GLOBAL MARKETS-Asian shares stumble, oil surges after U.S. air strikes in Iraq

* MSCI Asia ex-Japan turns negative, erases early gains

* Senior Iran official killed in U.S. air strike

* Brent crude surges more than 3%

* Asian stock markets: https://tmsnrt.rs/2zpUAr4

By Andrew Galbraith

SHANGHAI, Jan 3 (Reuters) - Asian shares fell on Friday,

erasing early gains, while oil prices spiked after U.S. air

strikes in Iraq killed a top Iranian commander, heightening

geopolitical tensions.

Iranian Major-General Qassem Soleimani, head of the elite

Quds Force and top Iraqi militia commander Abu Mahdi al-Muhandis

were killed early on Friday in a U.S. air strike on their convoy

at Baghdad airport, the Pentagon said.

MSCI's broadest index of Asia-Pacific shares outside Japan

.MIAPJ0000PUS had touched its highest point since June 15,

2018 in early trade, but fell after reports of the air strike

emerged. It was last down 0.26%.

China's CSI300 index, one of the world's best-performing

indexes last year, also turned negative, losing 0.25%.

Australian shares .AXJO were 0.66% higher, but that was off

earlier highs.

"It remains very unclear exactly what impact (the U.S.

strikes) could have on the equity market," said Tapas

Strickland, director of economics and markets at National

Australia Bank.

"It is significant that one of Iran's top military generals

was reported to have been taken out ... but it all hinges on

what Iran does in terms of retaliation," he said.

Middle Eastern tensions upset a rally for the MSCI index,

which finished at its highest close in more than 18 months on

Thursday.

It had been lifted by a New Year's Day announcement from

China's central bank that it would cut the amount of cash that

banks must hold as reserves, releasing around 800 billion yuan

($114.87 billion). Against the backdrop of a thaw in trade relations between

the United States and China, global markets had seen renewed

appetite for risk assets.

"You have from both a policy and trade perspective a

favourable framework for ... risk assets for the weeks to come,"

said Frank Benzimra, head of Asia equity strategy at Societe

Generale in Hong Kong.

"The issue in our view, and that is the central scenario, is

beyond these few weeks - where could we see a further

correction?" he said, noting that the United States is unlikely

to enjoy further fiscal stimulus before the presidential

election in November.

Shares had received further support from data on Thursday

showing factory activity in China continued to grow at a solid

pace in December, and that business confidence improved.

South Korean factory activity also improved in December,

returning to growth after seven straight months of contraction,

which analysts saw as a positive sign for global growth.

Markets in Japan remain closed for a national holiday.

Overnight, Wall Street's major indexes notched record highs

in their first session of the decade. The Dow Jones Industrial

Average .DJI rose 1.16% to 28,868.8. The S&P 500 .SPX gained

0.84% to 3,257.85 and the Nasdaq Composite .IXIC added 1.33%

to 9,092.19.

But U.S. stock futures pointed to a grim day on Friday after

the air strikes, with S&P e-minis ESc1 shedding 0.8%.

OIL SURGE

While equity markets turned lower, oil prices surged on news

of Soleimani's death, with global benchmark Brent crude LCOc1

shooting 3.02% higher to $68.25 per barrel and U.S. West Texas

Intermediate crude CLc1 jumping 2.75% to $62.86 per

barrel. News of the strikes came after U.S. Defense Secretary Mark

Esper said on Thursday there were indications Iran or forces it

backs may be planning additional attacks after Iranian-backed

demonstrators hurled rocks at the U.S. embassy in Baghdad

following American strikes on Sunday against bases of the

Tehran-backed Kataib Hezbollah group.

Esper warned that the "game has changed" and it was possible

the United States might have to take preemptive action to

protect American lives. In currency markets, the dollar weakened as investors

snapped up safe-haven yen. The greenback fell 0.52% against the

Japanese currency to 108.00 JPY= .

The dollar was flat against the euro at $1.1170 EUR= .

The dollar index .DXY , which tracks the dollar against a

basket of six major rivals, was down 0.09% at 96.758.

The U.S. strikes in Iraq and a weaker dollar combined to

burnish the value of gold, driving the precious metal 0.75%

higher on the spot market XAU= to $1,540.25 per ounce, around

four-month highs. GOL/

($1 = 6.9642 Chinese yuan)