. interest rates further due to low rates on 10-year Treasuries.

The dollar index <.DXY> rose 0.24 percent, with the euro down 0.2 percent to $1.1126. The greenback is up nearly 1 percent for the month.

Sterling was last trading at $1.2624, down 0.85 percent on the day. Bank of England Governor Mark Carney doused speculation that he might soon back higher interest rates, telling bankers on Tuesday that he first wanted to see how the economy coped with Brexit talks in coming months.

Benchmark 10-year Treasury notes last rose 9/32 in price to yield 2.1565 percent, down from 2.188 percent late on Monday.

(Editing by Bernadette Baum and Dan Grebler)