(Adds close of U.S. markets)
* British election sees government losing majority
* Pound falls to two-month low around $1.27 in erratic trade
* Wall Street hits new intra-day highs before paring most gains
* Selloff in technology shares knocks Nasdaq, S&P 500 lower
By Herbert Lash
NEW YORK, June 9 (Reuters) - The British pound fell to a seven-week low on Friday after a shock election result cast doubt on Britain's talks to leave the European Union, but key indices hit fresh record highs before tumbling technology shares drove the Nasdaq and S&P 500 lower.
British Prime Minister Theresa May said she would form a government backed by a small Northern Irish party after her Conservative Party lost its parliamentary majority in a vote on Thursday just days before the EU departure talks begin.
The benchmark FTSE 100 index of large British multinationals fed off sterling's decline, as earnings from abroad will be worth more from a weaker currency and gained 1 percent.
But some sectors seen as particularly sensitive to Brexit instability saw heavy losses, such as homebuilders and real estate investment trusts, which are seen as a barometer of Brexit sentiment due to their holdings of London office space.
After an initial plunge, sterling pared losses against the dollar and euro, while the dollar gained. Safe-haven gold and prices of U.S. Treasuries drifted lower.
The impact of the British election on the U.S. markets was muted. The three major U.S. indices hit fresh intra-day highs before tumbling shares of Facebook, Amazon, Apple, Microsoft and Google parent Alphabet slammed the Nasdaq and S&P 500.
"Tech has been on a tear for a very, very long period of time," said John Praveen, managing director for Prudential International Investments Advisers in Newark, New Jersey.
A research note from Goldman Sachs on this year's surge in technology shares has evoked unhappy memories for some investors of the euphoria before the tech bubble burst in 2000.
Amazon, Apple Facebook had surged year-to-date about 30 percent before Friday's selloff, while Microsoft and Google had gained a bit less. They all fell more than 3 percent, except for Microsoft, which slid 2.3 percent.
Investors have relied on almost $2 trillion that central banks, including the Federal Reserve, have pumped into capital markets over the past 12 months, which has driven up asset prices, said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
"If there's one metric that I'm going track, to determine whether or not I want to stay engaged in risk-taking, it's going to be that liquidity," Ablin said.
"If I get a sense the Fed or other central banks will start to close up shop on that, we're going to reduce risk."
European shares closed higher, erasing early choppiness. Britain's FTSE 100 index rose 1 percent, and the pan-regional FTSEurofirst 300 index of leading European shares rose 0.37 percent to 1,534.39.
MSCI's all-country stock world stock index <.MIWD00000PUS) slid 0.04 percent as much of Wall Street retreated. Earlier, Germany's DAX index rose 0.8 percent and the Nikkei 225 in Tokyo gained 0.52 percent.
The Dow Jones Industrial Average closed up 89.44 points, or 0.42 percent, to 21,271.97. The S&P 500 lost 2.02 points, or 0.08 percent, to 2,431.77 and the Nasdaq Composite fell 113.85 points, or 1.8 percent, to 6,207.92.
The pound shed more than 2 percent against the dollar, dropping as low as $1.2636 before trimming losses.
The dollar rose to a 10-day high against a basket of currencies. The dollar index, which tracks the greenback against six major rivals, was up 0.36 percent at 97.269.
The euro was down 0.16 percent to $1.1194 against the dollar, a day after the European Central Bank closed the door on more interest rate cuts.
Oil prices rose after a pipeline stoppage in Nigeria, but crude ended the week down nearly 4 percent on persistent worries about global oversupply.
Brent crude oil settled 29 cents higher at $48.15 a barrel, and U.S. crude rose 19 cents to settle at $45.83.
U.S. Treasury long-dated yields rose to one-week highs ahead of next week's government debt auctions and a widely expected interest rate increase by the Fed. U.S. short-term yields also advanced, with two-year Treasuries touching a four-week peak.
Investors largely shrugged off the British election, as well as scathing congressional testimony on Thursday by former Federal Bureau of Investigation director James Comey.
Comey accused President Donald Trump of firing him to try to undermine the bureau's investigation into possible collusion between his 2016 presidential campaign team and Russia.
U.S. 10-year Treasuries were last down 4/32 in price to yield 2.2093 percent.
Reporting by Herbert Lash; Editing by Nick Zieminski