GLOBAL MARKETS-Korea tensions, Irish jitters knock stocks lower

* Flight-to-safety trade on N. Korea attack sinks stocks

* Euro drops on Irish debt worries, Korea tensions

* Gold safe-haven status overcomes U.S. dollar strength (Updates with U.S. market close, comment, Nikkei futures)

By Daniel Bases

NEW YORK, Nov 23 (Reuters) - North Korea's deadly shelling of a South Korean island on Tuesday rattled global markets, prompting investors to sell stocks and seek safe haven in the U.S. dollar, gold and government bonds.

The euro, already soured by Ireland's debt crisis, accelerated its decline as investors feared a rescue package for Dublin may not stop problems from spreading to other indebted euro zone countries. The euro plunged to a two-month low beneath $1.34 and traded below 111 yen for the first time since mid-September.

Jeff Kleintop, chief market strategist at LPL Financial in Boston, said the news reminded traders how easily markets can be disturbed by geopolitics.

"As we move into 2011, (U.S. President Barack) Obama is going to be a lot less focused on domestic policy -- where we have gridlock -- and more focused on foreign policy and confronting some of these regimes," Kleintop said.

"That might mean higher geopolitical risk premiums going forward."

An upward revision of U.S. third-quarter gross domestic product growth added to the greenback's allure while weaker-than-forecast sales of previously owned U.S. homes did little to diminish the dollar. For details, see [ID:nN2399302]

Gold's safe-haven status overcame the stronger U.S. dollar, but crude oil fell.

Share prices in Tokyo are poised to drop on Wednesday from their five-month closing high in the previous session as the December futures contract for the Nikkei 225 stock index <0#NK:> trading in Chicago fell 230 points, or 2.28 percent to 9,875.

North Korea's artillery barrage killed two South Korean soldiers in one of the fiercest attacks on its neighbor since the Korean War ended in 1953. South Korea fired back and sent fighter jets to the area, close to a disputed maritime border on the west of the divided peninsula. [ID:nL3E6MN0SQ]

The iShares MSCI South Korea Index Fund traded down 5.42 percent during New York hours. Shares of Korea Electric Power traded in New York lost 4.13 percent to $12.30.

The Dow Jones industrial average <.DJI> dropped 142.21 points, or 1.27 percent, at 11,036.37. The Standard & Poor's 500 Index <.SPX> fell 17.11 points, or 1.43 percent, at 1,180.73. The Nasdaq Composite Index <.IXIC> lost 37.07 points, or 1.46 percent, at 2,494.95.

The MSCI All-Country World equity index <.MIWD00000PUS> fell 1.75 percent while the Thomson Reuters global stock index <.TRXFLDGLPU> dropped 1.10 percent.

The FTSEurofirst 300 <.FTEU3> index of top European shares fell 1.53 percent to 1076.71, its lowest close in six weeks.

"The Irish bailout continues to cause uncertainty amongst European investors as concerns about the potential of contagion to other countries have increased," said Angus Campbell, head of sales at Capital Spreads.

IRISH JITTERS

The debt tensions in Ireland led to weak bank shares in Europe in addition to pulling the euro down 1.91 percent at $1.3365 , its weakest point since late September.

Bank of Ireland shares fell 24.94 percent. Other banks to fall included Spain's Banco Santander , off 4.73 percent, and BBVA off 3.90 percent.

The U.S. dollar rose 1.30 percent against a basket of currencies that make up its major trading partners. The dollar however fell 0.16 percent to 83.15 against the yen .

In Europe, Bund futures rose more than one point to 128.94 as political disarray in Ireland cast doubt over whether the government could pass its austerity budget and pave the way for a European Union/IMF aid deal to tackle its debt problems.

The premium investors demand to hold Spanish bonds over German benchmarks rose to a euro-lifetime high of 237 basis points after Madrid was forced to pay a high cost to sell short-term bills, reflecting contagion risks from Ireland.

Irish spreads rose back above 600 bps and other peripheral government bond yield spreads widened. The cost of insuring higher-yielding euro zone sovereign debt against default also was rising, even though traders said the European Central Bank had been buying bonds, mainly Portuguese.

"Europe is in self-implode mode. There is a huge flight-to-quality bid developing," a trader said.

Portugal and Spain are seen as the next weakest links and an official from Portugal's main opposition party said it would allow passage of the minority Socialist government's 2011 budget in the final vote on Nov. 26. [ID:nLSB001015]

Benchmark 10-year U.S. Treasuries rose 6/32 of a point in price, driving the yield down to 2.78 percent .

Spot gold prices rose $10.75 to $1,376.50, while crude oil fell 67 cents $81.07 per barrel. (Additional reporting by Steven C. Johnson, Rodrigo Campos, Emelia Sithole-Matarise, Joanne Frearson, Kirsten Donovan, Natsuko Waki, Chris Reese; Editing by Kenneth Barry)