San Francisco Frontiers - Stock markets rally, oil dips after surge

Europe's main stock markets jumped more than 1.5 percent approaching the half-way stage, and after a largely upbeat session in Asia and overnight on Wall Street.

Oil prices dropped, having soared Monday after Palestinian militant group Hamas unexpectedly launched a deadly attack on Israel, stoking fear of spreading unrest in the crude-rich Middle East.

"Equity markets are bouncing back on Tuesday after a risk-averse start to the week, buoyed... by some promising Fed commentary," said analyst Craig Erlam at trading firm OANDA.

"It would appear the recent surge in bond yields hasn't gone unnoticed at the central bank, to the extent that Fed officials are coming across as less hawkish in their views."

Traders remained on edge as Israel carried out retaliatory attacks in Gaza.

The death toll in Israel has surged above 900 from the worst attack in the country's 75-year history, while Gaza officials have reported 687 people killed.

"It is perhaps a little surprising that markets have bounced back as quickly and strongly as they have given the clear risk aversion we saw at the start of the week," added Erlam.

"Hamas attacks in Israel created uncertainty around the Middle East and investors will no doubt continue to monitor the situation very closely."

Israel pounded Hamas targets in Gaza Tuesday and said the bodies of 1,500 Islamist militants were found in southern towns recaptured by the army in gruelling battles near the Palestinian enclave.

Claims that Tehran helped Hamas plan the raids have stoked fears Israel will hit major crude producer Iran, which would cause a major escalation and likely send prices higher. Iran has denied the claims.

Despite simmering geopolitical tensions, sentiment was helped by Friday's forecast-busting US jobs report that also showed wage gains slowing -- a so-called "Goldilocks" scenario in which the data was neither too weak nor too strong.

The upbeat mood was boosted Monday after Fed Vice Chair Philip Jefferson said the recent spike in US Treasury yields to multi-year highs could provide the necessary restraint on credit that would be achieved by higher interest rates.

"Looking ahead, I will remain cognisant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy," he told a National Association for Business Economics conference in Dallas.

His comments echoed those of Dallas Fed President Lorie Logan, who suggested that if bond market costs were on the rise, that "could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening".

- Key figures around 1050 GMT -

London - FTSE 100: UP 1.6 percent at 7,608.44 points

Frankfurt - DAX: UP 1.8 percent at 15,393.44

Paris - CAC 40: UP 1.6 percent at 7,134.35

EURO STOXX 50: UP 1.8 percent at 4,185.73

Tokyo - Nikkei 225: UP 2.4 percent at 31,746.53 (close)

Hong Kong - Hang Seng Index: UP 0.8 percent at 17,664.73 (close)

Shanghai - Composite: DOWN 0.7 percent at 3,075.24 (close)

New York - Dow: UP 0.6 percent at 33,604.65 (close)

Euro/dollar: UP at $1.0604 from $1.0567 on Monday

Dollar/yen: UP at 148.89 yen from 148.51 yen

Pound/dollar: UP at $1.2263 from $1.2238

Euro/pound: UP at 86.47 pence from 86.34 pence

Brent North Sea crude: DOWN 0.3 percent at $87.91 per barrel

West Texas Intermediate: DOWN 0.3 percent at $86.14 per barrel

burs-rfj/bcp/rox

P.Thomas--SFF