GLOBAL MARKETS - Stocks Tumble, Dollar Firms Amid Geopolitical Risk

GLOBAL MARKET - NEW YORK/LONDON, April 12 (Reuters) - U.S. stocks sold off sharply on Friday while the dollar jumped as investors grappled with rising geopolitical tensions and persistent inflation that could lead to diverging monetary policy between the U.S. and Europe.

MSCI's gauge of stocks across the globe .MIWD00000PUSwas last down 1.2%, its biggest one-day drop in about six months, dragged down by U.S. performance.

Wall Street's main indexes all slumped well over 1% with the S&P 500 .SPX posting its biggest one-day drop since Jan. 31, as first-quarter earnings season kicked off on a dour note with reports from major banks.

"We have a mix of elevated geopolitical risk, inflation worries and mild (earnings) disappointments," said Angelo Kourkafas, senior investment strategist at Edward Jones.

Worries that Iran might retaliate for an airstrike on its embassy in Damascus that it blamed on Israel have hovered over markets, propping up oil and prompting moves into gold and other safe-haven assets. Israel did not claim responsibility for the airstrike on April 1.

U.S. President Joe Biden said on Friday he expected Iran to attack Israel "sooner, rather than later" and warned Tehran not to proceed.

There are "concerns that there may be an attack on Israel by Iran," said Kristina Hooper, chief global market strategist at Invesco. "Geopolitical risk has been driving a lot of the moves."

Central bank outlooks were also in focus. The European Central Banksignaled on Thursday it could start cutting rates, while a hotter-than-expected inflation reading on Wednesday pushed back bets for the Federal Reserve's first cut until later in the year.

The dollar index =USD gained 0.69% and hit its highest level in over five months. The euro EUR= was down 0.76%.

"We've got a dollar, U.S. interest rate strength play, that's what's going on here," said Joseph Trevisani, senior analyst at FX Street in New York.

The Japanese yen JPY=bucked the trend, firming 0.02% against the dollar in a rebound after hitting a 34-year low during the day as investors watched for signs of intervention from Tokyo officials.

On Wall Street, the Dow Jones Industrial Average .DJI fell 475.84 points, or 1.24%, to 37,983.24, the S&P 500 .SPX lost 75.65 points, or 1.46%, to 5,123.41 and the Nasdaq Composite .IXIC lost 267.10 points, or 1.62%, to 16,175.09.

Investors were digesting results from JP MorganJPM.N, CitigroupC.N and Wells FargoWFC.N, with the S&P 500 Banks index .SPXBKdropping 3.3%.

Europe's STOXX 600 .STOXX index rose 0.14%.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 5.9 basis points to 4.518% from 4.576% late on Thursday.

Federal Reserve Bank of Boston President Susan Collins is eyeing a couple of interest rate cuts this year amid expectations it could still take some time to get inflation back to targeted levels.

Market pricing implied investors expect the Fed to reduce its main funds rate by about 48 basis points this year after traders started 2024 betting on about 150 bps of cuts.

Oil prices rose on Middle East tensions.

U.S. crude CLc1settled up 0.75% at $85.66 a barrel and Brent LCOc1settled at $90.45 per barrel, up 0.79% on the day.

Spot gold XAU= lost 1.24% at $2,343.76 an ounce, taking a breather after rising above $2,400 per ounce to an all-time high.

By Lewis Krauskopf and Naomi Rovnick

(Reporting by Lewis Krauskopf and Chuck Mikolajczak in New York, Naomi Rovnick amd Kevin Buckland; Editing by David Holmes, Alison Williams, Ros Russell and Richard Chang)