GLOBAL MARKETS-British rate hike hint boosts sterling, Iraq unrest drives up oil

* Sterling surges after clear rate hike talk from BoE (Shenzhen: 000725.SZ - news)

* Iraq fighting, weak US data hit risk appetite, buoy yen

* Oil nears $115 a barrel

* Stocks drop back, Wall Street set for 1st weekly fall in 3

By Marc Jones

LONDON, June 13 (Reuters) - Sterling surged on Friday after

the Bank of England hinted at an interest rate rise this year,

while escalating violence in Iraq drove oil higher and sent

equity markets lower.

U.S. stock index futures pointed to a lower start for Wall

Street, putting the Dow and S&P 500 on track for

their first weekly declines in four despite touching record

highs earlier in the week.

European shares' prospects of a ninth straight

weekly rise looked to be dashed as the unrest in Iraq and signs

that the era of record low interest rates is near an end, at

least in some countries, made investors cautious.

Bank of England Governor Mark Carney said late on Thursday

that British interest rates could rise sooner than financial

markets expect, in a surprisingly stark warning that monetary

policy may start to tighten before the end of this year. Markets

had previously been expecting a rate hike in the first quarter

of 2015.

That would make the BoE the first of the four major central

banks to raise interest rates and create a big divergence in

Europe where the European Central Bank is edging towards the

kind of asset buying and lending plans the UK has had in place

for years.

Sterling neared a five-year high against

the dollar on Carney's comments and hit a 1-1/2 year high of

1.2525 euros. The gap (NYSE: GPS - news) between 2-year UK and German

yields ballooned to its widest in four years, reflecting just

how different BoE and ECB policies are likely to be.

"The BoE seems to be slightly ahead of the Fed as far as

rate hikes are concerned," said Lutz Karpowitz, currency analyst

at Commerzbank (Xetra: CBK100 - news) . "Macro (Shenzhen: 000533.SZ - news) data is likely to attract particular

attention over the coming months. Anything pointing towards a

possible rate hike would then support the pound further."

Financial markets' focus was otherwise on the rising

violence in Iraq where Sunni Islamist militants have surged out

of the north this week to menace Baghdad and want to establish

their own state in Iraq and Syria.

President Barack Obama on Thursday threatened U.S. military

strikes in Iraq against the insurgents, who gained more ground


"I don't rule out anything because we do have a stake in

making sure that these jihadists are not getting a permanent

foothold in either Iraq or Syria," Obama said at the White House

when asked whether he was contemplating air strikes. Officials

later stressed that ground troops would not be sent in.


Oil drove sharply higher, with Brent crude slicing

through $114 a barrel at one point to a fresh nine-month high

and the market looking in a jumpy mood.

U.S. crude touched an intraday high of $107.68. Both

benchmarks are set to gain almost 5 percent this week, the

biggest weekly rise since July 2013.

"There have been no disruptions to oil supplies so far but

people are very nervous," said Ken Hasegawa, a Tokyo-based

commodity sales manager at Newedge Japan.

In Asian trading, the yen and gold both

benefited from their traditional safe-haven statuses. U.S.

Treasury yields also sagged as soft U.S. data added

to the renewed sense of caution, a move mirrored by German

government bonds in Europe.

Weaker-than-expected U.S. retail sales and jobless claims

data on Thursday further tempered economic optimism felt earlier

in the week that had propelled Wall Street to record highs.

Taking its cue from an overnight slide in U.S. stocks,

MSCI (NYSE: MSCI - news) 's broadest index of Asia-Pacific shares outside Japan

shed 0.3 percent. Tokyo's Nikkei swam

against the tide to rise 0.9 percent on hopes for news of a

corporate tax cut, taking its rise over the last three weeks to

almost 9 percent.

Back with central banks, the Bank of Japan stood pat on

monetary policy as its chief Haruhiko Kuroda stressed there was

no chance of the bank quitting its stimulus programme before it

is confident on inflation.

Reaction was more muted towards China's industrial output

and retail sales data, which rose in line with forecasts but

were not solid enough to show that the world's second-largest

economy was on a solid, broad recovery.

The dollar edged up 0.3 percent to 102.04 yen but was

still stuck near a two-week low of 101.60 hit on Thursday.

On the week, the dollar was on course to lose about 0.5

percent against the yen but gain 0.2 percent against a broader

basket of currencies.

(Additional reporting by Anirban Nag; Editing by Susan Fenton)