* Oil falls as Qatar rift threatens output cuts
* Sterling recovers as investors focus on election
* Wall Street stocks dip after falls in oil, European market
* Thursday's ECB meeting keeps lid on euro zone bond yields
* Gold retreats after six-week high on Friday's U.S. jobs report (Adds settled oil prices; updates throughout)
By Hilary Russ
NEW YORK, June 5 (Reuters) - World equity markets fell with oil prices on Monday amid concerns a diplomatic rift among some key Middle Eastern energy producers may weaken a pact on output cuts, and the U.S. dollar rebounded from a near seven-month low against the euro.
Sterling firmed as investors focused on the impending British election, while Friday's disappointing U.S. employment report initially lifted gold prices to a six-week high and boosted Treasury yields as investors booked profit.
"We had a pretty significant reaction to payrolls, which was a little overdone," said Bruno Braizinha, interest rates strategist at Societe Generale in New York.
The data initially pushed gold to its recent high of $1,282 an ounce because it dimmed prospects for an aggressive interest rate run. Higher rates pressure gold prices by increasing the opportunity cost of holding non-yielding bullion.
But gold retreated and was last down slightly at $1,278. Even so, markets signaled they expected the U.S. Federal Reserve to raise interest rates next week.
Key U.S. stock indexes were little changed to lower as investors mostly shrugged off weekend attacks in London and after Arab states cut ties with Qatar over alleged support for Islamist and Iran.
The Dow Jones Industrial Average fell 7.67 points, or 0.04 percent, to 21,198.62, the S&P 500 lost 1.34 points, or 0.05 percent, to 2,437.73 and the Nasdaq Composite dropped 4.89 points, or 0.08 percent, to 6,300.91.
Apple also weighed on all the three major indexes following a rating cut and ahead of its developer conference.
The pan-European FTSEurofirst 300 index lost 0.13 percent and MSCI's gauge of stocks across the globe shed 0.10 percent.
In the Middle East, Qatar's main stock index fell more than 7 percent. Saudi Arabia - the world's biggest crude oil exporter - the United Arab Emirates, Egypt and Bahrain cut ties with Qatar, accusing the Gulf Arab state of supporting terrorism.
Qatar is the world's biggest supplier of liquefied natural gas (LNG) and a major supplier of condensate.
Brent crude oil, the international benchmark, rose more than 1 percent at one point, recouping some of last week's 4 percent losses, but turned tails to drop back below $50 a barrel.
It was last at $49.46, down 0.98 percent on the day, with U.S. crude settling 0.55, or 26 cents, lower at $47.40 per barrel.
"I think it's still going to be a bit of a debate on the true impact it can have on the oil market," said Olivier Jakob, strategist at Petromatrix, adding that a breakdown in relations between Qatar and Saudi Arabia could hamper an OPEC-led deal on production cuts.
Britain's pound initially fell half a cent against the dollar after the third militant attack in Britain in less than three months but recovered and last traded at $1.2908, up 0.20 percent on the day.
Prime Minister Theresa May said Thursday's election would go ahead. Opinion polls in the past week have put her Conservatives ahead, though with a narrowing lead over the Labour opposition.
"Even if May does just about enough to increase the majority - that could still potentially be sterling positive," said ING currency strategist Viraj Patel.
The dollar index rose 0.08 percent, having hit its lowest since Nov. 9 after Friday's U.S. jobs report, and rebounded against the euro as traders doubted any European Central Bank shift in policy stance could strengthen the euro further.
European Central Bank policymakers meet this week. They are expected to take a more benign view of the euro zone economy and discuss dropping pledges to ramp up economic stimulus if needed, sources with direct knowledge of the discussions told Reuters last week.
The euro was down 0.22 percent to $1.1255 and the Japanese yen weakened 0.07 percent versus the greenback at 110.50 per dollar.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Additional reporting by Nigel Stephenson, Patrick Graham and Zandi Shabalala in London, Tanya Agrawal in Bengaluru and Gertrude Chavez-Dreyfuss and Sam Forgione in New York; Editing by Bernadette Baum and Nick Zieminski