Oil drops with dollar on recession fears; Wall Street wobbles

* Bank of England expects recession throughout 2023

* Treasury yield curve inversion deepens

* Dollar drops; sterling slides against euro

* Oil hits pre-Ukraine lows as demand outlook worsens

By Kevin Buckland

OTTAWA, Aug 4 (Reuters) - Crude oil sank with Treasury yields and the dollar on Thursday as recession worries intensified following the Bank of England's warning of a drawn-out downturn, which sent sterling tumbling versus the euro.

Wall Street stocks searched for direction a day after rallying, with a key U.S. jobs report looming on Friday.

The S&P 500 .SPX was flat at 4,155 as of 17:41 GMT, following its close at a two-month high in the previous session.

The Dow .DJI dropped 0.18% to 32,752, from near an almost three-month high.

The Nasdaq .NDX swung to a 0.2% gain to 13,281, looking to extend a three-month peak.

The two-year Treasury yield US2YR=RR eased 5.1 basis points to 3.057%, while the 10-year yield US10YR=RR slipped 4.7 basis points to 2.70%.

The gap between them went as wide as negative 39.2 basis points earlier in the day, the deepest inversion since 2000. An inverted curve is often viewed as portending a recession.

Crude oil prices dropped to levels last seen before Russia's February invasion of Ukraine, with Brent LCOc1 off more than 3% to $93.81 per barrel, and West Texas Intermediate (WTI) CLc1 down 2.7% to $88.21.

Traders fretted that any recession could torpedo energy demand, while an unexpected surge in U.S. crude inventories also weighed on prices, which had surged to over $120 a barrel this year.

Cleveland Federal Reserve Bank President Loretta Mester said on Thursday that the economy is not currently in recession, but the risks of one have risen, while reiterating the central bank's resolve to continue with aggressive tightening until there is compelling evidence of a let up in inflation.

The monthly U.S. non-farm payrolls report will be closely watched on Friday for clues on whether the tight labor market will continue to push up wages. Data early Thursday showed a tick up in jobless claims.

"Expectations that we're headed for a recession are clear, and the clearest signal is coming from the Treasury market," said Edward Moya, senior market analyst at OANDA in New York.

"Things are looking worse abroad, and there's an expectation that we're going to see more economic weakness going into year-end, and it's hard to be optimistic on equities."

The Bank of England delivered a bigger, half-point rate rise earlier in the day, joining the Federal Reserve and other central banks in an accelerated race to catch inflation. But the hike was widely expected, and investors were more focused on the central bank's warning that a lengthy recession is on the way.

"The main surprise seems to be the somewhat downbeat economic forecasts that we have also been given," said Stuart Cole, head macro economist at Equiti Capital.

"That is somewhat worse than what we had seen in May, where the outlook was for one or two difficult quarters of low or negative growth, and then a recovery."

Britain's FTSE 100 stock index .FTSE was little changed, compared to small gains for the pan-European STOXX 600 index .STOXX following some solid corporate earnings.

The euro added 0.53% to 0.84155 against the British pound EURGBP=D3 , and rose as high as 0.8438 at one point for the first time since July 26.

Sterling GBP=D3 recovered though to be up 0.08% at $1.2159 after earlier dipping to $1.2065 for the first time since July 29.

The greenback accelerated declines amid lower U.S. yields, with the dollar index =USD - which measures the currency against six major counterparts including sterling, the euro and the yen - sliding 0.64% to 105.80.

The dollar dropped 0.51% to 133.17 yen JPY=EBS , with the currency pair particularly sensitive to long-term Treasury yields.

Spot gold XAU= jumped 1.52% to a one-month high of $1,792 an ounce, helped by lower U.S. yields and a weaker dollar.

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Reporting by Kevin Buckland; Additional reporting by Huw
Jones; Editing by Alden Bentley, Kim Coghill, Mark Potter and
Susan Fenton

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