GLOBAL MARKETS-Stocks, oil fall as US consumers' mood sour

* Unexpected drop in US consumer sentiment raises concerns

* Stocks, oil fall; Treasuries, yen firm on safe-haven bid

* Muted US inflation reinforces bets on low Fed rates (Updates with U.S. market close, quotes, changes byline)

By Jennifer Ablan

NEW YORK, Aug 14 (Reuters) - U.S. and European stocks dropped on Friday after U.S. consumer confidence fell in August for the second straight month, adding to concerns the five-month rally in global equities has outpaced economic fundamentals.

Oil prices also shed $4 a barrel as the Reuters/University of Michigan consumer sentiment survey showed a growing number of Americans grew increasingly worried over jobs and wages. Its preliminary reading of the index of confidence fell to 63.2 from 66.0 in July, well below market expectations for a reading of 68.5.

The weak data eclipsed reports that showed U.S. industrial output gained for the first time in nine months and that inflation was muted in July. For details, see [ID:nN14304812]

"The consumer confidence number weighed heavily on the market's thinking today and added to concerns that the market has rallied too far, too fast against the growth outlook," said Tom Sowanick, chief investment officer at Clearbrook Partners in Princeton, New Jersey.

The MSCI's all-country world stock index <.MIWD00000PUS> fell 1 percent after gaining nearly 2 percent the past two sessions. The index has gained more than 45 percent since its March low.

The Dow Jones industrial average <.DJI> ended down 76.79 points, or 0.82 percent, at 9,321.40 points. The Standard & Poor's 500 Index <.SPX> fell 8.64 points, or 0.85 percent, to 1,004.09. The Nasdaq Composite Index <.IXIC> was down 23.83 points, or 1.19 percent, at 1,985.52.

The pan-European FTSEurofirst 300 <.FTEU3> index fell 0.81 percent to 940.94, ending the week about 1 percent lower after four straight weeks of gains.

Emerging market stocks posted smaller losses, with the benchmark MSCI index for the asset class <.MSCIEF> down 0.48 percent.

News that U.S. industrial output rose 0.5 percent in July, above expectations for a 0.3-percent advance and following a 0.4-percent contraction in June, curbed stock market losses.

Even so, concerns about the strength of the U.S. economic recovery sent front-month U.S. crude oil prices down $3.01, or 4.3 percent, to $67.51 a barrel.

On the foreign exchange market, the yen rallied as investors' tolerance of risk decreased.

The dollar fell 0.61 percent against the Japanese currency at 94.80. But the euro shed 0.70 percent against the greenback to change hands at $1.4186, down from a previous session close of $1.4286.

The bond market also caught the flight-to-safety bid as traders weight consumers' sour mood as well as a flat consumer inflation reading.

The contained inflation reading helped depress yields by reinforcing a view that the Federal Reserve -- the U.S. central bank -- will maintain benchmark interest rates near zero for a long time even after the economy emerges from recession.

"This negative CPI print is really good news for Treasuries," said William Hornbarger, senior fixed-income strategist with Wells Fargo Advisors in St. Louis, Missouri.

The benchmark 10-year U.S. Treasury note was up 11/32, with the yield at 3.56 percent after the Labor Department said U.S. consumer prices were flat in July and fell over the past 12 months at the fastest rate since 1950.

Yields on 10-year notes had closed at 3.60 percent on Thursday.

The 2-year U.S. Treasury note was up 2/32, with the yield at 1.06 percent.

At the long end of the yield curve, the 30-year U.S. Treasury bond was up 21/32, with the yield at 4.41 percent.

"Treasuries have had a rough summer so this is a nice change for them, at the very least," added Clearbrook's Sowanick. (To read Reuters Global Investing blog, click on: http://blogs.reuters.com/globalinvesting; for the MacroScope blog, click on http://blogs.reuters.com/macroscope; for Hedge Fund blog, click on http://blogs.reuters.com/hedgehub)