GLOBAL MARKETS-World stocks tumble, dlr up vs euro

* World equity index <.MIWD00000PUS> down 1.5 pct

* Weaker than forecast U.S. payrolls hit equities, lift dlr

* European shares <.FTSE>4-week low

* Dollar index 0.2 pct up at 77.35 <.DXY> but wary of G7

(Updates with U.S. payrolls, fresh quotes, changes byline)

By Emelia Sithole-Matarise

LONDON, Oct 2 (Reuters) - Equity markets across the globe extended losses and oil prices fell on Friday after a weaker than expected key U.S. jobs report fanned doubts about the pace of economic recovery.

U.S. crude futures shed $2 to $68.82 a barrel and gold fell more than 1 percent to as low as $986.20 an ounce as the dollar initially gained versus the euro after the data.

The Labor Department said U.S. employers cut 263,000 jobs, lifting the unemployment rate to 9.8 percent, the highest since June 1983 and payrolls have now dropped for 21 consecutive months. [ID:nN02314318]

Analysts polled by Reuters had expected non-farm payrolls to drop 180,000 in September and the unemployment rate to rise to 9.8 percent from 9.7 percent the prior month.

European shares slid, hitting a four-week low with the pan-European FTSEurofirst 300 index <.FTEU3> down more than 2 percent on the day as investors sought the relative safety of government bonds.

The index, which posted its best quarterly performance in nearly 10 years in the last quarter, was on track for a third day of losses.

The MSCI world equity index <.MIWD00000PUS> fell to 277.18 from 278.76 just prior to the release of the data and was down 1.34 percent on the day. It fell for a second day running after rising 17 percent in the third quarter which ended Wednesday.

"I was thinking we'd actually have a lot priced in because of the bad data earlier in the week but apparently that was not the case. Risk aversion is going to be the key for today," said Dan Cook, senior market analyst at IG Markets in Chicago.

"This could drive the market for a couple of days. As we're getting into the earnings season in the equities side, it is going to take a lot of good news on the earnings front to make up for this terrible job situation."

G7 MEETING

Benchmark 10-year Treasury notes traded 18/32 in price on the day, having been up by 5/32 moments before the jobs data. The 10-year bond yield, which moves inversely to price, was at 3.11 percent, compared with 3.16 percent before the data.

Spot gold extended falls, dropping more than 1 percent to $986.60/oz.

The euro fell to session lows against the dollar to $1.4481 from $1.4539 before the data but later reversed to hit session highs at $1.4566, as traders likely reassessed the impact of the weak jobs report on the economy.

The currency market also remained wary on expectations the Group of Seven finance chiefs, who meet in Istanbul this weekend, would repeat its call to rebalance the world economy -- a process which will likely involve a weaker dollar.

U.S. stocks opened lower, with the Dow Jones industrial average <.DJI> down 0.65 percent and the S&P 500 <.SPX> falling 0.78 percent.

They suffered their worst one-day fall in three months the previous day after a survey of national factory activity declined in September and weekly jobless claims were worse than expected.

Tokyo's Nikkei average hit a two-month closing low on Friday, down 2.5 percent <.N225>. It slid 5.2 percent on the week for its biggest weekly drop in about three months. (Editing by Mike Peacock)