GLOBAL MARKETS-Oil eyes $120 record, shares up cautiously

HONG KONG, April 28 (Reuters) - Oil prices hit a new record close to $120 a barrel on Monday as supply problems outweighed the burden of a firm dollar, while stock and bond investors trimmed their positions ahead of a U.S. interest rate decision.

Share markets in Asia were flat to slightly higher, buoyed by strength in banks, while European shares rose in early trade, with Britain's FTSE 100, the German DAX, and the French CAC 40 up between 0.2-0.3 percent.

Investors were focused on the Federal Reserve's interest rate setting meeting, which starts on Tuesday. Although financial markets expect a small reduction, the Fed could signal that its rate-cutting cycle is over.

"Investors want to see the outcome of the meeting as the market had already factored in a possibility that the Fed may stop cutting interest rates, prompting investors to return to financials," said Kazuhiro Takahashi, general manager of the equity marketing department at Daiwa Securities SMBC.

Many stockmarket investors took oil's latest record with a pinch of salt, preferring to ponder the impact of Wednesday's U.S. interest rate decision and to trim their portfolios after a rout in the bond market and a rush back into bank stocks.

Japan's Nikkei stock average rose 0.2 percent to 13,894.37, its highest close since Feb.28, after an early surge took it above 14,000. Among the biggest gainers were banks such as Mitsubishi UFJ Financial Group, which rocketed 10 percent. MSCI's index of stocks across the rest of Asia was 0.4 percent higher.

The Asia ex-Japan index has rallied almost 18 percent since hitting a seven-month low in mid-March, but is still down around 7 percent so far this year.

Seoul's KOSPI ended down 0.1 percent, Hong Kong's Hang Seng index was up 0.4 percent and Australia's S&P/ASX 200 closed 0.3 percent higher.

OIL SLICK

Oil prices have soared in the last year because of the weak dollar, unrelenting demand from booming emerging economies, speculative investment and supply problems.

The latter helped push U.S. crude oil futures to $119.93 a barrel in early Asian trade on Monday, 3 cents beyond a record struck last Tuesday, as a Scottish strike and a Nigerian attack conspired to restrict supplies.

The strike over pensions at the Grangemouth refinery in Scotland forced the closure on Sunday of the 700,000 barrel per day Forties pipeline, which carries nearly half of Britain's oil, operator BP Plc said.

A step up in tensions between U.S. and the world's fourth-largest crude exporter Iran also contributed to oil's gain. The U.S. Navy said a cargo ship hired by the U.S. military fired warning shots at boats suspected to be Iranian although Iran denied there had been any confrontation between its forces and a U.S. ship.

By 0629 GMT U.S. crude was trading at $119.55. A Reuters poll of 33 analysts shows a consensus forecast for U.S. crude this year of $96.68 a barrel, compared to an average last year of $72.30.

FED IN FOCUS

Activity in Tokyo remained slow as many local investors stayed away from the market before Japan's Golden Week string of national holidays that starts on Tuesday.

Those that remained were focused on the Fed, which could help the dollar - and by extension Asian exporters - if it signals in its post-meeting statement on Wednesday that rate cuts will be put on hold in the face of mounting global energy and food inflation pressure.

While most analysts expect a 25 basis point rate cut, U.S. short-term interest rate futures show a small chance the Fed will keep rates on hold when it announces its rate decision on Wednesday at 2:15 p.m. EDT (1815 GMT).

The prospect of U.S. interest rates bottoming out has helped fuel the idea that the stock market might have weathered the worst of the credit crunch and kept the dollar firm at around 104.6 yen on Monday.

The change in outlook caused a rout in Japanese government bonds on Friday, which continued on Monday before bargain-hunters moved in, pulling the 10-year bond yield back from a six-month peak of 1.675 percent. (Additional reporting by Fayen Wong in PERTH, Geraldine Chua in SYDNEY, Aiko Hayashi and Elaine Lees in TOKYO; Editing by Louise Heavens)